SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. 2)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Equitex, Inc.
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(Name of Registrant as Specified in its Charter)
John Kellogg, Esq.
RaLea Sluga, Esq.
Friedlob Sanderson Paulson & Tourtillott, LLC
1400 Glenarm Place
Denver, Colorado 80111
(303) 571-1400
(303) 595-3970
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(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
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(4) Proposed Maximum aggregate value of transaction:
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(5) Total Fee Paid:
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[X] Fee previously paid with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:__________________________________
(2) Form, Schedule or Registration Statement No.:____________
(3) Filing Party:____________________________________________
(4) Date Filed:______________________________________________
EQUITEX, INC.
7315 EAST PEAKVIEW AVENUE
ENGLEWOOD, COLORADO 80111
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Notice of Special Meeting of Stockholders
To Be Held on __________ __, 2001
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________ __, 2001
To the Stockholders of Equitex, Inc.
A Special Meeting of Stockholders of Equitex, Inc., a Delaware
corporation, will be held at 2401 PGA Blvd., Suite 190, Palm Beach Gardens,
Florida 33410, on __________ __, 2001 at ___ a.m. Eastern Daylight Time, to
consider and take action on:
1. A proposal to amend paragraph 4 of the Certificate of Incorporation
to increase the number of authorized shares of Equitex's common stock, $.02 par
value, from 7,500,000 shares to 50,000,000 shares. Passage of this proposal
requires the affirmative vote of a majority of the outstanding stock of each
class entitled to vote thereon as a class.
2. A proposal to provide for the following actions:
o the distribution by Equitex of all of its assets and
liabilities to Equitex 2000, Inc., a wholly-owned and
Delaware-chartered subsidiary of Equitex; and
o the distribution by Equitex of all of the outstanding shares of
common stock of Equitex 2000 to the stockholders of Equitex on
the basis of one share of common stock of Equitex 2000 for each
share of common stock of Equitex, as further described in the
attached proxy statement.
Passage of this proposal requires the affirmative vote of a majority of
the outstanding stock of each class entitled to vote thereon as a class.
3. A proposal to acquire all of the outstanding capital stock of Nova
Financial Systems, Inc. and Key Financial Systems, Inc., companies under common
control with nearly an identical ownership structure, in exchange for the
greater of 7,140,000 shares or 50% of the outstanding common stock of Equitex on
a post acquisition basis, cash consideration of $5 million and a warrant. This
proposal is subject to the approval of proposal number one. Passage of this
proposal requires the affirmative vote of a majority of the total votes cast on
the proposal in person or by proxy.
4. Such other business as may properly come before the meeting, or any
adjournment or adjournments thereof.
The discussion of the proposals by the board of directors set forth
above is intended only as a summary, and is qualified in its entirety by the
information relating to the proposals set forth in the accompanying proxy
statement.
Only holders of record of Equitex's common stock at the close of
business on ________ ___,2001 will be entitled to notice of and to vote at this
special meeting, or any postponements or adjournments thereof.
By Order of the Board of Directors:
Thomas B. Olson
Secretary
YOU ARE URGED TO DATE, SIGN AND PROMPTLY RETURN YOUR PROXY SO THAT YOUR
SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES. THE GIVING OF SUCH PROXY
DOES NOT AFFECT YOUR RIGHT TO VOTE IN PERSON IF YOU ATTEND THE MEETING.
Your vote is important
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Proxy
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EQUITEX, INC.
7315 EAST PEAKVIEW AVENUE
ENGLEWOOD, COLORADO 80111
Special Meeting of Stockholders
To Be Held On __________ ___, 2001
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Equitex, Inc. hereby constitutes and
appoints Henry Fong or Thomas B. Olson as attorney and proxy, to appear, attend
and vote all of the shares of the common stock of Equitex, Inc. standing in the
name of the undersigned at a Special Meeting of Stockholders of Equitex, Inc. to
be held at 2401 PGA Blvd, Suite 190, Palm Beach Gardens, Florida 33410, on _____
__, 2001, at ___ a.m. Eastern Daylight Time, and at any postponements or
adjournments thereof:
1. To consider and vote upon an amendment to paragraph 4 of the
Certificate of Incorporation to increase the number of authorized shares of
Equitex's common stock, $.02 par value, from 7,500,000 shares to 50,000,000
shares.
FOR ______ AGAINST ______ ABSTAIN ______
2. To consider and vote upon the distribution by Equitex of all of its
assets and liabilities to Equitex 2000, Inc., a wholly-owned and
Delaware-chartered subsidiary of Equitex, and the distribution by Equitex of all
of the outstanding shares of common stock of Equitex 2000 to the stockholders of
Equitex on the basis of one share of common stock of Equitex 2000 for each share
of common stock of Equitex.
FOR ______ AGAINST ______ ABSTAIN ______
3. To consider and vote upon the acquisition all of the outstanding
capital stock of Nova Financial Systems and Key Financial Systems, companies
under common control with nearly an identical ownership structure, in exchange
for the greater of 7,140,000 shares or 50% of the outstanding common stock of
Equitex on a post acquisition basis, cash consideration of $5 million and a
warrant. This proposal is subject to the approval of proposal number one.
FOR ______ AGAINST ______ ABSTAIN ______
4. To transact such other business as may properly come before the
meeting.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS SPECIFIED HEREON WITH
RESPECT TO EACH PROPOSAL AND FOR ALL OF THE PROPOSALS IF NO SPECIFICATION IS
MADE. THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE DISCRETION OF THE PROXIES
ON ANY OTHER BUSINESS PROPERLY BROUGHT BEFORE THE SPECIAL MEETING.
Please mark, date and sign your name exactly as it appears hereon and
return the proxy in the enclosed envelope as promptly as possible. It is
important to return this proxy properly signed in order to exercise your right
to vote if you do not attend the meeting and vote in person. When signing as
agent, partner, attorney, administrator, guardian, trustee or in any other
fiduciary or official capacity, please indicate your title. If stock is held
jointly, each joint owner must sign.
Date: ____________, 2001 ____________________________________
Signature(s)
Address if different from that on label:
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Street Address
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City, State and Zip Code
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Number of shares
Please check if you intend to be present at the meeting: ___________
TABLE OF CONTENTS
Questions and Answers about the Proposals.....................................1
Who Can Help Answer Your Questions............................................2
Proxy Statement Summary.......................................................3
Risk Factors.........................................................3
The Special Meeting..................................................4
The Increase in Authorized Shares of Common Stock....................4
The Distribution and Spin-Off........................................7
The Acquisitions of Nova Financial Systems and
Key Financial Systems......................................11
Corporate Structure..........................................................14
Risk Factors ...........................................................15
Forward Looking Statements...................................................22
The Special Meeting..........................................................23
Available Information........................................................25
Documents Incorporated by Reference..........................................25
Revocability of Proxy........................................................26
Solicitation ...........................................................26
Voting Securities ...........................................................26
Dividend Policy ...........................................................26
Price Range of Equitex Common Stock..........................................27
Selected Financial Data......................................................28
Security Ownership of Principal Stockholders and Management..................30
Liability and Indemnification of Directors and Officers......................30
Proposal Number One: Increase in Common Stock...............................32
Acquisition of Nova Financial Systems and Key Financial Systems.....33
Acquisition of The Meridian Residential Group.......................35
Acquisition of First Bankers Mortgage Services and Rescission.......37
Summary of Securities Authorized and Issued in Association
with the Acquisitions......................................37
Accretion and Dilution..............................................39
Description of Preferred Stock......................................39
Options and Warrants................................................41
Proposal Number Two: The Distribution and Spin-Off..........................43
The Distribution and Spin-Off.......................................43
Equitex 2000's Business After the Distribution and Spin-Off.........45
Proposal Number Three: The Acquisition of Nova Financial System
and Key Financial Systems...........................................47
Business of Nova Financial Systems and Key Financial Systems........47
Nova Financial Systems Management's Discussion and Analysis of
Financial Condition and Results of Operations..............53
Key Financial Systems Management's Discussion and Analysis of
Financial Condition and Results of Operations..............55
Equitex and Equitex 2000 Pro Forma Financial Information............58
Financial Information........................................................67
Stockholder Proposals........................................................67
Other Matters ...........................................................67
Exhibit 1-- Revised Paragraph 4 of Certificate of Incorporation................
Exhibit 2 - Financial Statements of Nova Financial Systems.....................
Exhibit 3 - Financial Statements of Key Financial Systems.....................
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QUESTIONS AND ANSWERS ABOUT THE PROPOSALS
Q1: WHAT ARE THE PRACTICAL EFFECTS OF THE DISTRIBUTION AND SPIN-OFF?
A1: After the distribution by Equitex of all of its assets and liabilities
(listed under proposal number two to this proxy statement), such assets
and liabilities will be owned by Equitex 2000, Inc. After the spin-off
of Equitex 2000 common stock is completed, Equitex's stockholders will
own all of the outstanding shares of Equitex 2000 and, therefore, a
direct interest in the assets of Equitex existing before the
acquisitions discussed in proposal number three. You will own the same
number of shares of Equitex 2000 that you own of Equitex as of the
close of business on ______, 2001.
Q2: WHY DO A DISTRIBUTION AND SPIN-OFF?
A2: Equitex has been engaged, through its subsidiaries, in the active
conduct of two principal lines of business:
o Consumer financial service business; and o Retail and commercial
mortgage banking business.
The distribution by Equitex of all of its assets and liabilities to
Equitex 2000 and spin-off of Equitex 2000 common stock are to separate
the two principal lines of business. Equitex believes that, after
completing the distribution and spin-off, Equitex 2000 will have an
enhanced ability to focus more directly on the mortgage banking
business and Equitex will be able to focus more directly on its
consumer financial service business.
The spin-off of Equitex 2000 common stock will give you a direct
investment in Equitex and Equitex 2000. Equitex believes that,
following the distribution and spin-off, the financial markets will be
able to focus on the individual strengths of Equitex and Equitex 2000
and more accurately evaluate the performance of each distinct business
compared to companies in the same or similar businesses.
Q3: WILL SHARES TRADE ANY DIFFERENTLY AS A RESULT OF THE SPIN-OFF?
A3: YES. Because there is no public market for the new Equitex 2000 common
stock, its stock cannot be traded until the application for trading of
its common stock on the Nasdaq SmallCap Market is approved. If
Equitex's application is not approved, its common stock may be traded
on either the electronic bulletin board or the National Quotation
Bureau, Inc.'s "Pink Sheets." Equitex's common stock will continue to
trade on a regular basis on the Nasdaq SmallCap Market.
Q4: IS THE DISTRIBUTION AND SPIN-OFF TAXABLE FOR U.S. TAX PURPOSES?
A4: YES, but because Equitex has no current and post-1913 accumulated
earnings and profits, the distribution will be applied against, and
reduce the adjusted basis of your stock in Equitex as a return of
capital. If the distribution is greater than the adjusted basis of your
Equitex stock, the excess will be treated as a capital gain. The value
of the distribution will be equal to the fair market value of the
assets distributed by Equitex to Equitex 2000.
Q5: WHAT DO I NEED TO DO NOW?
A5: You should vote your shares by mailing your signed proxy card in the
enclosed return envelope as soon as possible so that your shares will
be represented at the special meeting. If you do not vote your shares,
it will be the same as a vote against adoption of proposal number one
to amend Equitex's articles of incorporation and proposal number two to
approve the distribution and spin-off.
Q6: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A6: Your broker will vote your shares only if you instruct your broker how
to vote. Your broker should mail information to you that will explain
how to give voting instructions to your broker. Please provide
instructions to your broker on how to vote your shares. If you do not
instruct your broker how to vote,
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your shares will not be voted. This will be same as a vote against
adoption of proposal number one to amend Equitex's articles of
incorporation and proposal number two to approve the distribution and
spin- off.
Q7: WHAT IF I WANT TO CHANGE MY VOTE?
A7: You can change your vote at any time before your proxy is voted at the
special meeting. If you hold your shares directly, you can do this in
one of three ways:
o You can send a written notice to the Secretary of Equitex stating
that you would like to revoke your proxy.
o You can complete and submit a new proxy card.
o You can attend the special meeting and request to vote in person.
Your attendance at the special meeting alone will not, however,
revoke your proxy.
If you have instructed a broker to vote your shares, you must follow
directions received from your broker to change those instructions.
Q8: SHOULD I SEND IN MY STOCK CERTIFICATES?
A8: No. After the spin-off by Equitex of all of the Equitex 2000 common
stock, if you are a holder of record of Equitex common stock as of the
record date, which shall be prior to the acquisitions of Nova Financial
Systems and Key Financial Systems, you will receive a separate stock
certificate for your Equitex 2000 common stock.
WHO CAN HELP ANSWER YOUR QUESTIONS?
If you would like additional copies of this proxy statement or if you
have questions about the proposals to be acted on at the special meeting, you
should contact:
Equitex, Inc.
Attn: Thomas B. Olson, Secretary
7315 E. Peakview Avenue
Englewood, Colorado 80111
(303) 796-8940
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT, BUT
DOES NOT CONTAIN ALL THE DETAILS ABOUT EQUITEX OR THE PROPOSALS TO BE ACTED ON
AT THE SPECIAL MEETING, INCLUDING INFORMATION THAT MAY BE IMPORTANT TO YOU. TO
BETTER UNDERSTAND THE PROPOSALS TO BE ACTED ON AT THE SPECIAL MEETING, YOU
SHOULD CAREFULLY REVIEW THIS ENTIRE DOCUMENT, INCLUDING EXHIBITS AND DOCUMENTS
INCORPORATED BY REFERENCE.
RISK FACTORS
YOU SHOULD BE AWARE THAT THE DISTRIBUTION BY US OF ALL OF OUR ASSETS
AND LIABILITIES TO EQUITEX 2000, THE SPIN-OFF OF EQUITEX 2000 COMMON STOCK, THE
OWNERSHIP OF EQUITEX 2000 COMMON STOCK AND THE PROPOSED ACQUISITION OF NOVA
FINANCIAL SYSTEMS AND KEY FINANCIAL SYSTEMS INVOLVE RISKS, INCLUDING THOSE
BRIEFLY DESCRIBED BELOW AND ELSEWHERE IN THIS PROXY STATEMENT, THAT COULD
ADVERSELY AFFECT THE VALUE OF YOUR HOLDINGS. SEE RISK FACTORS ON PAGE 14 FOR A
FULL DESCRIPTION.
RISKS REGARDING OUR HISTORY
o We have had net losses in the past two years and there is no
assurance we will have a profit this year.
o We have not consummated certain recent mergers and
acquisitions and we can provide no assurance that we will
consummate the proposed acquisitions.
RISKS ASSOCIATED WITH OUR SECURITIES
o There may be substantial dilution to our current stockholders
upon the approval of proposal number one.
o We have outstanding convertible securities that may cause
substantial dilution to holders of our common stock.
o Upon closing of the acquisitions of Nova Financial Systems and
Key Financial Systems, we will issue a warrant which will
cause dilution to our existing stockholders.
RISKS ARISING FROM THE DISTRIBUTION AND SPIN-OFF
o An active trading market might not develop for the Equitex
2000 common stock and trading prices are uncertain.
o Equitex 2000 will indemnify us in litigation, but there is no
assurance of a favorable outcome.
o Equitex 2000 may not pay dividends after the distribution and
spin-off.
o Equitex 2000's absence of history as an independent company
makes it difficult to predict future performance.
o Equitex 2000 may not be able to consummate or integrate
effectively acquisitions and its results may be adversely
affected.
o Anti-takeover provisions may affect the marketability and
market price of Equitex 2000 common stock.
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RISKS RELATED TO THE BUSINESS OF NOVA FINANCIAL SYSTEMS AND KEY FINANCIAL
SYSTEMS
o Social, economic and geographic factors affect our retention
of credit card accounts.
o Consumer protection laws may restrict our ability to collect
receivables and maintain yield on portfolio.
o Our ability to generate credit card revenue is dependent upon
retaining old customers and obtaining new customers and there
is no assurance we will be successful in our efforts.
o Marketing of the Pay As You Go credit card and Net 1st
National Bank was suspended for one month and there is no
guarantee that another suspension will not occur.
o Our earnings are dependent upon the marketing and acceptance
of one product.
o Timing of payments is not certain.
o The ability to change terms of the credit card accounts could
alter payment patterns and reduce our earnings.
o We face intense competition and there is no assurance that we
will achieve market acceptance of our product.
o We could have increased delinquencies and credit losses which
may reduce our earnings.
o We are reliant on certain vendor relationships which we may
not be able to maintain.
o Our industry is heavily regulated by the government which may
affect our ability to conduct business.
o We are dependent upon our management and may not be able to
retain key employees.
o We face industry risks related to the financial services
industry which could affect our ability to achieve market
acceptance.
o In conjunction with the acquisitions, we intend to issue
convertible preferred stock to raise cash which will cause
dilution to our existing stockholders.
THE SPECIAL MEETING
DATE, TIME AND PLACE
Equitex is providing this proxy statement in connection with its
solicitation of proxies from you for use at a special meeting of stockholders of
Equitex to be held at 2401 PGA Blvd., Suite 190, Palm Beach Gardens, Florida
33410 at _____ a.m. Eastern Daylight Time on ________, 2001 and at any
adjournments of that meeting.
MATTERS FOR CONSIDERATION
INCREASE IN AUTHORIZED SHARES OF COMMON STOCK
At the special meeting, you will be asked to consider and vote upon a
proposal providing for an amendment of paragraph 4 of our Certificate of
Incorporation to increase the number of authorized shares of
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Equitex's common stock, $.02 par value, from 7,500,000 shares to 50,000,000
shares. By approving this proposal, our stockholders will not be allowed a
separate opportunity to vote upon the following transactions:
1) The issuance of our Series D 6% Convertible Preferred Stock to
provide cash for the acquisition of First Bankers Mortgage
Services which may convert into approximately 347,511 shares
of our common stock;
2) The issuance of our Series E Convertible Preferred Stock in
connection with the acquisition and rescission of First
Bankers Mortgage Services which may convert into approximately
300,000 shares of our common stock;
3) The issuance of our Series F Convertible Preferred Stock in
connection with the acquisition of The Meridian Residential
Group which may convert into approximately 525,000 shares of
our common stock;
4) The issuance of our Series G Convertible Preferred Stock in
connection with a private placement which may convert into
approximately 376,500 shares of our common stock; and
5) The issuance of 100,000 shares of our common stock to two
consultants for services performed.
Each of the above series of preferred stock was issued subject to the
approval of the increase in the number of authorized shares of our common stock.
Until the approval of proposal number one, these series of preferred stock are
not convertible into our common stock. If we fail to obtain approval of proposal
number one on or before May 15, 2001, we will be required to redeem for
approximately $1,755,000 the outstanding shares of Series G Convertible
Preferred Stock.
The stockholders should be aware that approval of this proposal may
ratify the board of directors' prior actions regarding these transactions and
the ratification could be used as an affirmative defense against future
shareholder suits.
The following table summarizes information regarding the estimated fair
value and summary financial information regarding the companies we have acquired
or will acquire upon approval of proposals one and three:
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Nova Financial Key Financial
Systems Systems Meridian Services(1)
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(pending) (pending) (completed)
Estimated fair value $32,183,000 (2) $32,183,000 (2) $3,613,000 (3)
Net income (loss)
For the year ended December 31, 2000 $ 576,000 $ 2,980,800 $ 65,300
For the year ended December 31, 1999 $ 205,000 $ 5,384,900 $ 8,700(4)
For the quarter ended September 30, 2000 $ (44,427) $ 1,203,011 $ 12,400
For the quarter ended June 30,2000 $ 255,326 $ 710,826 $ (98,800)
For the quarter ended March 31, 2000 $ 374,865 $ 946,263 $ 93,300 (4)
Consideration issued/paid
Estimated fair value of options and
warrants to be issued $3,800,000(5) $3,800,000(5) --
Stock options to be issued (shares) 893,200 893,200 --
Warrants to be issued (shares) 285,000 285,000 --
Cash $ 2,500,000 $ 2,500,000 $ 850,000
Proceeds received/anticipated to be
received through equity financing $ 2,500,000(9) $ 2,500,000(9) $ 1,300,000(8)
Market value of common stock issued/to $25,883,000(6) $25,883,000 (6) $2,763,000 (7)
be issued
Common stock (shares) 3,570,000 3,570,000 425,000
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(1) Meridian Residential Group, Inc. merged with GR.com, our wholly owned
subsidiary. Subsequent to the merger, GR.com changed its name to
Meridian Services, Inc.
(2) Acquisitions are to be accounted for as reverse acquisitions. See Pro
Forma Financial Information appearing elsewhere in this proxy
statement.
(3) The acquisition agreement was signed September 7, 2000 and was
completed September 27, 2000. The acquisition was accounted for as a
purchase.
(4) Fiscal year-ended and fiscal quarter ended February 29, 2000.
(5) Estimated fair value of options and warrants to be issued based upon
Black-Scholes option pricing model, utilizing a 0% expected dividend
yield, a 6% risk-free interest rate, an expected volatility of 48% and
expected lives of the options and warrants of three years.
(6) Market value based on the price of our common stock at June 27, 2000
($7.25 per share).
(7) Market value based on the price of our common stock at September 7,
2000 ($6.50 per share).
(8) Proceeds received in connection with the sale of 1,300 shares of Series
G 6% Convertible Preferred Stock.
(9) Proceeds anticipated in connection with the proposed sale of up to
5,500 shares of a new series of preferred stock (net of $500,000 issue
costs) which is to be used to finance the cash portion of our
acquisition of Nova Financial Systems and Key Financial Systems. No
shares have been issued yet. The
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new series of preferred stock will contain a beneficial conversion
feature similar to the Series G preferred stock in which the preferred
stock may be converted at any time at a price per share of common stock
equal to the lesser of (a) $6.50 or (b) 65% of the market price of our
common stock.
Background And Reasons For The Increase in Authorized Shares
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The increase in authorized shares will allow us to issue shares of our
common stock and common stock underlying our convertible preferred stock
issuances in connection with the following:
o common stock issued in the proposed Nova Financial Systems and
Key Financial Systems acquisitions;
o preferred stock which may be issued to raise the cash
consideration for the Nova Financial Systems and Key Financial
Systems acquisitions;
o preferred stock issued in connection with the Meridian
Residential Group acquisition; and
o preferred stock issued in connection with the First Bankers
Mortgage Services acquisition and rescission.
In addition, the increase in authorized shares will facilitate the
following:
o the possible issuance of common stock or securities
convertible or exercisable into common stock, in connection
with one or more equity or debt financings; and
o issue common stock issuable pursuant to our stock option plans
and outstanding warrants.
Condition to the Increase in Common Stock
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The increase in common stock is conditioned upon the approval of the
increase in common stock by the holders of a majority of the outstanding stock
entitled to vote and a majority of the outstanding stock of each class entitled
to vote as a class.
Risk Factors
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You should be aware that the increase in the number of authorized
shares involves certain risks, including those described under "Risk Factors,"
that could adversely affect the value of your holdings.
THE DISTRIBUTION AND SPIN-OFF
At the special meeting, you will also be asked to consider and vote
upon a proposal providing for the distribution by us of all of our assets and
liabilities to Equitex 2000, our wholly-owned and Delaware-chartered subsidiary,
and the distribution by us of all of the outstanding shares of Equitex 2000
common stock to our stockholders on the basis of one share of common stock of
Equitex 2000 for each share of our common stock, as further described in this
proxy statement.
If our stockholders approve the distribution and spin-off, we
anticipate that our board of directors will authorize the various components of
the distribution and declare a special dividend payable in Equitex 2000 common
stock and set a record date for that dividend which shall be prior to the
acquisitions of Nova Financial Systems and Key Financial Systems. The
distribution would involve the actions described below.
We will contribute to Equitex 2000, including the following:
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o all of our cash, or such lesser amount as our board of
directors may determine in its sole discretion;
o all securities and investments owned by us in our investee
companies including our interest in First Teleservices and
First Telebank;
o all shares of the Meridian Services, our wholly-owned mortgage
banking subsidiary;
o any residual rights related to the First Bankers Mortgage
Services acquisition and rescission;
o all shares of nMortgage, our Internet based mortgage banking
subsidiary;
o all receivables of any nature, including accounts and notes
receivable;
o all furniture, fixtures and equipment; and
o any other assets that are related in any manner to our
company.
Equitex 2000 will assume all of our liabilities and will indemnify us
and assume our prosecution or defense in the following lawsuits: WILLIAM G.
HAYES, JR. LIQUIDATING AGENT FOR RDM SPORTS GROUP, INC. AND RELATED DEBTORS V.
EQUITEX, INC., SMITH, GAMBRELL, RUSSELL, L.L.P., DAVID J. HARRIS, P.C., AND
DAVID J. HARRIS, INDIVIDUALLY, Adversary Proceeding No., 00-1065 (U.S.
Bankruptcy Court for the Northern District of Georgia, Newnan Division); and
EQUITEX, INC. AND HENRY FONG V. BERTRAND T. UNGER, Case No. 98-CV-2437 (Dist.
Ct. Arapahoe County, Colorado).
Federal Income Tax Consequences Related to the Distribution and
Spin-Off
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While the spin-off of shares of Equitex 2000 will be a taxable
distribution to our stockholders, because we have no current and post-1913
accumulated earnings and profits, the distribution will be applied against, and
reduce the adjusted basis of our common stock owned by the stockholder as a
return of capital. If the value distribution is greater than the adjusted basis
of the stockholder's Equitex stock, the excess is treated as a capital gain. The
value of the distribution will be equal to the fair market value of the assets
distributed by Equitex to Equitex 2000.
What Our Stockholders Will Receive in the Distribution and Spin-Off
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We will distribute, in the form of a special dividend, all of the
outstanding shares of common stock of Equitex 2000, on a pro rata basis, to our
holders of common stock as of a record date for the special dividend which shall
be prior to the acquisitions of Nova Financial Systems and Key Financial
Systems. In the special dividend, each shareholder will retain its shares of
Equitex common stock, and for each share of Equitex common stock held by it on
the record date for the special dividend, will be entitled to receive one share
of Equitex 2000 common stock.
Prior to our distribution to our stockholders, the Equitex 2000 common
stock will be registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934 and Equitex 2000 shall have filed and sought to make
effective an application for the inclusion of the Equitex 2000 common stock on
the Nasdaq SmallCap Market. If Equitex 2000's application is not approved, its
common stock may be traded on either the electronic bulletin board or the
National Quotation Bureau, Inc.'s "Pink Sheets."
Following the distribution and spin-off, we are expected to close on
our acquisitions of Nova Financial Systems and Key Financial Systems.
Our board of directors has retained discretion, even if all conditions
to the distribution of its assets and liabilities and spin-off of Equitex 2000
common stock are satisfied, to abandon, defer or modify the distribution of its
assets and liabilities and/or spin-off of shares of Equitex 2000.
-8-
Assets and Liabilities Distributed
----------------------------------
The following table summarizes the carrying values of the assets and
liabilities by subsidiary to be transferred to Equitex 2000 at their net
carrying values utilizing December 31, 2000 carrying values:
Total assets
Triumph First distributed/
Sports, Teleservices, Meridian liabilities assumed
Equitex Inc. Inc. nMortgage Services by Equitex 2000
--------- ------ ------ --------- -------- ---------------
Assets distributed:
Cash $ 29,000 $ 10,000 -- $ 8,000 $ 290,000 $ 337,000
Receivables 963,000 595,000 $ 250,000 7,000 7,000 1,822,000
Investments 1,144,000 1,000 325,000 -- -- 1,470,000
Other assets 28,000 189,000 -- -- 114,000 331,000
Intangible and other assets 1,192,000 114,000 1,000 1,749,000 2,415,000 5,471,000
Liabilities assumed:
Payables and other liabilities 764,000 99,000 140,000 144,000 113,000 1,260,000
Notes payable 545,000 491,000 -- 921,000 -- 1,957,000
Minority interest -- -- -- 461,000 170,000 631,000
Net income (loss):
For the year ended December 31,
2000 (2,820,000) (845,000) (413,000) (3,347,000) 58,000*
For the year ended December 31,
1999 (2,721,000) (388,000) (502,000) (4,106,000) 9,000
For the quarter ended March 31,
2000 (139,000) (16,000) (34,000) (1,729,000) 93,000
For the quarter ended June 30,
2000 (1,051,000) (145,000) (92,000) (5,676,000) (99,000)
For the quarter ended September
30, 2000 (625,000) (98,000) (347,000) (428,000) 12,000
- -----------------
* Represents net income of Meridian Services from date of organization by
Equitex on September 29, 2000 through December 31, 2000.
Equitex Pre and Post Distribution and Spin-Off
----------------------------------------------
We have been engaged, through our subsidiaries, in the active conduct
of two principal lines of business, the consumer financial service business and
the retail and commercial mortgage banking business. The distribution by us of
all of our assets and liabilities to Equitex 2000 and spin-off of Equitex 2000
common stock will separate the two principal lines of business and allow Equitex
2000 the ability to focus more directly on the mortgage banking business and us
to focus more directly on our consumer financial service business.
The following table summarizes the balance sheet and income statement
information for us as of and for the year ended December 31, 2000 and on a
historical basis and on a pro-forma basis reflecting the distribution, spin-off
and the acquisitions of Nova Financial Systems and Key Financial Systems as
discussed under proposal number three:
-9-
Equitex and subsidiaries
------------------------
pre-distribution/spin off post-distribution/spin-off
------------------------- --------------------------
Historical Pro forma
------------ ------------
As of December 31, 2000
-----------------------
Assets:
Cash and cash equivalents $ 337,000 $ 74,000
Marketable securities 238,000
Receivables 1,822,000 6,184,000
Inventories 70,000 --
Investments 1,232,000 --
Fixed assets, net 261,000 267,000
Intangible and other assets 5,471,000 638,000
------------ ------------
Total assets $ 9,431,000 $ 7,163,000
============ ============
Liabilities and equity:
Accounts payable and accrued expenses $ 1,260,000 $ 1,876,000
Notes payable 1,957,000 --
Payable to Seller -- 5,000,000
Due to cardholders 4,389,000
------------ ------------
Total liabilities 3,217,000 11,265,000
------------ ------------
Minority interest 631,000 --
------------ ------------
Mandatory redeemable preferred stock 1,536,000 1,536,000
------------ ------------
Stockholders' equity (deficit) 4,047,000 (5,638,000)
------------ ------------
Total liabilities and stockholders equity $ 9,431,000 $ 7,163,000
============ ============
Statement of operations data:
Revenue $ 2,869,000 $ 14,513,000
------------ ------------
Gross profit 2,636,000 14,513,000
------------ ------------
Total expenses, net 15,122,000 10,956,000
------------ ------------
Income (loss) before income taxes and unusual gain (12,486,000) 3,557,000
Unusual gain on subsidiary stock transaction 5,132,000 --
------------ ------------
Income (loss) before income taxes (7,354,000) --
Provision for income taxes 13,000 1,448,000
------------ ------------
Net income (loss) (7,367,000) 2,109,000
Beneficial conversion features (700,000) (700,000)
Accretion on redemption of preferred stock (453,000) (453,000)
Deemed preferred stock dividends (97,000) (97,000)
------------ ------------
Net income (loss) applicable to common stockholders $ (8,617,000) $ 859,000
============ ============
Basic net income (loss) per share $ (1.21) $ 0.06
============ ============
Diluted net income (loss) per share $ (1.21) $ 0.04
============ ============
Weighted average number of common shares outstanding 7,106,749 14,247,042
============ ============
Background and Reasons for the Distribution and Spin-off
--------------------------------------------------------
Our board or directors believes that the distribution of our assets and
liabilities to Equitex 2000 and the spin-off of shares of Equitex 2000 common
stock will serve a number of purposes, including:
o increasing the ability of both companies to improve the
corporate fit and focus of their respective businesses;
-10-
o facilitating acquisitions by both companies by improving the
attractiveness of their respective capital stock as
acquisition currency; and
o allowing both companies to effectively motivate and enhance
management performance by providing equity compensation and
incentives more closely tied to the businesses in which the
employees work.
Conditions to the Distribution and Spin-Off
-------------------------------------------
The distribution by us of all of our assets and liabilities to Equitex
2000 and spin-off of Equitex 2000 common stock are conditioned upon, among other
things:
(i) approval of the distribution and spin-off by the holders of a
majority of the outstanding stock of each class entitled to
vote thereon as a class; and
(ii) there not being in effect any statute, rule, regulation or
order of any court, governmental or regulatory body that
prohibits or makes illegal the transaction contemplated by the
distribution.
The conditions listed above cannot be waived. Our board of directors
has reserved the right to abandon the distribution and spin-off even if all
conditions are satisfied.
Principal Office After the Distribution and Spin-Off
----------------------------------------------------
Equitex 2000, Inc.
2401 PGA Boulevard, Suite 190
Palm Beach Gardens, Florida 33410
Risk Factors
------------
You should be aware that the distribution by us of all of our assets
and liabilities to Equitex 2000 and spin-off of all outstanding shares of
Equitex 2000 common stock involves certain risks, including those described
under "Risk Factors," that could adversely affect the value of your holdings.
ACQUISITIONS OF NOVA FINANCIAL SYSTEMS AND KEY FINANCIAL SYSTEMS
At the special meeting, you will also be asked to consider and vote
upon a proposal providing for the acquisition all of the outstanding capital
stock of Nova Financial Systems and Key Financial Systems, companies under
common control with nearly an identical ownership structure, in exchange for the
greater of (i) 7,140,000 shares or (ii) 50% of our outstanding common stock on a
post-acquisition basis, cash consideration of $5 million and a warrant. Nova
Financial Systems and Key Financial Systems are both financial companies which
specialize in selling credit card programs designed for high risk clients. This
proposal is subject to the approval of proposal number one.
Background and Reasons for the Acquisitions
-------------------------------------------
Our board of directors believes that the acquisitions of Nova Financial
Systems and Key Financial Systems will serve a number of purposes, including:
o adding an ongoing, profitable, business to our operations;
o adding a business which complements our plans and objectives
relative to Internet financial services;
o provide us with additional revenues and resources with the
potential for future growth; and
-11-
o to create the potential for increased stockholder value.
Conditions to the Acquisitions
------------------------------
Consummation of the acquisitions of Nova Financial Systems and Key
Financial Systems is subject to a number of conditions, including:
(i) the distribution by us of all of our assets and liabilities to
Equitex 2000 and the spin-off of Equitex 2000 common stock;
(ii) the approval of the acquisitions of Nova Financial Systems and
Key Financial Systems by our stockholders; and
(iii) the approval of the increase in our authorized shares of
common stock from 7,500,000 shares to 50,000,000 shares
pursuant to proposal number one.
Nova Financial Systems and Key Financial Systems may waive the approval
of the increase in authorized shares if our stockholder meeting has not been
held prior to the closing of the mergers or the closing may be postponed until
our stockholder meeting has been held and an amended Certificate of
Incorporation has been filed in Delaware.
Risk Factors
------------
You should be aware that these acquisitions involve certain risks,
including those described under "Risk Factors," that could adversely affect the
value of your holdings.
OTHER MATTERS
You may also be asked to act on other business that properly comes
before the special meeting.
NO RIGHT OF APPRAISAL
Our stockholders will not be entitled to appraisal rights under the
Delaware General Corporation Law in connection with the distribution, the
spin-off or the acquisitions of Nova Financial Systems and Key Financial
Systems.
SPECIAL MEETING RECORD DATE
Our board of directors has fixed the close of business on __, 2001 as
the record date for the special meeting.
VOTING AND QUORUM
Holders of record of our common stock at the record date are entitled
to notice of, and to vote at, the special meeting. Each share of our common
stock outstanding at the close of business on the record date is entitled to one
vote on each matter presented at the special meeting. The presence in person or
by proxy of the stockholders holding a majority of the outstanding shares of our
common stock on the record date will constitute a quorum for the transaction of
business at the special meeting.
VOTE REQUIRED
o Proposal number one - approval of the adoption of the
amendment of paragraph 4 of the Certificate of Incorporation
to increase the number of authorized shares of our common
-12-
stock, $.02 par value, from 7,500,000 shares to 50,000,000
shares will require the affirmative vote of a majority of the
outstanding stock of each class entitled to vote thereon as a
class;
o Proposal number two - approval of the distribution by us of
all of our assets and liabilities to Equitex 2000 and the
distribution by us of all of the outstanding shares of common
stock of Equitex 2000 to our stockholders on the basis of one
share of common stock of Equitex 2000 for each share of our
common stock, as further described in this proxy statement
will require the affirmative vote of a majority of the
outstanding stock of each class entitled to vote thereon as a
class; and
o Proposal number three - approval of the acquisition all of the
outstanding capital stock of Nova Financial Systems and Key
Financial Systems in exchange for the greater of (i) 7,140,000
shares or (ii) 50% of our outstanding common stock on a post
acquisition basis, cash consideration of $5 million and a
warrant will require the affirmative vote of a majority of the
total votes cast on the proposal in person or by proxy.
Proxies which vote against any of the above proposals shall not be used
by management to exercise discretionary authority.
BOARD RECOMMENDATIONS
Our board of directors unanimously recommends that the stockholders
vote "FOR" each of the proposals.
-13-
CORPORATE STRUCTURE
The following chart illustrates the current Equitex corporate
structure:
Equitex Stockholders
own 100% of common stock
|
Equitex, Inc.
|
-----------------------------------------------------------------
| | | |
Own 88% of common First TeleServices, Own 69% of common stock Meridian
stock of Triumph Inc. of nMortgage Services, Inc.
Sports
Assuming the Equitex stockholders approve each of the proposals to be
voted upon at the meeting and the proposed transactions are completed, the
following chart illustrates the future corporate structure of Equitex and
Equitex 2000:
Equitex, Inc.
- -------------
Equitex Stockholders Nova and Key Stockholders
own 50% of Common Stock own 50% of Common Stock
| |
----------------------------------------
|
Equitex, Inc.
|
----------------------------------------
| |
Key Financial Systems, Inc. Nova Financial Systems, Inc.
Equitex 2000
- ------------
Equitex Stockholders
own 100% of common stock
|
Equitex 2000, Inc.
|
-----------------------------------------------------------------
| | | |
Own 88% of common First TeleServices, Own 69% of common stock Meridian
stock of Triumph Inc. of nMortgage Services, Inc.
Sports
-14-
RISK FACTORS
YOU SHOULD BE AWARE THAT THE DISTRIBUTION BY US OF ALL OF OUR ASSETS
AND LIABILITIES TO EQUITEX 2000, THE SPIN-OFF OF EQUITEX 2000 COMMON STOCK, THE
OWNERSHIP OF EQUITEX 2000 COMMON STOCK AND THE PROPOSED ACQUISITION OF NOVA
FINANCIAL SYSTEMS AND KEY FINANCIAL SYSTEMS INVOLVE RISKS, INCLUDING THOSE
DESCRIBED BELOW AND ELSEWHERE IN THIS PROXY STATEMENT, THAT COULD ADVERSELY
AFFECT THE VALUE OF YOUR HOLDINGS. WE ARE NOT MAKING, AND NO OTHER PERSON IS
AUTHORIZED TO MAKE, ANY REPRESENTATION AS TO THE FUTURE MARKET VALUE OF EQUITEX
2000 COMMON STOCK.
RISKS REGARDING OUR HISTORY
WE HAVE HAD NET LOSSES IN THE PAST TWO YEARS AND THERE IS NO ASSURANCE WE WILL
HAVE A PROFIT THIS YEAR
We incurred a net loss of approximately $7.4 million (a loss applicable
to common stockholders of $8.6 million) for the year ended December 31, 2000,
compared to a loss of approximately $7.7 million (a loss applicable to common
stockholders of approximately $11 million) for the year ended December 31, 1999
and recorded a net decrease in net assets resulting from operations of
approximately $2 million for the year ended December 31, 1998 as a business
development company. There is no assurance that we will have a profit for the
year ended December 31, 2001.
WE HAVE NOT CONSUMMATED CERTAIN RECENT MERGERS AND ACQUISITIONS AND WE CAN
PROVIDE NO ASSURANCE THAT WE WILL CONSUMMATE THE PROPOSED ACQUISITIONS
We recently failed to consummate two acquisitions and one merger. On
August 2, 2000, we announced that our agreement for the acquisition of First
TeleBanc Corp had expired. In addition, as a result of certain deficiencies
noted in the operations of First TeleBanc Corp.'s operating bank, Net 1st
National Bank, we withdrew our application with the Federal Reserve to become a
bank holding company. On September 21, 2000, we agreed to terminate our
agreement and plan of merger with Innovative Gaming Corporation of America.
While we acquired First Bankers Mortgage Services on August 23, 1999, we reached
an agreement to rescind the acquisition on August 15, 2000, effective June 28,
2000. We can provide no assurance that we will consummate the proposed
acquisitions with Nova Financial Systems and Key Financial Systems or that if
consummated, the acquisitions will prove to be successful.
RISKS ASSOCIATED WITH OUR SECURITIES
THERE MAY BE SUBSTANTIAL DILUTION TO OUR CURRENT STOCKHOLDERS UPON THE APPROVAL
OF PROPOSAL NUMBER ONE.
Upon the approval of proposal number one in this proxy, our
shareholders may experience dilution from the conversion of shares of our Series
D, E, F and G preferred stock into approximately 1,549,696 shares of our common
stock or 19.8% of the number of shares of common stock outstanding prior to the
conversion. The 1,200 outstanding shares of Series D 6% Convertible Preferred
Stock would currently convert into approximately 347,511 shares of our common
stock as of March 30, 2001, using a conversion price of 65% of the closing price
of our common stock of $5.3125 at that date. The 250 outstanding shares of
Series E Convertible Preferred Stock and 50 shares to be issued automatically
converts into 300,000 shares of our common stock when proposal number one is
approved. The 460,000 outstanding shares of Series F Convertible Preferred Stock
would currently convert into approximately 525,715 shares of our common stock.
The 1,300 outstanding shares of Series G Convertible Preferred Stock would
currently convert into approximately 376,470 shares of our common stock as of
March 30, 2001, using a conversion price of 65% of the closing price of our
common stock of $5.3125 at that date. In addition, upon the approval of proposal
number one, we have agreed to issue 100,000 shares of our common stock to two
consultants for services performed.
-15-
WE HAVE OUTSTANDING CONVERTIBLE SECURITIES THAT MAY CAUSE SUBSTANTIAL DILUTION
TO HOLDERS OF OUR COMMON STOCK.
The conversion terms of our outstanding Series D and G Convertible
Preferred Stock may cause substantial dilution in the book value per share of
our common stock. The conversion features in the Series D 6% Convertible
Preferred Stock and Series G Convertible Preferred Stock allows the holders to
purchase increasing shares of common stock as a result of a decreasing market
price of our common stock price including but not limited to the following
circumstances:
o To the extent that the selling securityholder converts or
exercises and then sells common stock, the common stock price
may decrease due to the additional shares in the market. This
could allow the holders to convert or exercise remaining
Series D or G Convertible Preferred Stock into greater amounts
of common stock, the sales of which would further depress the
stock price.
o The significant downward pressure on the price of the common
stock could encourage short sales and consequently place
further downward pressure on the price of the common stock.
o Under the terms of our Series D and G Convertible Preferred
Stock, holders of these shares must own less than 5% of our
outstanding shares of common stock. Holders of these shares
may circumvent this restriction by converting an amount of
preferred stock to common stock in an amount less than 5% of
our outstanding shares of common stock, then selling those
shares of common stock into the market and then converting
another block of preferred stock into common stock. By doing
the foregoing, holders of our Series D or G Convertible
Preferred Stock can create additional dilution to the existing
holders of our common stock.
o The conversion of the Series D and G Convertible Preferred
Stock may result in substantial dilution to the interests of
other holders of common stock.
Since we cannot know the conversion price of the Series D or G
Convertible Preferred Stock until notice of conversion has been provided by the
holder, we cannot currently determine how many shares of common stock we will
need to issue upon conversion of the Series D or G Convertible Preferred Stock.
The conversion ratio for issuing shares of our common stock in exchange for
Series D 6% Convertible Preferred Stock is determined by dividing the stated
value of the Series D 6% Convertible Preferred Stock by the conversion price,
which is 65% of the market price of our common stock
The conversion ratio for issuing shares of our common stock in exchange
for Series G Convertible Preferred Stock is determined by dividing the stated
value of the Series G Convertible Preferred Stock by the conversion price. The
conversion price will be the lowest of:
o $6.50; or
o 65% of the market price of our common stock provided that if
our common stock is delisted from the Nasdaq stock market for
any reason, then the conversion price for the remaining
outstanding shares of Series G Convertible Preferred Stock
drops to 50% of the market price.
For example and for illustrative purposes only, if the conversion date
is March 30, 2001, the closing market price of our common stock on March 30,
2001 was $5.3125, 65% of $5.3125 is $3.453125. Therefore, the lower of $6.50 and
$3.453125 is $3.453125 and is the conversion price.
The following table sets forth, for illustrative purposes only, the
effect of increasing and decreasing stock prices and its result on the
conversion price per share and number of shares issued upon conversion of the
Series D and G Convertible Preferred Stock.
-16-
Price per Conversion Aggregate number of Conversion price Aggregate number of Percentage of
share of price of Series shares of common stock of Series G shares of common outstanding
common D 6% convertible from all convertible stock convertible common stock(5)
stock Convertible Series D 6% Convertible Preferred Stock from all Series G
Preferred Stock Preferred Stock(2) (3) Convertible
(1) Preferred Stock(4)
- ------------------------------------------------------------------------------------------------------------------------
$5.3125 $3.4531 347,511 $3.4531 376,471 10.2%
$3.9843(6) $2.5898 463,320 $2.5898 501,931 13.7%
$2.6562(7) $1.7265 695,048 $1.7265 752,968 20.5%(10)
$6.6406(8) $4.3164 278,009 $4.3164 301,173 8.2%
$7.9687(9) $5.180 231,660 $5.180 250,965 6.8%
(1) The conversion price is 65% of the market price of our common stock.
(2) Assumes that all 1,200 shares of Series D 6% Convertible Preferred
Stock, which have a stated value of $1,200,000, will be converted into
common stock and there have been no prior conversions of the Series D
6% Convertible Preferred Stock.
(3) The conversion price is the lesser of (a) $6.50 (b) 65% of the market
price of our common stock.
(4) Assumes that all 1,300 shares of Series G Convertible Preferred Stock,
which have a stated value of $1,300,000, will be converted into common
stock and there have been no prior conversions of the Series G
Convertible Preferred Stock.
(5) Assumes 7,071,618 outstanding shares of our common stock prior to the
conversion of the Series D and G Convertible Preferred Stock.
(6) Reflects a 25% reduction from the average closing bid price of $5.3125.
(7) Reflects a 50% reduction from the average closing bid price of $5.3125.
(8) Reflects a 25% increase from the average closing bid price of $5.3125.
(9) Reflects a 50% increase from the average closing bid price of $5.3125.
(10) The Certificate of Designation for the Series D and G Convertible
Preferred Stock limit us from issuing shares of common stock exceeding
20% of the outstanding number of shares of our common stock on the
date the shares of preferred stock were issued. The limit is 1,404,489
for the Series D Convertible Preferred Stock and 1,421,389 for the
Series G Convertible Preferred Stock. We must obtain shareholder
approval to issue shares in excess of the 20% limitation or redeem any
shares in excess of the 20% limitation at the 125% stated value of
those shares.
Both the Series D and G Convertible Preferred Stock contain provisions
prohibiting us from issuing shares in excess of 20% of the number of shares of
our common stock outstanding on the date the securities were issued. We would be
required to obtain shareholders approval to issue shares in excess of the 20%
limitation or redeem the remaining number of shares at 125% of the stated value.
UPON CLOSING OF THE ACQUISITIONS OF NOVA FINANCIAL SYSTEMS AND KEY FINANCIAL
SYSTEMS, WE WILL ISSUE A WARRANT WHICH WILL CAUSE DILUTION TO OUR EXISTING
STOCKHOLDERS.
-17-
Upon the closing of the acquisitions of Nova Financial Systems and Key
Financial Systems, we will issue a warrant equal to the aggregate amount of any
warrants, options, preferred stock or other convertible securities outstanding
at the closing. At this time, we estimate that we will issue a warrant to
purchase 4,162,397 shares of our common stock.
RISKS ARISING FROM THE DISTRIBUTION AND SPIN-OFF
AN ACTIVE TRADING MARKET MIGHT NOT DEVELOP FOR THE EQUITEX 2000 COMMON STOCK AND
TRADING PRICES ARE UNCERTAIN.
Equitex 2000 intends to apply to list the shares of its common stock to
be distributed in the spin-off on the Nasdaq SmallCap Market. There is no
assurance this application will be approved. If Equitex 2000's application is
not approved, its common stock may be traded on either the electronic bulletin
board or the National Quotation Bureau, Inc.'s "Pink Sheets." However, there is
presently no public market for the Equitex 2000 common stock and an active
market may not develop following the distribution and spin-off. There can be no
assurance regarding the prices at which the Equitex 2000 common stock will trade
on or after the spin-off of Equitex 2000 common stock. Until the Equitex 2000
common stock is fully distributed and an orderly market develops, the prices at
which the stock trades may fluctuate significantly. Prices for the Equitex 2000
common stock will be determined in the marketplace and may be influenced by many
factors, including, without limitation, (1) the depth and liquidity of the
market for the Equitex 2000 common stock; (2) investors' perceptions of Equitex
2000, Inc. and the industries in which it participates; (3) Equitex 2000's
dividend policy; and (4) changes in government regulation and general economic
and market conditions.
EQUITEX 2000 WILL INDEMNIFY US IN LITIGATION, BUT THERE IS NO ASSURANCE OF A
FAVORABLE OUTCOME.
As part of the distribution of all of our assets and liabilities,
Equitex 2000 will assume all of our liabilities and will indemnify us and assume
our prosecution or defense in the following lawsuits: WILLIAM G. HAYES, JR.
LIQUIDATING AGENT FOR RDM SPORTS GROUP, INC. AND RELATED DEBTORS V. EQUITEX,
INC., SMITH, GAMBRELL, RUSSELL, L.L.P., DAVID J. HARRIS, P.C., AND DAVID J.
HARRIS, INDIVIDUALLY, Adversary Proceeding No., 00-1065 (U.S. Bankruptcy Court
for the Northern District of Georgia, Newnan Division); and EQUITEX, INC. AND
HENRY FONG V. BERTRAND T. UNGER, Case No. 98-CV-2437 (Dist. Ct. Arapahoe County,
Colorado). Although we believe these lawsuits are without merit, there is no
assurance of a favorable outcome. The costs to defend these matters may be
material and an unfavorable outcome of either or both matters may have a
material adverse effect on Equitex 2000.
EQUITEX 2000 MAY NOT PAY DIVIDENDS AFTER THE DISTRIBUTION AND SPIN-OFF.
The dividend policy of Equitex 2000 after the distribution by us of all
of our assets and liabilities to Equitex 2000 and spin-off of Equitex 2000
common stock will be determined by its board of directors. The future payment of
dividends by Equitex 2000 will be based on the results of operations and
financial condition of Equitex 2000 and other business considerations that its
board of directors considers relevant. We cannot assure you that Equitex 2000
will pay any dividends after the distribution and spin-off of Equitex 2000
common stock.
EQUITEX 2000'S ABSENCE OF HISTORY AS AN INDEPENDENT COMPANY MAKES IT DIFFICULT
TO PREDICT FUTURE PERFORMANCE.
Equitex 2000's proposed business has historically been conducted by us
as part of our overall operations. Therefore, Equitex 2000 does not have an
operating history as an independent company. Equitex 2000 was recently formed
solely for the purpose of effecting the distribution by us of all of our assets
and liabilities to Equitex 2000 and spin-off of Equitex 2000 common stock.
Therefore, the financial information included in this proxy statement does not
necessarily reflect the financial position, results of operations and cash flows
of Equitex 2000 had Equitex 2000 been operated independently during the periods
presented. As a stand-alone company, Equitex 2000's results of operations may or
may not continue at a level similar to its results of operations while a part of
us. In addition, we have not been profitable in these operations. We also
believe that Equitex 2000's general and administrative expenses will be higher
than the expenses reflected in our historical financial statements of our
businesses.
-18-
EQUITEX 2000 MAY NOT BE ABLE TO CONSUMMATE OR INTEGRATE EFFECTIVELY ACQUISITIONS
AND ITS RESULTS MAY BE ADVERSELY AFFECTED.
We have completed several acquisitions and the business strategy of
Equitex 2000 contemplates continued expansion, including growth through future
acquisitions. However, the ability of Equitex 2000 to consummate and integrate
effectively the completed and any future acquisitions on terms that are
favorable to them may be limited. Equitex 2000 may not have adequate financial
resources to consummate any acquisitions. In addition, the ability of Equitex
2000 to issue additional equity securities to raise capital or consummate
acquisitions may be impaired, for a period of time after the distribution by us
of all of our assets and liabilities to Equitex 2000 and spin-off of Equitex
2000 common stock.
ANTI-TAKEOVER PROVISIONS MAY AFFECT THE MARKETABILITY AND MARKET PRICE OF
EQUITEX 2000 COMMON STOCK.
The articles of incorporation of Equitex 2000, as well as Delaware
statutory law, contain provisions that may have the effect of discouraging an
acquisition of control of Equitex 2000 not approved by its board of directors.
These provisions may also have the effect of discouraging third parties from
making proposals involving an acquisition or change of control of Equitex 2000,
although any proposals, if made, might be considered desirable by a majority of
Equitex 2000's stockholders. These provisions could also have the effect of
making it more difficult for third parties to replace current management of
Equitex 2000, Inc. without the concurrence of Equitex 2000's board of directors.
The existence of these provisions may adversely affect the marketability and
market price of Equitex 2000 common stock.
RISKS RELATED TO THE BUSINESS OF
NOVA FINANCIAL SYSTEMS, INC. AND KEY FINANCIAL SYSTEMS, INC.
IF THE ACQUISITIONS OF NOVA FINANCIAL SYSTEMS AND KEY FINANCIAL SYSTEMS
ARE APPROVED AND COMPLETED, WE WILL BE SUBJECT TO THE FOLLOWING RISKS:
SOCIAL, ECONOMIC AND GEOGRAPHIC FACTORS MAY AFFECT OUR RETENTION OF CREDIT CARD
ACCOUNTS.
The ability or willingness of cardholders to prepay credit cards may
change from a variety of social, economic and geographic factors. Social factors
include changes in consumer confidence levels, the public's perception of the
use of credit cards and changing attitudes about incurring debt and the stigma
of personal bankruptcy. Economic factors include the rates of inflation,
unemployment rates and relative interest rates offered for various types of
loans. As a result of these factors, our rate of retention of credit card
accounts may vary.
CONSUMER PROTECTION LAWS MAY RESTRICT OUR ABILITY TO COLLECT RECEIVABLES AND
MAINTAIN YIELD ON OUR PORTFOLIO.
Federal and state consumer protection laws regulate the creation and
enforcement of consumer loans. Congress and the states may enact additional laws
and amend existing laws to regulate further the credit card and consumer
revolving loan industry or to reduce finance charges or other fees or charges.
These laws, as well as many new laws, regulations or rulings which may be
adopted, may materially adversely affect our ability to collect the receivables
or to maintain previous levels of finance charges or fees.
Receivables also may be written off as uncollectible if a debtor seeks
relief under federal or state bankruptcy laws.
OUR ABILITY TO GENERATE CREDIT CARD REVENUE IS DEPENDENT UPON RETAINING OLD
CUSTOMERS AND OBTAINING NEW CUSTOMERS AND THERE IS NO ASSURANCE WE WILL BE
SUCCESSFUL IN OUR EFFORTS.
A significant portion of our revenue will be derived from credit card
fees charged on accounts. This revenue is directly tied to the number of active
accounts in the portfolio. Continued generation of new fee revenue depends, in
part, on the number of accounts or account balances lost to competing card
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issuers and our ability to designate new accounts. The credit card industry is
highly competitive and we will compete with numerous other credit card providers
for new accounts and for use of the credit cards.
Credit card customers choose their credit card issuers largely on the
basis of price, credit limit and other product features and once an account is
originated, customer loyalty may be limited. Customers can and frequently do
move accounts from one credit card issuer to another, or cease or limit use of
one credit card in favor of another.
The credit card and consumer revolving loan industry is highly
competitive and operates in a legal and regulatory environment increasingly
focused on the cost of services charged to consumers. There is increased use of
advertising, target marketing, pricing competition, incentive programs and new
credit card issuers seeking to expand or to enter the market and compete for
customers. In addition, some of our competitors are now attempting to employ
programs similar to the specialized marketing programs and information based
strategies through which we have has solicited new accounts.
MARKETING OF THE PAY AS YOU GO CREDIT CARD AND NET 1ST NATIONAL BANK WAS
SUSPENDED FOR ONE MONTH AND THERE IS NO GUARANTEE THAT ANOTHER SUSPENSION WILL
NOT OCCUR.
On November 15, 2000, Key Financial Systems temporarily suspended
marketing for Net 1st National Bank. This suspension was at the request of Net
1st National Bank to conform to the requirements of a Consent Order between Net
1st National Bank and the Office of the Comptroller of the Currency. Net 1st
National Bank was required to obtain legal opinions that Key Financial Systems's
credit card marketing and Pay As You Go program conform to all federal and state
laws. The necessary opinions have been prepared and have been forwarded to the
Office of the Comptroller of the Currency. On December 15, 2000, Net 1st
National Bank notified Key Financial Systems to resume marketing the Pay As You
Go credit card program. Despite Net 1st National Bank's compliance with all
requirements, there is no assurance that the Office of the Comptroller of the
Currency will not suspend marketing of this product in the future.
OUR EARNINGS ARE DEPENDENT UPON THE MARKETING AND ACCEPTANCE OF ONE PRODUCT.
Nova Financial Systems and Key Financial Systems currently market one
product, the Pay As You Go credit card. Our product may not be able to be
successfully marketed or achieve customer acceptance. If revenue from new
products or enhancements does not replace declining revenues from existing
products, we may experience lower operating revenues, lower net revenues, lower
cash flows and less liquidity.
TIMING OF PAYMENTS IS NOT CERTAIN.
The receivables may be paid at any time. We cannot assure you that any
particular pattern of accountholder payments will occur. In addition to other
factors discussed above in this "Risk Factors" section, changes in finance
charges can alter the monthly payment rates of accountholders.
THE ABILITY TO CHANGE TERMS OF THE CREDIT CARD ACCOUNTS COULD ALTER PAYMENT
PATTERNS AND REDUCE OUR EARNINGS.
As owner of a participation interest in the accounts, we will have the
right to change various account terms, including the fees and the required
monthly minimum payment. If any fees are reduced, there could be a corresponding
decrease in the collection of finance charges. In addition, changes in the
account terms may alter payment patterns.
We ordinarily will not reduce any fees, unless the issuing bank of our
cards is required by law to do so or it determines that such reduction is
necessary to maintain its credit card business on a competitive basis.
We may change the terms of the accounts or our servicing practices,
including the reduction of the required minimum monthly payment and the
calculation of the amount or the timing of fees and charge offs, if we take the
same action on our other substantially similar accounts.
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We have no restrictions on our ability to change the terms of the
accounts except as described above. Changes in relevant law, changes in the
marketplace, or prudent business practices could impel us to change account
terms.
WE FACE INTENSE COMPETITION AND THERE IS NO ASSURANCE THAT WE WILL ACHIEVE
MARKET ACCEPTANCE OF OUR PRODUCT.
We will face intense and increasingly aggressive competition from other
consumer lenders in all of our product lines. Many competitors are substantially
larger and have greater financial resources than us, and customer loyalty is
often limited. Competitive practices, such as the offering of lower interest
rates and fees and the offering of incentives to customers, could hurt our
ability to attract and retain customers.
The Gramm-Leach-Bliley Act of 1999, which permits the affiliation of
commercial banks, securities firms and insurance companies, may increase the
number of competitors in the banking industry and the level of competition in
providing banking products, including credit cards. To the extent that the
Gramm-Leach-Bliley Act of 1999 promotes competition or consolidation among
financial service providers active in the consumer credit market, we could
experience increased competition for customers, employees and funding. However,
we are unable to predict at this time the scope or extent of any such impact.
In October 1998, the U.S. Justice Department filed a complaint against
MasterCard International Incorporated, Visa U.S.A., Inc. and Visa International,
Inc., asserting that the overlapping ownership and control of both the
MasterCard and Visa associations by the same group of banks restrains
competition between Visa and MasterCard in the market for general purpose credit
card products and networks in violation of the antitrust laws. The government
seeks as relief that only member banks "dedicated" to one association be
permitted to participate in the governance of that association. In addition, the
complaint challenges the rules adopted by both MasterCard and Visa that restrict
member banks from joining American Express, Discover/Novus or other competing
networks. MasterCard and Visa have stated that they consider the suit without
merit and have denied the allegations of the complaint. Neither the ultimate
outcome of this litigation nor its effect on the competitive environment in the
credit card industry if the lawsuit succeeds can be predicted with any
certainty.
WE COULD HAVE INCREASED DELINQUENCIES AND CREDIT LOSSES WHICH MAY REDUCE OUR
EARNINGS.
The delinquency rate on our consumer loans, as well as the rate at
which our consumer loans are charged off as uncollectible, which are referred to
as the "credit loss rate", may increase, depending on a number of factors,
including (i) an increase in new accounts, which generally experience higher
delinquency and credit loss rates, and (ii) an increase in the number of
customers seeking protection under the bankruptcy laws. Increased delinquencies
and credit losses could also occur in the event of a national or regional
economic downturn or recession, or for other reasons. Unlike a traditional
credit card portfolio, sub prime portfolios experience higher initial
delinquency and first payment default rates. An increase in new accounts can
significantly increase delinquency and loss rates.
WE ARE RELIANT ON CERTAIN VENDOR RELATIONSHIPS WHICH WE MAY NOT BE ABLE TO
MAINTAIN.
Our business will depend on a number of services provided by third
parties, including marketing, data processing, nationwide credit bureaus, postal
and telephone service, bankcard associations and transaction processing
services. A major disruption in one or more of these services could
significantly hurt our operations.
OUR INDUSTRY IS HEAVILY REGULATED BY THE GOVERNMENT WHICH MAY AFFECT OUR ABILITY
TO CONDUCT BUSINESS.
Federal and state laws significantly limit the types of activities in
which we and/or our subsidiaries will be permitted to engage. In addition,
consumer protection and debtor relief laws limit the manner in which we may
offer, extend, manage and collect loans. Congress, the States, and other
jurisdictions in which we operate may enact new laws and amendments to existing
-21-
laws that further restrict consumer lending, including changes to the laws
governing bankruptcy, which could make it more difficult or expensive for us to
collect loans, or impose limits on the interest and fees that we may charge our
customers. Our earnings could also be hurt by changes in government fiscal or
monetary policies, including changes in capital requirements and rates of
taxation, and by changes in general social and economic conditions.
WE ARE DEPENDENT UPON OUR MANAGEMENT AND MAY NOT BE ABLE TO RETAIN KEY
EMPLOYEES.
Our growth and profitability will depend on its ability to retain key
executives and managers, attract capable employees, maintain and develop the
systems necessary to operate our businesses and control the rate of growth of
our expenses. Expenses could significantly increase due to acquisition-related
expenses, new product development, facilities expansions, increased funding or
staffing costs and other internal and external factors.
WE FACE OTHER INDUSTRY RISKS RELATED TO THE FINANCIAL SERVICES INDUSTRY WHICH
COULD AFFECT OUR ABILITY TO ACHIEVE MARKET ACCEPTANCE.
We will face the risk of fraud by accountholders and third parties, as
well as the risk that increased criticism from consumer advocates and the media
could hurt consumer acceptance of our products. The financial services industry
as a whole is characterized by rapidly changing technologies. System disruptions
and failures may interrupt or delay our ability to provide services to our
customers. In particular, we face technological challenges in the developing
online credit card market. The secure transmission of confidential information
over the Internet is essential to maintain consumer confidence in the products
and services offered by e-commerce business. Security breaches, acts of
vandalism, and developments in computer capabilities could result in a
compromise or breach of the technology we use to protect customer transaction
data. Consumers generally are concerned with security breaches and privacy on
the Internet, and Congress, individual States and other jurisdictions could
enact new laws regulating the electronic commerce market that could adversely
affect us.
IN CONJUNCTION WITH THE ACQUISITIONS, WE INTEND TO ISSUE PREFERRED STOCK TO
RAISE CASH WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
In conjunction with the acquisitions of Nova Financial Systems and Key
Financial Systems we intend to issue 5,500 shares of a new convertible preferred
stock to raise $5,000,000 (net of $500,000 issue costs) for payment of the cash
portion of the purchase price. No shares have been issued yet. The new series of
preferred stock will contain a beneficial conversion feature similar to the
Series G preferred stock in which the preferred stock may be converted at any
time at a price per share of common stock equal to the lesser of (a) $6.50 or
(b) 65% of the market price of our common stock.
FORWARD-LOOKING STATEMENTS
THIS PROXY STATEMENT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS
AS SUCH TERM IS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
OR BY THE SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND
RELEASES, WHICH REPRESENT OUR EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED
TO, STATEMENTS CONCERNING OUR OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL
CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY," "WILL," "EXPECT," "BELIEVE," "ANTICIPATE," "INTEND," "COULD," "ESTIMATE,"
"MIGHT," OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS, BY THEIR NATURE, INVOLVE SUBSTANTIAL RISKS AND
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UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND OUR CONTROL, AND ACTUAL RESULTS MAY
DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING
UNCERTAINTY RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND
MAINTAINING GROWTH, VOLATILITY OF STOCK PRICES AND ANY OTHER FACTORS DISCUSSED
IN THIS AND OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
THE SPECIAL MEETING
PURPOSE OF THE SPECIAL MEETING
THE INCREASE IN COMMON STOCK
At the special meeting, the stockholders will be asked to approve the
increase in common stock which involves the following:
o An amendment of paragraph 4 of the Certificate of
Incorporation to increase the number of authorized shares of
our common stock, $.02 par value, from 7,500,000 shares to
50,000,000 shares.
The increase in authorized common stock is conditioned upon the
approval of the increase by the holders of a majority of the outstanding stock
entitled to vote and a majority of the outstanding stock of each class entitled
to vote as a class. The increase in common stock will not occur if this
condition is not satisfied.
THE DISTRIBUTION AND SPIN-OFF
At the special meeting, the stockholders will be asked to approve the
distribution and spin-off of Equitex 2000 common stock which involves the
following:
o The distribution by us of all of our assets and liabilities to
Equitex 2000 and the distribution by us of all of the
outstanding shares of common stock of Equitex 2000 to our
stockholders on the basis of one share of common stock of
Equitex 2000 for each share of our common stock, as further
described in this proxy statement.
If our stockholders approve the distribution by us of all of our assets
and liabilities to Equitex 2000 and spin-off of Equitex 2000 common stock, and
the other conditions to the distribution and spin-off of Equitex 2000 common
stock are satisfied or waived, we anticipate that our board of directors will
authorize the various components of the distribution and spin-off of Equitex
2000 common stock and declare a special dividend payable in Equitex 2000 common
stock and set a record date for that dividend which shall be prior to the
acquisitions of Nova Financial Systems and Key Financial Systems. Each holder of
record of our common stock on the record date for the special dividend will be
entitled to receive one share of Equitex 2000 common stock for each share of our
common stock held on the record date for the spin-off of Equitex 2000 common
stock. No consideration will be paid by the holders of our common stock for the
Equitex 2000 common stock.
Our board of directors has conditioned the distribution by us of all of
our assets and liabilities to Equitex 2000 and spin-off of Equitex 2000 common
stock upon, among other things:
(i) approval of the distribution and spin-off of Equitex 2000
common stock by the holders of a majority of the outstanding
stock of each class entitled to vote thereon as a class; and
(ii) there not being in effect any statute, rule, regulation or
order of any court, governmental or regulatory body that
prohibits or makes illegal the transaction contemplated by the
distribution.
The distribution of all of our assets and liabilities and spin-off of
Equitex 2000 common stock will not occur if the conditions described above are
not satisfied.
-23-
Our board of directors has retained discretion, even if all conditions
to the distribution of its assets and liabilities and spin-off of Equitex 2000
common stock are satisfied, to abandon, defer or modify the distribution of its
assets and liabilities and/or the spin-off of Equitex 2000 common stock.
The distribution of our assets and liabilities and spin-off of Equitex
2000 common stock will separate us into two publicly owned companies. After the
distribution of Equitex assets and liabilities and spin-off of Equitex 2000
common stock, Equitex 2000 will primarily operate in the mortgage banking
industry.
The Acquisitions
----------------
At the special meeting, the stockholders will be asked to approve the
acquisitions which involves the following:
o The acquisition all of the outstanding capital stock of Nova
Financial Systems and Key Financial Systems, companies under
common control with nearly an identical ownership structure,
in exchange for the greater of 7,140,000 shares or 50% of our
outstanding common stock on a post acquisition basis, cash
consideration of $5 million and a warrant.
Our board of directors has conditioned the acquisitions Nova Financial
Systems and Key Financial Systems upon, among other things:
(i) the distribution by us of all of our assets and liabilities to
Equitex 2000 and the spin-off of Equitex 2000 common stock;
(ii) the approval of the acquisitions of Nova Financial Systems and
Key Financial Systems by our stockholders; and
(iii) the approval of the increase in the authorized shares of
common stock from 7,500,000 shares to 50,000,000 shares
pursuant to proposal number one.
The acquisitions of Nova Financial Systems and Key Financial Systems
will not occur if the conditions described above are not satisfied.
Our board of directors has retained discretion, even if all conditions
to the acquisitions of Nova Financial Systems and Key Financial Systems are
satisfied, to abandon, defer or modify the acquisitions.
Vote Required
The proposals to be acted on at the meeting require the following
votes:
o Approval of the adoption of the amendment of paragraph 4 of
the Certificate of Incorporation to increase the number of
authorized shares of our common stock, $.02 par value, from
7,500,000 shares to 50,000,000 shares will require the
affirmative vote of a majority of the outstanding stock of
each class entitled to vote thereon as a class;
o Approval of the distribution by us of all of our assets and
liabilities to Equitex 2000 and our distribution of all of the
outstanding shares of common stock of Equitex 2000 to our
stockholders on the basis of one share of common stock of
Equitex 2000 for each share of our common stock will require
the affirmative vote of a majority of the outstanding stock of
each class entitled to vote thereon as a class; and
o Approval of the acquisition all of the outstanding capital
stock of Nova Financial Systems and Key Financial Systems in
exchange for the greater of 7,140,000 shares or 50% of our
-24-
outstanding common stock on a post acquisition basis, cash
consideration of $5 million and a warrant will require the
affirmative vote of a majority of the total votes cast on the
proposal in person or by proxy.
PROXIES
All shares of our common stock represented by properly executed proxies
will, unless the proxies have previously been revoked, be voted at the special
meeting in accordance with the directions on the proxies. If no direction is
indicated on a properly executed proxy, the shares will be voted in favor of
each of the proposals. If any other matters are properly presented at the
special meeting for action, which is not anticipated, the proxy holders will
vote the proxies which confer authority to such holders to vote on such matters
in accordance with their judgment. However, proxies which vote against any of
the proposals shall not be used by management to exercise discretionary
authority. A shareholder returning a proxy may revoke it at any time before it
is voted by communicating the revocation in writing to our Secretary or by
executing and delivering a later-dated proxy. In addition, any person who has
executed a proxy and is present at the special meeting may vote in person
instead of by proxy, thereby canceling any proxy previously given, whether or
not written revocation of the proxy has been given. Any written notice revoking
a proxy should be sent to Equitex, Inc., 7315 East Peakview Avenue, Englewood,
Colorado 80111, Attention: Secretary.
NO RIGHT OF APPRAISAL
Our stockholders will not be entitled to appraisal rights under the
Delaware General Corporation Law in connection with the distribution, the
spin-off or the acquisitions of Key and Nova.
AVAILABLE INFORMATION
We are subject to the informational requirements of the Securities and
Exchange Act of 1934, as amended, and in accordance therewith file reports,
proxy statements and other information with the Securities and Exchange
Commission. Such reports, proxy statements and other information filed with the
Commission can be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at Room 1024, 450 Fifth
Street, NW, Washington, DC 20549 or at the Regional Offices of the Securities
and Exchange Commission which are located as follows: Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and Seven
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can also be obtained from the Securities and Exchange Commission at
prescribed rates. Written requests for such material should be addressed to the
Public Reference Section, Securities and Exchange Commission, 450 Fifth Street,
NW, Washington, DC 20549. The Securities and Exchange Commission maintains a Web
site that contains reports, proxy statements and other information filed
electronically by us with the Securities and Exchange Commission which can be
accessed over the Internet at http://www.sec.gov.
DOCUMENTS INCORPORATED BY REFERENCE
THIS PROXY STATEMENT INCORPORATES BY REFERENCE DOCUMENTS RELATING TO US
WHICH ARE NOT INCLUDED IN OR DELIVERED WITH THESE PROXY MATERIALS. DOCUMENTS
RELATING TO US (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING
ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS DELIVERED, UPON WRITTEN OR
ORAL REQUEST, WITHOUT CHARGE, FROM US AT 7315 EAST PEAKVIEW AVENUE, ENGLEWOOD,
COLORADO 80111, ATTENTION: SECRETARY, TELEPHONE (303) 796-8940. IN ORDER TO
ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH REQUEST SHOULD BE MADE BY
_______________ ___, 2001. COPIES OF DOCUMENTS SO REQUESTED WILL BE SENT BY
FIRST CLASS MAIL, POSTAGE PAID WITHIN ONE BUSINESS DAY OF THE RECEIPT OF SUCH
REQUEST.
Our following documents are incorporated by reference herein:
1. Annual report on Form 10-K, for the year ended December 31, 2000;
and
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2. The description of our common stock contained in its Registration
Statement on Form 8-A (Commission File No. 0-12374) as filed with the
Securities and Exchange Commission on July 21, 1983.
All documents filed by us with the Securities and Exchange Commission
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities and Exchange
Act of 1934, as amended, after the date hereof and prior to the date of the
special meeting shall be deemed to be incorporated by reference herein and shall
be a part hereof from the date of filing of such documents. Any statements
contained in a document incorporated by reference herein or contained in this
proxy statement shall be deemed to be modified or superseded for purposes hereof
to the extent that a statement contained herein (or in any other subsequently
filed document which also is incorporated by reference herein) modifies or
supersedes such statement. Any statement so modified or superseded shall not be
deemed to constitute a part hereof except as so modified or superseded.
REVOCABILITY OF PROXY
If the enclosed proxy is executed and returned, it will be voted on the
proposals as indicated by the stockholder. The proxy may be revoked by the
stockholder at any time prior to its use by notice in writing to our Secretary,
by executing a later dated proxy and delivering it to us prior to the meeting or
by voting in person at the meeting.
SOLICITATION
The cost of preparing, assembling and mailing the Notice of Meeting,
Proxy Statement and Proxy, miscellaneous costs with respect to the materials
and solicitation of the proxies will be paid by us. We also may use the services
of our directors, officers and employees to solicit proxies, personally or by
telephone, mail, telefax or tele graph, but at no additional salary or
compensation. We intend to request banks, brokerage houses and other custodians,
nominees and fiduciaries to forward copies of the materials to those persons for
whom they hold such shares and request authority for the execution of the
proxies. We will reimburse them for the reasonable out-of-pocket expenses
incurred by them in so doing.
VOTING SECURITIES
Holders of record of our common stock, $.02 par value, at the close of
business on ________ ____, 2001 will be entitled to vote on all matters. On
March 31, 2001, we had outstanding 7,071,618 shares of common stock. The holders
of all shares of common stock are entitled to one vote per share. The common
stock is the only class of voting securities outstanding. One-third of the
issued and outstanding shares of the common stock entitled to vote, represented
in person or by proxy, constitutes a quorum at any stockholders' meeting.
Passage of proposal number one requires the affirmative vote of a majority of
the outstanding stock of each class entitled to vote thereon as a class. Passage
of proposal number two requires the affirmative vote of the majority of the
outstanding stock of each class entitled to vote thereon as a class at the
stockholders' meeting. Passage of proposal number three requires the affirmative
vote of the majority of the total votes cast on the proposal in person or by
proxy at the stockholders' meeting. Abstentions on a proposal will be counted as
votes against that proposal. Broker non-votes will not be counted as shares
represented at the meeting.
DIVIDEND POLICY
The payment and level of cash dividends by us is subject to the
discretion of our board of directors. Dividend decisions are based on a number
of factors, including the future operating results and financial requirements of
us, state law requirements and other factors. No dividends have been declared.
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PRICE RANGE OF EQUITEX COMMON STOCK
Our common stock is listed and traded on the Nasdaq SmallCap Market
under the symbol "EQTX." The following table reflect the high and low sales
prices per share of our common stock, as reported on the Nasdaq SmallCap Market
for the fiscal period indicated.
PRICE RANGE
HIGH LOW
---- ---
1998:
First Quarter $3.6250 $0.8125
Second Quarter 5.6250 3.0000
Third Quarter 7.1250 4.3750
Fourth Quarter 7.5625 6.4375
1999:
First Quarter $12.7500 $6.7500
Second Quarter 48.8125 9.0000
Third Quarter 14.2500 8.5000
Fourth Quarter 10.5625 7.6250
2000:
First Quarter $11.7500 $6.4062
Second Quarter 9.3906 4.6250
Third Quarter 8.4375 5.6250
Fourth Quarter 6.3750 3.8750
2001:
First Quarter $7.00 $3.9375
The stockholders are urged to obtain current trading price information
before voting on the distribution by us of all of our assets and liabilities to
Equitex 2000 and spin-off of Equitex 2000 common stock.
There is no established a public trading market for Equitex 2000 common
stock.
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SELECTED FINANCIAL DATA
The selected financial data set forth below as of and for the years
ended December 31, 2000 and December 31, 1999, has been derived from our
consolidated financial statements which have been audited by Gelfond Hochstadt
Pangburn, P.C. The selected financial data as of and for each of the years in
the four-year period ended December 31, 1998, has been derived from our
financial statements which have been audited by Davis & Co., CPAs, P.C.
Because of recent changes in our business, the historical information
reflected below may not be a good basis for evaluating our current and future
performance. You should read this information, together with the financial
statements and related notes, and the information under the heading
"Management's discussion and analysis of financial condition and results of
operations."
BALANCE SHEET DATA
(IN THOUSANDS)
As of December 31,
------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Note 1) (Note 1) (Note 1)
Assets:
Cash and cash equivalents 337 $ 784 $ 32 $ 9 $ 54
Inventories 70 167 -- -- --
Receivables 1,822 1,708 -- -- --
Marketable securities 238 903 -- -- --
Mortgage loans held for sale -- 14,787 -- -- --
Other investments 1,232 2,573 5,592 4,701 10,200
Property, plant and
equipment (net) 261 1,058 26 29 39
Intangible assets 5,471 19,765 0 0 0
Total assets 9,431 41,745 5,859 5,039 10,478
Liabilities:
Warehouse loans -- 18,582 -- -- --
Total liabilities 3,217 26,170 1,771 1,499 3,217
Mandatory redeemable preferred
stock 1,536 - - - -
Minority interest 631 6,473 -- -- --
Stockholders' equity 4,047 9,102 4,088 3,540 7,261
- ----------------
1. On January 4, 1999, we withdrew our election to be treated as a
Business Development Company subject to the Investment Company Act of
1940. As a result of this withdrawal, we are now required to present
our financial statements consistent with those of a normal operating
company as opposed to a Business Development Company. Because we were
a Business Development Company during the years ended December 31,
1995 through December 31, 1998, the 1998, 1997, 1996 and 1995
financial statements reflect the Business Development Company format.
-28-
STATEMENT OF OPERATIONS DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For the year ended December 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Note 1) (Note 1) (Note 1)
Revenues $ 2,869 $ 2,340 $ 448 $ 378 $ 633
Expenses (10,963) (9,136) (2,418) (1,814) (1,153)
Loss on First Bankers
Mortgage Services rescission (3,979) -- -- -- --
Unusual gain 5,132 -- -- -- --
Other income (expense) (413) (921) -- -- --
----------- ----------- ----------- ----------- -----------
Net loss before income taxes (7,354) (7,717) (1,970) (1,436) (520)
Provision for income taxes (13)
----------- ----------- ----------- ----------- -----------
Net loss (7,367) (7,717) (1,970) (1,436) (520)
Net investment loss -- -- (2,267) (1,406) (586)
Net realized gain on
investments -- -- 1,108 1,004 1,226
Unrealized loss on
investments -- -- (1,056) (3,522) (5,207)
Accretion of redemption
value on preferred stock (453)
Beneficial conversion
features (700) (3,218) -- -- --
Deemed preferred stock
dividends (97) (51) -- -- --
----------- ----------- ----------- ----------- -----------
Net loss applicable to
common stockholders $ (8,617) $ (10,986) $ (4,185) $ (5,360) $ (5,087)
=========== =========== =========== =========== ===========
Net loss per common share $ (1.21) $ (1.64)
=========== ===========
Decrease in net assets per
share - primary $ (0.45) $ (1.25) $ (1.42)
=========== =========== ===========
Decrease in net assets per
share fully diluted $ (1.26)
===========
Weighted average common
share outstanding 7,106,749 6,718,170 4,416,988 3,192,600 3,214,708
=========== =========== =========== =========== ===========
- -----------
1. On January 4, 1999, we withdrew our election to be treated as a
Business Development Company subject to the Investment Company Act of
1940. As a result of this withdrawal, we are now required to present
our financial statements consistent with those of a normal operating
company as opposed to a Business Development Company. Because we were a
Business Development Company during the years ended December 31, 1995
through December 31, 1998, the 1998, 1997, 1996 and 1995 financial
statements reflect the Business Development Company format.
-29-
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
Set forth below is certain information as of March 31, 2001, with
respect to ownership of our common stock held of record or beneficially by (i)
our executive officers, (ii) each of our directors, (iii) each person who owns
beneficially more than five percent of our outstanding common stock; and (iv)
all directors and executive officers as a group:
Name and Address of Shares of Shares of Shares of Common Shares of Percentage
Beneficial Owner Common Common Stock Stock underlying Other of
Stock Owned underlying Warrants/Preferred Common Common
(1) Options (1) Stock (1) Stock Stock
Owned (1) Owned
Henry Fong 215,300 945,700 (2) 0 403,719 (3) 19.5%
7315 East Peakview Ave.
Englewood, CO 80111
Russell L. Casement 121,000 365,900 (4) 0 0 6.5%
1355 S. Colorado Blvd.
Suite 320
Denver, CO 80222
Aaron A. Grunfeld 32,700 379,500 (5) 0 0 5.5%
10390 Santa Monica
Blvd., Fourth Floor
Los Angeles, CA 90025
Thomas Olson 30,000 66,300(6) 0 0 1.3%
7315 East Peakview
Avenue
Englewood, CO 80111
All officers and directors 399,000 1,757,400 (7) 0 403,719 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 our 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 our 1993 Stock
Option Plan for Non-Employee Directors and 329,500 shares underlying
options granted under our 1999 Stock Option Plan.
5. Includes 50,000 shares underlying options granted under our 1993 Stock
Option Plan for Non-Employee Directors and 329,500 shares underlying
options granted under our 1999 Stock Option Plan.
6. Includes 66,300 shares underlying options granted under our 1999 Stock
Option Plan.
7. Includes 86,400 shares underlying options granted under our 1993 Stock
Option Plan for Non-Employee Directors and 1,671,000 shares underlying
options granted under our 1999 Stock Option Plan.
The issuance of an estimated 7,140,000 shares of our common stock in
the acquisitions of Nova Financial Systems and Key Financial Systems, as
described under proposal number one, may, at a subsequent date, result in a
change in control of our company.
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
Generally, a director of a Delaware corporation will not be found to
have violated his fiduciary duties unless there is proof by clear and convincing
-30-
evidence that the director has not acted in good faith, in a manner he
reasonably believes to be in or not opposed to the best interests of the
corporation, or with the care that an ordinarily prudent person in a like
position would use under similar circumstances. In general, a director is liable
for monetary damages for any action or omission as a director only if it is
proved by clear and convincing evidence that such act or omission was undertaken
either with deliberate intent to cause injury to the corporation or with
reckless disregard for the best interest of the corporation.
Under Delaware law, a corporation must indemnify its directors, as well
as its officers, employees and agents, against expenses where any such person is
successful on the merits or otherwise in defense of an action, suit or
proceeding. A corporation may indemnify such persons in actions, suits and
proceeds (including derivative suits) if the individual has acted in good faith
and in a manner that he believes to be in or not opposed to the best interests
of the corporation. In the case of a criminal proceeding, the individual must
also have no reasonable cause to believe that his conduct was unlawful.
Indemnification may be made only if ordered by a court or if authorized in a
specific case upon a determination that the applicable standard of conduct has
been met. Such a determination may be made by a majority of the disinterested
directors, by independent legal counsel or by the stockholders. In order to
obtain reimbursement for expenses in advance of the final disposition of any
action, the individual must provide an undertaking to repay the amount if it is
ultimately determined that his is not entitled to be indemnified.
In general, Delaware law requires that all expenses, including
attorney's fees, incurred by a director in defending any action, suit or
proceeding be paid by the corporation as they are incurred in advance of final
disposition if the director agrees to repay such amounts if it is proved by
clear and convincing evidence that his action or omission was undertaken with
deliberate intent to cause injury to the corporation or with reckless disregard
for the best interests of the corporation and if the director reasonably
cooperated with the corporation concerning the action, suit or proceeding.
-31-
PROPOSAL NUMBER ONE
TO CHANGE PARAGRAPH 4 OF THE
CERTIFICATE OF INCORPORATION
TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK
NECESSARY TO COMPLETE THE PROPOSED TRANSACTIONS
The board of directors recommends an amendment to our Certificate of
Incorporation to cause an increase in the number of authorized shares of common
stock. The increase is needed to issue approximately 12,852,094 shares of common
stock in the following transactions:
o the acquisition of Nova Financial Systems and Key Financial
Systems;
o the acquisition of The Meridian Residential Group; and
o the acquisition of First Bankers Mortgage Services and
Rescission.
In addition, upon the approval of proposal number one, we have agreed
to issue 100,000 shares of our common stock to two consultants for services
performed. While shares of common stock may be issued in future transactions,
except as noted above, none are planned at this time. As of December 31, 2000,
there were only 359,707 shares of common stock available for issuance. We should
maintain a reserve of shares of common stock to be issued under our stock option
plans and in line with good corporate practices to maintain a number of
authorized but unissued shares.
A condition to the completion of several proposed transactions
described below is approval of this proposal. The 1,200 shares of our Series D
6% Convertible Preferred Stock issued to provide cash for the acquisition of
First Bankers Mortgage Services may convert into approximately 347,511 shares of
our common stock. The 250 outstanding shares of Series E Convertible Preferred
Stock and 50 shares to be issued in connection with the acquisition and
rescission of First Bankers Mortgage Services, described below, each
automatically convert into 1,000 shares of our common stock, or an aggregate of
300,000 shares of our common stock, upon (i) the approval of the increase in our
authorized shares of common stock from 7,500,000 shares to 50,000,000 (ii) or
our subsequent merger with or into another company or (iii) the sale of
substantially all of our assets. Our Series F Convertible Preferred Stock issued
in connection with the acquisition of the Meridian Residential Group, described
below, may convert into approximately 525,715 shares of our common stock. This
conversion is based upon the fact that the 460,000 shares of outstanding Series
F Convertible Preferred Stock have a stated value of $3,680,000 which can be
converted at $7.00 per share. Our Series G Convertible Preferred Stock issued in
connection with a private placement may convert into approximately 376,471
shares of our common stock. In exchange for all of the outstanding capital stock
of Nova Financial Systems and Key Financial Systems, companies under common
control with nearly an identical ownership structure, we intend to issue
approximately 7,140,000 shares of common stock, cash consideration of $5 million
and a warrant for the purchase of our common stock equal to 100% of any
warrants, options, preferred stock or other convertible securities outstanding
at the closing date and exchangeable for or convertible into our common stock.
We estimate that 4,162,397 shares of common stock will underlie the warrant to
be issued in the Nova Financial Systems and Key Financial Systems acquisition.
In addition, we intend to issue up to 5,500 shares of a new series of
convertible preferred stock to raise the cash consideration of $5 million (net
of $500,000 issue costs), which is to be used to finance the cash portion of our
acquisitions of Nova Financial Systems and Key Financial Systems. The new series
of preferred stock will contain a beneficial conversion feature similar to the
Series G Preferred Stock in which the preferred stock may be converted at any
time at a price per share of common stock equal to the lesser of (a) $6.50 or
(b) 65% of the market price of our common stock. In addition, we have agreed to
issue 100,000 shares of our common stock to two consultants for services
performed.
Our Certificate of Incorporation currently authorizes the issuance of
up to 7,500,000 shares of common stock with a par value of $0.02 per share and
2,000,000 shares of preferred stock with a par value of $0.01 per share. As of
March 31, 2001, of the 7,500,000 shares of common stock authorized, 7,140,293
shares were issued, 7,071,618 shares were outstanding and 2,612,700 shares of
common stock are reserved for issuance upon the exercise of outstanding options
and warrants. See Options and Warrants on page 42. As of March 31, 2001, of the
2,000,000 shares of preferred stock authorized 1,200 shares of Series D 6%
-32-
Convertible Preferred Stock, 250 shares of Series E Convertible Preferred Stock,
460,000 shares of Series F Convertible Preferred Stock and 1,300 shares of
Series G Convertible Preferred Stock were outstanding.
Our board of directors deems it advisable to amend the Certificate of
Incorporation to increase the number of authorized shares of common stock to
50,000,000 shares. A copy of paragraph 4 of the Certificate of Incorporation as
it would read following adoption of this proposal is included with this proxy
statement as Exhibit 1.
The additional shares of common stock would become part of the existing
class of common stock, and the additional shares, when issued, would have the
same rights and privileges as the shares of common stock now issued. There are
no preemptive rights relating to the common stock.
To the extent that any further issue of shares is made on other than a
pro rata basis to current stockholders, the present ownership of current
stockholders may be diluted.
If the proposed amendment is approved, the additional authorized shares
would be available for issuance by the board of directors for any proper
corporate purpose at any time without further stockholder approval except as
otherwise required by applicable law or securities exchange listing rules.
Nonetheless, it is the intention of the board of directors to use a portion of
the additional shares to: (i) be issued in connection with the acquisitions of
Key Financial Systems, Nova Financial Systems, the Meridian Residential Group
and First Bankers Mortgage Services, described below; (ii) for possible issuance
in connection with one or more equity financings, including, but not limited to
1,300 shares of Series G Convertible Preferred Stock and the underlying common
stock; and (iii) to issue shares issuable pursuant to our stock option plans and
outstanding warrants.
The board of directors believes the increase is necessary to allow us
to raise necessary financing and complete the expansion of our business. As
described above, the increase is a condition to the completion of several
proposed transactions.
In addition, the increase in authorized shares will facilitate the
following:
o the possible issuance of common stock or securities
convertible or exercisable for common stock in connection with
one or more equity or debt financings; and
o issue common stock issuable pursuant to our stock option plans
and outstanding warrants.
ACQUISITION OF NOVA FINANCIAL SYSTEMS AND KEY FINANCIAL SYSTEMS
As described more fully under proposal number three of this proxy
statement, we signed a definitive agreement with Nova Financial Systems and Key
Financial Systems to acquire all the outstanding capital stock of Nova Financial
Systems and Key Financial Systems, companies under common control with nearly
an identical ownership structure, in exchange for the greater of 7,140,000
shares or 50%, of our outstanding common stock on a post acquisition basis, cash
consideration of $5 million and a warrant for the purchase of our common stock
equal to 100% of any warrants, options, preferred stock or other convertible
securities outstanding at the closing date and exchangeable for or convertible
into our common stock. In order to raise the cash consideration of $5 million
(net of $500,000 issue costs), we intend to issue up to 5,500 shares of a new
series of convertible preferred stock. The new series of preferred stock will
contain a beneficial conversion feature similar to the Series G Preferred Stock
in which the preferred stock may be converted at any time at a price per share
of common stock equal to the lesser of (a) $6.50 or (b) 65% of the market price
of our common stock. Consummation of the Nova Financial Systems and Key
Financial Systems acquisitions is subject to a number of conditions, including
the approval of the increase in the authorized shares of common stock from
7,500,000 shares to 50,000,000 shares pursuant to proposal number one. Nova
Financial Systems and Key Financial Systems 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.
-33-
The transaction will be accounted for as a reverse acquisition. The
purchase price applied to the reverse acquisition has been based on the net book
value of our underlying assets prior to the transaction plus $5,000,000 cash
paid in connection with the acquisition of Nova Financial Systems and Key
Financial Systems.
Our board of directors considered the following factors both positive
and negative regarding the Nova Financial Systems and Key Financial Systems
acquisitions to determine whether the increase in authorized shares is necessary
and in the best interest of our company and our stockholders:
DATABASE OF CONSUMERS. We have sought to position ourselves as an
Internet-based consumer financial services company. The acquisition of Nova
Financial Systems and Key Financial Systems provides for a database of loyal
sub-prime consumers for cross-marketing a variety of financial products and
services to be offered in the future by our online mortgage operations and
Equitex 2000 subsequent to the spin-off transaction.
SIZE AND SCOPE OF TARGET MARKET. With estimates as high as 60 million
consumers considered sub-prime, the size of the market to be targeted by Nova
Financial Systems and Key Financial Systems is estimated as high as 25-30% of
all U.S. households. In addition, the market has shown continuous growth with a
higher than average profit potential when compared to the consumer credit
industry as a whole.
SUCCESSFUL OPERATING HISTORY. With over 889,000 applications processed
and over 85,000 active credit card accounts, Nova Financial Systems and Key
Financial Systems have demonstrated their ability to be successful despite being
in business for only two and three years, respectively. Nova Financial Systems
and Key Financial Systems have developed their business including significant
technology infrastructure in a short period of time and on a profitable basis.
STATE-OF-THE-ART CALL CENTER. Nova Financial Systems and Key Financial
Systems have built and maintain a 17,000 square foot call center employing
state-of-the-art technology which can be utilized for other financial product
offerings. This center is used for both outbound marketing as well as a service
center handling customer service calls and written correspondence for both
telemarketing and Internet customers.
EXPERIENCE OF PRINCIPALS. With a combined fifty years of experience in
business, more than half of which is in the financial services industry, the two
Nova Financial Systems and Key Financial Systems principals bring a wealth of
knowledge and experience in financial services to us.
COMPETITION. Competition in the credit card industry is intense and
Nova Financial Systems and Key Financial Systems compete with many significantly
larger financial institutions. However, the board of directors feels there is
significant opportunity for companies such as Nova Financial Systems and Key
Financial Systems given the size of the market, their past success, and the
uniqueness of the product offered.
RELIANCE ON THIRD PARTIES. Nova Financial Systems and Key Financial
Systems must rely on third party partner banks in marketing their products. Nova
Financial Systems and Key Financial Systems must attract additional partner
banks in order to continue to be successful and to mitigate the risk associated
with reliance on third party partners which Nova Financial Systems and Key
Financial Systems do not control. The board of directors believes that Nova
Financial Systems and Key Financial Systems can be successful in obtaining
additional partner banks.
DILUTION TO PRESENT STOCKHOLDERS. While the acquisition of Nova
Financial Systems and Key Financial Systems will result in significant dilution
to our present stockholders, our board of directors feels the dilution effect is
outweighed by the positive effect the acquisition of a profitable growing
business should provide us. In addition, the shares will be issued to a small
group of stockholders many of which will have a vested interest in the operation
and stockholder value of us in the future.
Financial statements of Nova Financial Systems as of and for the years
ended December 31, 2000 and December 31, 1999 and the period from inception
October 10,1998 through December 31, 1998 are included as Exhibit 2 to this
proxy statement.
-34-
Financial statements of Key Financial Systems as of and for the years
ended December 31, 2000, December 31, 1999 and December 31, 1998 are included as
Exhibit 3 to this proxy statement.
ACQUISITION OF THE MERIDIAN RESIDENTIAL GROUP
On September 7, 2000 we signed an agreement to acquire by merger of all
of the issued and outstanding common stock of the Meridian Residential Group
through our wholly-owned subsidiary, GR.com, in exchange for 425,000 shares of
our Series F Convertible Preferred Stock. We completed the acquisition 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 our common stock any time
and from time to time at the option of the holder until March 7, 2004, at a
conversion price of $7.00 per share. On March 7, 2004, all remaining outstanding
Series F Preferred Stock shall be automatically converted into shares of our
common stock. To the extent that the holders realize proceeds from the sale of
the shares of common stock in an amount that is less than conversion price, we
have agreed to issue the holders additional shares of our common stock having a
market value equal to any such deficiency.
The transaction was accounted for as a purchase, and the results of
operations of Meridian Residential Group are included in Equitex 2000's
unaudited proforma condensed consolidated statement of operations for the year
ended December 31, 2000. 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, Equitex
2000 will agree to issue additional shares of common stock to the Meridian
Residential Group 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 business for each
of the five years subsequent to closing, commencing with the year ending
December 31, 2000. Since there was no increase in pre-tax net earnings in 2000
as compared to 1999, there were no shares of our common stock issued or owed to
Meridian Residential Group stockholders for the year ended December 31, 2000.
The aggregate market value of the additional shares of Equitex 2000's common
stock cannot exceed (i) $3,440,000 and (ii) without shareholder approval, 19.9%
of Equitex 2000's currently outstanding common stock.
In connection with the Meridian Residential Group 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 Group. GreatRate.com
business, including the names GreatRate.com and GreatRateMortgage.com for a cash
purchase price of $850,000.
The Meridian Residential Group stockholders have the right at any time
and from time to time prior to March 7, 2004, to exchange up to 50% of the
shares of our common stock received upon conversion of the Series F Preferred
Stock or in connection with the merger, for shares of nMortgage common stock.
Each share of our common stock will be exchanged for shares of nMortgage common
stock in accordance with the ratio determined by dividing (i) the greater of the
then market price of our common stock or $8.00 by (i) the lesser of the market
price of the nMortgage common stock or $1.00.
Our board of directors considered the following factors both positive
and negative regarding the Meridian Residential Group acquisition to determine
whether the increase in authorized shares is necessary and in the best interest
of our company and our stockholders:
SUCCESSFUL OPERATING HISTORY. The Meridian Residential Group has been
in business since 1996 and has been profitable for the past four years. The
company funded over $500 million in mortgage loans during that period and has
generated increasing gross revenues during each year since inception.
COMPLEMENTARY LINE OF BUSINESS. The Meridian Residential Group began to
transition from traditional mortgage lending to an Internet direct lending
-35-
platform in 1998 and conducts its business in a very similar fashion to our
Internet mortgage company nMortgage, Inc. Given the Meridian Residential Group's
proven track record with traditional mortgage lending as well as its focus on
Internet mortgage lending, the board of directors feels the Meridian Residential
Group is a natural fit to complement our present mortgage operations.
NO SIGNIFICANT DEBT. Our board of directors recognizes the dangers
inherent in traditional mortgage lending utilizing warehouse lines of credit to
initially fund and later sell mortgage loans. The Meridian Residential Group
utilizes the table funding method to originate its mortgage loans which
transfers the risks associated with funding the loan to the lender. The Meridian
Residential Group maintains no significant debt or warehouse lines of credit.
This method of funding loans made the acquisition of the Meridian Residential
Group much more attractive when compared to other mortgage operations.
SUSCEPTIBILITY TO THE ECONOMY AND ASSOCIATED INTEREST RATE
FLUCTUATIONS. As with any mortgage company, the Meridian Residential Group is
susceptible to fluctuations in the economy and the corresponding changes in
interest rates. These are the risks associated with operating in the mortgage
industry. Our board of directors is of the opinion that like nMortgage, the
Meridian Residential Group operates its business in an efficient manner which
mitigates certain risks associated with fluctuating economic trends.
LIMITED MARKET. Presently, the Meridian Residential Group operates only
in the states of New York, New Jersey and Connecticut. Our board of directors is
confident, however, that nMortgage and the Meridian Residential Group will be
able to locate and complete an agreement with a suitable financial institution
partner which will enable the companies to operate in additional states.
BUSINESS OF MERIDIAN RESIDENTIAL GROUP
Meridian Residential Group was established on February 28, 1996. In its
initial phase Meridian Residential Group set out to become a mortgage banker, in
order to capitalize on the experience and vast client base of its principals.
Over time Meridian Residential Group became a provider of mortgage management
services and E commerce infrastructure platforms to the mortgage industry. As a
result, Meridian Residential Group began to seek a strategic alliance with an
entity that could provide technology compatible with its net stream lined
virtual back office. Details of the new business model and strategic alliance
partner are detailed below.
Since March 1, 2000, Meridian Residential Group 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 its site, Meridian Residential Group is developing web based mortgage
products that will allow it to capitalize on its streamlined back office
operation to expand its business nationwide. The goal of the new business plan
is to create a Business-to-Business platform for Meridian Residential Group to
reach out to small banks and financial institutions allowing them to utilize
Meridian Residential Group's/nMortgage's technology and infrastructure. This
will enable the financial institution to enter into the business of providing
residential and small commercial mortgages to their clientele with almost no
startup costs.
We believe Meridian Services will take its streamlined virtual back
office and join it with our mortgage technology subsidiary, nMortgage. Meridian
Services should benefit from the technology already developed by nMortgage.
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ACQUISITION OF FIRST BANKERS MORTGAGE SERVICES AND RESCISSION
On August 23, 1999, we acquired First Bankers Mortgage Services, Inc.
First Bankers Mortgage Services, a Florida corporation, is a full service
mortgage banking company headquartered in the Fort Lauderdale, Florida area. We
acquired all of the outstanding common stock of First Bankers Mortgage Services
from its sole shareholder, Vincent Muratore. The total aggregate purchase price
for First Bankers Mortgage Services, was 1,000 shares of our Series E
Convertible Preferred Stock, 250 shares of which were issued at closing and 750
shares of which were issuable upon satisfaction of certain performance
conditions. In addition, the purchase price was subject to post-closing
adjustments pursuant to the Agreement and Plan of Reorganization, dated June 22,
1999, among us, First Bankers Mortgage Services, Vincent Muratore and FBMS
Acquisition Corp., as amended. Under Delaware law, we were not required to, and
did not, seek shareholder approval for this transaction.
The transaction was accounted for as a purchase. The total purchase
price was allocated to the assets and liabilities acquired based on their
estimated fair values, including goodwill of approximately $18,900,000, which
was being amortized by use of the straight line method over ten years prior to
the rescission.
In connection with the First Bankers Mortgage Services transaction, we
and our subsidiaries invested approximately $10.7 million in First Bankers
Mortgage Services for working capital purposes.
Subsequent to the acquisition of First Bankers Mortgage Services, all
outstanding shares of First Bankers Mortgage Services were transferred to our
new wholly owned subsidiary, nMortgage.
On August 15, 2000, we reached an agreement in principal to rescind the
acquisition of First Bankers Mortgage Services effective June 28, 2000. Under
the terms of the rescission agreement, all assets and liabilities of First
Bankers Mortgage Services as of June 28, 2000 were returned to the former owner
of First Bankers Mortgage Services. We retained certain intellectual property
rights valued at approximately $2,500,000 related to the Internet- based
mortgage banking business of nMortgage. Although all of the performance
conditions were not met, we intend to issue an additional 50 shares of Series E
Convertible Preferred Stock as part of the agreement and rescission related to
those conditions that were satisfied. 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 First Bankers
Mortgage Services as of June 28, 2000 and as a result, recorded a loss of
$3,979,000, which represents the write off of our investment in First Bankers
Mortgage Services, including remaining goodwill as of the date of the
rescission, net of technological rights retained. The operating results of First
Bankers Mortgage Services have been included in the consolidated statement of
operations from the date of acquisition through the date of rescission.
SUMMARY OF SECURITIES AUTHORIZED AND ISSUED IN ASSOCIATION WITH THE ACQUISITIONS
Number of Shares of
Common Stock
Outstanding or
Title of Purpose or Amount Issued or Amount Underlying Preferred
Securities Transaction to be Issued Authorized Stock or Warrant (1)
------------ ------------ ---------------- ---------- ---------------------
Series D 6% Provide Cash 1,200(2) 3,500 347,511
convertible Proceeds for
preferred stock Acquisition of
First Bankers
Mortgage Services
Series E Acquisition and 300(3) 1,093 300,000
convertible rescission of First
preferred stock Bankers Mortgage
Services
-37-
Series F Acquisition of The 460,000(4) 460,000 525,715
convertible Meridian
preferred stock Residential Group
Series G Acquisition of The 1,300(5) 1,300 376,471
convertible Meridian
preferred stock Residential Group
and GreatRate.com
New series of Acquisition of (6) 5,500(6) (6)
preferred stock Nova Financial
Systems and Key
Financial Systems
Common stock Acquisition of 7,140,000(7) (7) 7,140,000
Nova Financial
Systems and Key
Financial Systems
Warrant Acquisition of 4,162,397(8) (8) 4,162,397
Nova Financial
Systems and Key
Financial Systems ----------
Total 12,852,094
==========
(1) The number of shares of common stock is estimated for the Series D and
G convertible preferred stock based upon the price of our common stock
on March 30, 2001 which was $5.3125.
(2) Number of shares issued in association with the private placement to
raise proceeds for the acquisition of First Bankers Mortgage Services
and general working capital purposes.
(3) The number of shares currently issued and outstanding in association
with the acquisition of First Bankers Mortgage Services is 250. This
includes the 50 shares to be issued as part of the agreement and
rescission related to performance conditions that were met.
(4) There were 425,000 shares issued for the acquisition of The Meridian
Residential Group and the remaining 35,000 shares issued for other
purposes.
(5) Number of shares issued in association with the private placement to
raise proceeds for the acquisition of The Meridian Residential Group
and the purchase of the GreatRate.com intellectual property by
nMortgage and general working capital purposes.
(6) We may issue up to 5,500 shares of a new series of preferred stock in
exchange for net proceeds of $5,000,000 (net of $500,000 issue costs),
which is to be used to finance the cash portion of our acquisition of
Nova Financial Systems and Key Financial Systems. No shares have been
issued yet. The new series of preferred stock will contain a beneficial
conversion feature similar to the Series G Preferred Stock in which the
preferred stock may be converted at any time at a price per share of
common stock equal to the lesser of (a) $6.50 or (b) 65% of the market
price of our common stock.
(7) The number of shares of common stock issued will be the greater of
7,140,000 or 50% of our outstanding common stock on a post acquisition
basis. This issuance of common stock is conditioned upon the approval
of the increase in authorized shares from 7,500,000 to 50,000,000.
(8) In connection with the acquisition of Nova Financial Systems and Key
Financial Systems, we have agreed to issue a warrant for the purchase
of our common stock equal to 100% of any warrants, options, preferred
stock or other convertible securities outstanding at the closing date
and exchangeable for or convertible into our common stock, which at
this time would be a warrant to purchase 4,162,397 shares of our common
stock at an exercise price of $5.78 per share.
-38-
The following table summarizes the comparative ownership and capital
contributions of our stockholders prior to and after the issuance of common
stock and warrants in acquisition of Nova Financial Systems and Key Financial
Systems:
ACCRETION AND DILUTION
(In thousands, except per share data)
Year Ended December 31,
--------------------------------------------
Historical 2000 1999 1998 1997
- ---------- -------- -------- -------- --------
Net loss (7,367) (7,717) (1,981) (3,923)
Less beneficial conversion features (700) (3,218)
Less accretion of redemption value on preferred stock (453)
Less deemed preferred stock dividends (97) (51)
-------- -------- -------- --------
Net loss available to common stockholders $ (8,617) $(10,986) $ (1,981) $ (3,923)
======== ======== ======== ========
Weighted average number of shares outstanding during the period 7,107 6,718 4,417 3,193
======== ======== ======== ========
Basic and diluted net loss per share $ (1.21) $ (1.64) $ (0.45) $ (1.25)
======== ======== ======== ========
Aggregate Accretion/Dilution Per Share
Net loss available to common stockholders (historical) $ (8,617) $(10,986) $ (1,981) $ (3,923)
======== ======== ======== ========
Weighted average number of shares outstanding during the period
(historical) 7,107 6,718 4,417 3,193
Net number of shares to be issued on the assumed issuance of shares in
Key/Nova transaction 7,140 6,718 4,417 3,193
Net number of shares to be issued on the assumed exercise of stock
options and warrants 2,612 1,266 749 312
Net number of shares to be issued on the assumed exercise of stock
options and warrants in the Key/Nova transaction 2,612 1,266 749 312
Shares issued on the assumed conversion of convertible preferred stock 1,550 1,182 1,531 9,874
Shares issued on the assumed conversion of convertible preferred stock
in the Key and Nova transaction 1,550 1,182 1,531 9,874
-------- -------- -------- --------
Number of shares used in the computation of diluted earnings per share 22,571 18,332 13,394 26,758
======== ======== ======== ========
Diluted net income (loss) per share $ (0.38) $ (0.60) $ (0.15) $ (0.15)
======== ======== ======== ========
DESCRIPTION OF PREFERRED STOCK
Our preferred stock is so-called "blank check" preferred since our
board of directors may fix or change the terms, including: (i) the division of
such shares into series; (ii) the dividend or distribution rate; (iii) the dates
of payment of dividends or distributions and the date from which they are
cumulative; (iv) liquidation price; (v) redemption rights and price; (vi)
sinking fund requirements; (vii) conversion rights; (viii) restrictions on the
issuance of additional shares of any class or series. As a result, our board of
directors are entitled to authorize the creation and issuance of up to 2,000,000
shares of preferred stock in one or more series with such terms, limitations and
restrictions as may be determined in our board of director's sole discretion,
with no further authorization by our stockholders except as may be required by
applicable laws or securities exchange listing rules.
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The holders of shares of preferred stock have only such voting rights
as are granted by law and authorized by the board of directors with respect to
any series thereof. Our board of directors has the right to establish the
relative rights of the preferred stock in respect of dividends and other
distributions and in the event of the voluntary or involuntary liquidation,
dissolution or winding up of our affairs as compared with such rights applicable
to the common stock and any other series of preferred stock.
The effect of preferred stock upon the rights of holders of common
stock may include: (i) the reduction of amounts otherwise available for payment
of dividends on common stock to the extent that dividends are payable on any
issued shares of preferred stock; (ii) restrictions on dividends on common stock
if dividends on preferred stock are in arrears; (iii) dilution of the voting
power of the common stock and dilution of net income and net tangible book value
per share of common stock as a result of any such issuance, depending on the
number of shares of common stock not being entitled to share in our assets upon
liquidation until satisfaction of any liquidation preference granted to shares
of preferred stock. It is not possible to state the effect that other series of
preferred stock may have upon the rights of the holder of common stock until the
board of directors determines the terms relating to those series of preferred
stock.
Currently, we have the following series of preferred stock outstanding
and, except in connection with the acquisitions of Nova Financial Systems and
Key Financial Systems, described above, the board of directors has no present
commitment, arrangement or plan that would require the issuance of shares of
preferred stock in connection with an equity offering, merger, acquisition or
otherwise:
o SERIES D 6% CONVERTIBLE PREFERRED STOCK, STATED VALUE, $1,000
PER SHARE. The Series D 6% Convertible Preferred Stock ranks
prior to our common stock and pari passu with other series of
preferred stock issued prior to the Series D 6% Convertible
Preferred Stock and senior to any series of preferred stock
issued after the Series D 6% Convertible Preferred Stock. The
Series D 6% Convertible Preferred Stock entitles its holder to
6% annual dividends, payable quarterly. The Series D 6%
Convertible Preferred Stock liquidation preference is equal to
the sum of the stated value of each share plus an amount equal
to 30% of the stated value plus the aggregate of all accrued
and unpaid dividends on each share of Series D 6% Convertible
Preferred Stock until the most recent dividend payment date or
date of our liquidation, dissolution or winding up. Lastly,
the Series D 6% Convertible Preferred Stock is convertible at
any time, and from time to time at a conversion price per
share of common stock equal to 65% of the market price of the
common stock. The number of shares of common stock due upon
conversion of each share of Series D 6% Convertible Preferred
Stock is (i) the number of shares to be converted, multiplied
by (ii) the stated value of the Series D 6% Convertible
Preferred Stock and divided by (iii) the applicable conversion
price. As of March 31, 2001, 1,200 shares of Series D 6%
Convertible Preferred Stock were outstanding.
o SERIES E CONVERTIBLE PREFERRED STOCK. The Series E Convertible
Preferred Stock is not entitled to dividends, does not have a
liquidation preference and does not have voting rights. The
currently outstanding 250 shares of Series E Convertible
Preferred Stock plus the 50 additional shares of Series E
Convertible Preferred Stock to be issued in connection with
the acquisition and rescission of First Bankers Mortgage
Services, described above, each share automatically converts
into 1,000 shares of our common stock, or into an aggregate of
300,000 shares of our common stock, upon (i) the approval of
the increase in our authorized shares of common stock from
7,500,000 shares to 50,000,000 (ii) or our subsequent merger
with or into another company or (iii) the sale of
substantially all of our assets. As of March 31, 2001, 250
shares of Series E Convertible Preferred Stock were
outstanding.
o SERIES F CONVERTIBLE PREFERRED STOCK. The Series F Convertible
Preferred Stock has a stated value of $8.00 per share and each
share is convertible into shares of our common stock any time
and from time to time at the option of the holder until March
7, 2004, at a conversion price of $7.00 per share. Based upon
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the above calculation, our outstanding Series F Convertible
Preferred Stock may convert into approximately 525,715 shares
of our common stock. On March 7, 2004, all remaining
outstanding shares of Series F Convertible Preferred Stock
shall be automatically converted into shares of our common
stock. To the extent that the holders realize proceeds from
the sale of the shares of common stock in an amount that is
less than conversion price, we have agreed to issue the
holders additional shares of our common stock having a market
value equal to any such deficiency. As of March 31, 2001,
460,000 shares of Series F Convertible Preferred Stock were
outstanding.
o SERIES G CONVERTIBLE PREFERRED STOCK. The Series G Convertible
Preferred Stock has a stated value of $1,000 per share and
bears dividends at 6% per annum, payable quarterly commencing
September 30, 2000, when, as and if declared by our board of
directors. Dividends may be payable by us in cash or, at our
option, shares of common stock. The Series G Convertible
Preferred Stock is convertible, together with any accrued but
unpaid dividends, at any time and from time to time into
shares of our common stock at a conversion price per share
equal to the lesser of $6.50 or 65% of the market price upon
the occurrence of certain material events. All outstanding
shares of Series G Convertible Preferred Stock shall be
automatically converted into common stock on August 31, 2003.
The Series G Convertible Preferred Stock are redeemable at our
option at any time at a redemption price equal to $1,350 per
share plus any accrued but unpaid dividends. We are required
to redeem the Series G Convertible Preferred Stock if our
stockholders have not approved an increase in the number of
shares of authorized common stock from 7,500,000 to 50,000,000
effective on or before May 15, 2001 or a registration
statement relating to the resale of certain shares of our
common stock underlying the Series G Convertible Preferred
Stock is not declared effective on or before 180 days of its
filing. As of March 31, 2001, 1,300 shares of Series G
Convertible Preferred Stock were outstanding.
OPTIONS AND WARRANTS
As of March 31, 2001, the 2,612,700 shares of common stock reserved for
issuance upon the exercise of outstanding warrants and options were comprised of
the following:
o 86,400 shares are reserved for issuance upon the exercise of
options granted under our 1993 Stock Option Plan exercisable
until July 4, 2005 at a price of $3.00 per option.
o 1,700,000 shares are reserved for issuance upon the exercise
of options granted under our 1999 Stock Option Plan. 1,000,000
shares are exercisable until January 5, 2004 at an exercise
price of $6.75 per option and 700,000 shares are exercisable
until April 17, 2005 at an exercise price of $5.50 per option.
o 60,000 shares are reserved for issuance upon the exercise of
warrants exercisable until January 20, 2002. Of this amount,
10,000 warrants are exercisable at a price of $8.895 per
warrant. The remaining amount, 50,000 warrants, are
exercisable at a price of $10.00 per warrant.
o 50,000 shares are reserved for issuance upon the exercise of
warrants exercisable until April 30, 2002 at an exercise price
of $9.875 per warrant.
o 60,000 shares are reserved for issuance upon the exercise of
warrants exercisable until April 17, 2005 at an exercise price
of $4.00 per warrant.
o 120,000 shares are reserved for issuance upon the exercise of
warrants exercisable until August 31, 2002 at an exercise
price of $5.50 per warrant.
o 100,000 shares are reserved for issuance upon the exercise of
warrants exercisable until April 17, 2005 at an exercise price
of $4.00 per warrant.
o 50,000 shares are reserved for issuance upon the exercise of
warrants exercisable until April 17, 2005 at an exercise price
of $4.00 per warrant.
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o 130,000 shares are reserved for issuance upon the exercise of
warrants exercisable until September 5, 2003 at an exercise
price of $4.00 per warrant.
o 56,300 shares are reserved for issuance upon the exercise of
warrants exercisable until January 8, 2004 at an exercise
price of $4.00 per warrant.
o 200,000 shares are reserved for issuance upon the exercise of
warrants exercisable until January 8, 2004 at an exercise
price of $4.00 per warrant.
In addition, pursuant to the anti-dilution provisions in the agreement
for the acquisitions of Nova Financial Systems and Key Financial Systems, we
must issue at the closing of these transactions a warrant which equals on a one
for one basis all warrants, options, preferred stock or other convertible
securities outstanding at the closing date and exchangeable for or convertible
into our common stock. Presently, this would constitute a warrant allowing the
holder to purchase 4,162,397 shares of our common stock at an exercise price of
$5.78 per share which is the weighted average exercise price of all warrants and
options currently outstanding. In this warrant, 2,612,700 is attributable to
outstanding options and warrants and 1,549,697 is attributable to convertible
preferred stock. The exact terms of the warrant may change based upon any
changes in outstanding options or warrants to purchase our common stock which
take place prior to closing.
VOTE REQUIRED
The affirmative vote of the majority of the outstanding stock of each
class entitled to vote thereon as a class, at the stockholders' meeting will be
required to adopt the proposed amendment to paragraph 4 of the Certificate of
Incorporation. Abstentions on a proposal will be counted as votes against that
proposal. Broker non-votes will not be counted as shares represented at the
meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSAL TO INCREASE
THE NUMBER OF SHARES OF COMMON STOCK.
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PROPOSAL NUMBER TWO
TO DISTRIBUTE ALL OF OUR ASSETS AND LIABILITIES TO EQUITEX 2000 AND
TO DISTRIBUTE ALL OF THE OUTSTANDING SHARES OF COMMON STOCK
OF EQUITEX 2000 TO OUR STOCKHOLDERS
Our board of directors recommends the distribution of all of our assets
and liabilities to Equitex 2000 and to distribute all of the outstanding shares
of common stock of Equitex 2000 to our stockholders on the basis of one share of
common stock of Equitex 2000 for each share of our common stock.
RISK FACTORS
You should be aware that the distribution by us of all of our assets
and liabilities to Equitex 2000 and spin- off of Equitex 2000 common stock
involves certain risks, including those described under "Risk Factors," that
could adversely affect the value of your holdings.
BACKGROUND AND REASONS FOR THE DISTRIBUTION AND SPIN-OFF
Our board of directors believes that the distribution of all of our
assets and liabilities to Equitex 2000 and the spin-off of Equitex 2000 common
stock will serve a number of purposes, including:
o increasing the ability of both companies to improve the
corporate fit and focus of their respective businesses;
o facilitating acquisitions by both companies by improving the
attractiveness of their respective capital stock as
acquisition currency; and
o allowing both companies to effectively motivate and enhance
management performance by providing equity compensation and
incentives more closely tied to the businesses in which the
employees work.
THE DISTRIBUTION AND SPIN-OFF
If our stockholders approve the distribution by us of all of our assets
and liabilities to Equitex 2000 and spin-off of Equitex 2000 common stock, we
anticipate that its board of directors will authorize the various components of
the distribution and declare a special dividend payable in Equitex 2000 common
stock and set a record date for that dividend which shall be prior to the
acquisitions of Nova Financial Systems and Key Financial Systems. The
distribution would involve the actions described below.
We will contribute the following to Equitex 2000:
o all of our cash, or such lesser amount as our board of
directors may determine in its sole discretion;
o all securities and investments owned by us in our investee
companies including our interests in First Teleservices and
First Telebank;
o all shares of Meridian Services, our wholly-owned mortgage
banking subsidiary;
o any residual rights related to the First Bankers Mortgage
Services acquisition and rescission;
o all shares of nMortgage, our Internet based mortgage banking
subsidiary;
o all receivables of any nature, including accounts and notes
receivable;
o all furniture, fixtures and equipment; and
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o any other assets that are related in any manner to our
company.
Equitex 2000 will assume all of our liabilities and will indemnify us
and assume our prosecution or defense in the following lawsuits: WILLIAM G.
HAYES, JR. LIQUIDATING AGENT FOR RDM SPORTS GROUP, INC. AND RELATED DEBTORS V.
EQUITEX, INC., SMITH, GAMBRELL, RUSSELL, L.L.P., DAVID J. HARRIS, P.C., AND
DAVID J. HARRIS, INDIVIDUALLY, Adversary Proceeding No., 00-1065 (U.S.
Bankruptcy Court for the Northern District of Georgia, Newnan Division); and
EQUITEX, INC. AND HENRY FONG V. BERTRAND T. UNGER, Case No. 98-CV-2437 (Dist.
Ct. Arapahoe County, Colorado).
We will distribute, in the form of a special dividend, all of the
outstanding shares of common stock of Equitex 2000, on a pro rata basis, to the
holders of our common stock as of a record date for the special dividend. Each
of our shareholders will retain his shares of our common stock, and for each
share of our common stock held by him on the record date for the special
dividend contemplated by the distribution and spin-off, will be entitled to
receive one share of Equitex 2000 common stock.
Prior to its distribution to our stockholders, the Equitex 2000 common
stock will be registered pursuant to Section 12(b) or 12(g) of the Securities
Exchange Act of 1934 and Equitex 2000 shall have filed and sought to make
effective an application for the inclusion of the Equitex 2000 common stock on
the Nasdaq SmallCap Market. If Equitex 2000's application is not approved, its
common stock may be traded on either the electronic bulletin board or the
National Quotation Bureau, Inc.'s "Pink Sheets."
Following the distribution and spin-off, we are expected to close on
the acquisitions of Nova Financial Systems and Key Financial Systems as
discussed under proposal number three below.
FEDERAL INCOME TAX CONSEQUENCES RELATED TO THE DISTRIBUTION AND SPIN-OFF
While the spin-off of Equitex 2000 common stock will be a taxable
distribution to our stockholders, because we have no current and post-1913
accumulated earnings and profits, the distribution will be applied against, and
reduce the adjusted basis of our common stock owned by the stockholder. If the
distribution is greater than the adjusted basis of the stock, the excess is
treated as gain from the sale or exchange of property.
NO RIGHT OF APPRAISAL
Our stockholders will not be entitled to appraisal rights under the
Delaware General Corporation Law in connection with the distribution and
spin-off.
CONDITIONS TO THE DISTRIBUTION AND SPIN-OFF
The distribution and spin-off of Equitex 2000 common stock are
conditioned upon, among other things:
(i) approval of the distribution by us of all of our assets and
liabilities to Equitex 2000 and spin-off of Equitex 2000
common stock by the holders of a majority of the outstanding
stock of each class entitled to vote thereon as a class; and
(ii) there not being in effect any statute, rule, regulation or
order of any court, governmental or regulatory body that
prohibits or makes illegal the transaction contemplated by the
distribution.
Our board of directors has retained discretion, even if all conditions
to the distribution and spin-off of Equitex 2000 common stock are satisfied, to
abandon, defer or modify the distribution and/or spin-off of Equitex 2000 common
stock.
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EQUITEX 2000'S BUSINESS AFTER THE DISTRIBUTION AND SPIN-OFF
After the distribution by us of all of our assets and liabilities to
Equitex 2000 and spin-off of Equitex 2000 common stock, Equitex 2000 will own
and operate all of our assets distributed to it.
PRINCIPAL OFFICE OF EQUITEX 2000
Equitex 2000, Inc.
2401 PGA Boulevard, Suite 190
Palm Beach Gardens, Florida 33410
DESCRIPTION OF EQUITEX 2000 CAPITAL STOCK
Equitex 2000 has the authority to issue 52,000,000 shares of capital
stock, consisting of 50,000,000 shares of common stock, $.01 par value and
2,000,000 shares of preferred stock, $.01 par value.
EQUITEX 2000 DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The directors, executive officers, and control persons of Equitex 2000
are as follows:
LENGTH OF
NAME AGE OFFICES HELD SERVICE
- ---- --- ------------ -------
Henry Fong 64 President, Treasurer and Since inception
Director
Thomas B. Olson 34 Secretary Since inception
Aaron A. Grunfeld 53 Director Since inception
Russell L. Casement 56 Director Since inception
HENRY FONG. Mr. Fong has been the President, Treasurer and a director
of Equitex 2000 since its inception. Mr. Fong is currently the president,
treasurer and director of us. 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 us and was its president and
treasurer from 1987 to 1996. Subsequent to Mr. Fong's departure from RDM, it
filed Chapter 11 bankruptcy petitions for RDM and all of its subsidiaries with
the U.S. Bankruptcy Court for the Northern District of Georgia on August 29,
1997. From July 1996 to October 1997, Mr. Fong was a director of IntraNet
Solutions, Inc., a publicly-held investee company which provides
internet/intranet solutions to Fortune 1000 companies and was the chairman of
the board and treasurer of its predecessor company, MacGregor Sports and
Fitness, Inc. from February 1991 until the two companies merged in July 1996.
From January 1993 to January 20, 1999, Mr. Fong was chairman of the board and
Chief Executive Officer of California Pro Sports, Inc., a publicly traded
manufacturer and distributor of in-line skates, hockey equipment and related
accessories. From 1959 to 1982 Mr. Fong served in various accounting, finance
and budgeting positions with the Department of the Air Force. During the period
from 1972 to 1981 he was assigned to senior supervisory positions at the
Department of the Air Force headquarters in the Pentagon. In 1978, he was
selected to participate in the Federal Executive Development Program and in
1981, he was appointed to the Senior Executive Service. In 1970 and 1971, he
attended the Woodrow Wilson School, Princeton University and was a Princeton
Fellow in Public Affairs. Mr. Fong received the Air Force Meritorious Civilian
Service Award in 1982. Mr. Fong has passed the uniform certified public
accountant exam. In March 1994, Mr. Fong was one of twelve CEOs selected as
Silver Award winners in FINANCIAL WORLD magazine's corporate American "Dream
Team."
THOMAS B. OLSON. Mr. Olson has been Secretary of Equitex 2000 since its
inception. Mr. Olson is currently our Secretary. From February 1990 to February
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2000, Mr. Olson was a director, and from May 1994 to February 2000 secretary, of
Immune Response, Inc. a publicly held investee of the Registrant which was
recently merged with an unaffiliated third party company. Mr. Olson has attended
Arizona State University and the University of Colorado at Denver.
AARON A. GRUNFELD. Mr. Grunfeld has been a director of Equitex 2000
since its inception. Mr. Grunfeld is currently a director of us. Mr. Grunfeld
has been engaged in the practice of law for the past 28 years and has been of
counsel to the firm of Resch Polster Alpert & Berger, LLP, Los Angeles,
California since November 1995. From April 1990 to November 1995, Mr. Grunfeld
was a member of the firm of Spensley Horn Jubas & Lubitz, Los Angeles,
California. Mr. Grunfeld received an A.B. in Political Science from UCLA in 1968
and a J.D. from Columbia University in 1971. He is a member of the California
Bar Association.
RUSSELL L. CASEMENT. Dr. Casement has been a director of Equitex 2000
since its inception. Mr. Casement is currently a director of us. Since 1969, Dr.
Casement has been the president of his own private dental practice, Russell
Casement, D.D.S., P.C., in Denver, Colorado. Dr. Casement earned a Doctor of
Dental Science degree from Northwestern University in 1967. Dr. Casement is a
member of the American Dental Association, the Colorado Dental Association and
the Metro Denver Dental Association.
VOTE REQUIRED
The affirmative vote of the majority of the outstanding stock of each
class entitled to vote thereon as a class, at the stockholders' meeting will be
required to approve the proposal to distribute all of our assets and liabilities
to Equitex 2000 and to distribute all of the outstanding shares of common stock
of Equitex 2000 to our stockholders. Abstentions on a proposal will be counted
as votes against that proposal. Broker non-votes will not be counted as shares
represented at the meeting. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE
PROPOSAL TO DISTRIBUTE ALL OF OUR ASSETS AND LIABILITIES TO EQUITEX 2000 AND TO
DISTRIBUTE ALL OF THE OUTSTANDING SHARES OF COMMON STOCK OF EQUITEX 2000 TO OUR
STOCKHOLDERS.
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PROPOSAL NUMBER THREE
TO ACQUIRE ALL OF THE OUTSTANDING CAPITAL
STOCK OF NOVA FINANCIAL SYSTEMS
AND KEY FINANCIAL SYSTEMS IN
EXCHANGE FOR THE GREATER OF 7,140,000 SHARES,
OR 50%, OF OUR OUTSTANDING COMMON STOCK ON
A POST ACQUISITION BASIS, CASH CONSIDERATION OF $5 MILLION
AND A WARRANT.
THIS PROPOSAL IS SUBJECT TO THE APPROVAL OF PROPOSAL NUMBER ONE.
Our board of directors recommends the approval of the acquisition of
Nova Financial Systems and Key Financial Systems.
On June 29, 2000 we signed a definitive agreement with Nova Financial
Systems and Key Financial Systems, companies under common control with nearly an
identical ownership structure, to acquire all the outstanding capital stock of
Nova Financial Systems and Key Financial Systems in exchange for the greater of
7,140,000 shares or 50% of our outstanding common stock on a post acquisition
basis, cash consideration of $5 million and a warrant. In order to raise the
cash consideration of $5 million (net of $500,000 issue costs), we intend to
issue up to 5,500 shares of a new series of convertible preferred stock. The new
series of preferred stock will contain a beneficial conversion feature similar
to the Series G Preferred Stock in which the preferred stock may be converted at
any time at a price per share of common stock equal to the lesser of (a) $6.50
or (b) 65% of the market price of our common stock. The warrant to be issued
shall be equal to 100% of any warrants, options, preferred stock or other
convertible securities outstanding at the closing date and exchangeable for or
convertible into our common stock. We estimate that 4,162,397 shares of common
stock will underlie the warrant to be issued in the Nova Financial Systems and
Key Financial Systems acquisition. While these transactions are structured as
reverse subsidiary mergers of our acquisition subsidiaries which do not require
the approval of our stockholders, because more than 20% of our outstanding
common stock will be issued in the transaction, the rules of the Nasdaq SmallCap
Market require approval by our stockholders. We would operate Nova Financial
Systems and Key Financial Systems as subsidiaries. Nova Financial Systems and
Key Financial Systems are both financial companies which specialize in selling
credit card programs designed for high credit risk clients. Consummation of the
Nova Financial Systems and Key Financial Systems mergers is subject to a number
of conditions, including: (i) the distribution of all of our assets and
liabilities to Equitex 2000 and the spin-off of Equitex 2000 common stock; (ii)
the approval of the Nova Financial Systems and Key Financial Systems mergers by
our stockholders; and (iii) the approval of the increase in the authorized
shares of common stock from 7,500,000 shares to 50,000,000 shares pursuant to
proposal number one. Nova Financial Systems and Key Financial Systems may waive
the approval of the increase in authorized shares if our shareholder meeting has
not been held prior to the closing of the mergers or the closing may be
postponed until our shareholder meeting has been held and an amended Certificate
of Incorporation has been filed in Delaware.
BUSINESS OF NOVA FINANCIAL SYSTEMS AND KEY FINANCIAL SYSTEMS
Key Financial Systems 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, was
formed to provide the same services as Key Financial Systems for Key Financial
Systems' second bank client. Key Financial Systems marketed the Pay As You Go
credit card program for Key Bank & Trust until April of 1999 and is actively
marketing the Pay As You Go credit card program with Net 1st National Bank. Nova
Financial Systems marketed the Pay As You Go program for Merrick Bank until
September of 1999. Under its contracts with Key Bank & Trust and Net 1st
National Bank, Key Financial Systems 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 and all credit card income associated with
each portfolio flows to Key Financial Systems under the agreement. Key Financial
Systems 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 has the same type of relationship with Merrick
Bank. As of December 31, 2000, Nova Financial Systems and Key Financial Systems
have processed over 897,000 credit card applications and currently have 81,799
active credit card accounts.
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Together, Nova Financial Systems and Key Financial Systems are a full
service organization, operating from 17,000 square feet with 102 employees. They
provide credit card portfolio management services including:
APPLICATION PROCESSING. Nova Financial Systems and Key Financial
Systems provide automated application processing services with a proprietary
software system including application entry by data file or paper, underwriting
and data edits, processing fee payment processing by ACH or check, and return
item processing. Nova Financial Systems and Key Financial Systems generate files
for uploading new credit card account records to Equifax and FDR.
CUSTOMER SERVICE. Nova Financial Systems and Key Financial Systems
handle inbound customer service calls and written correspondence from customers
concerning their application or credit card account. They have access to Equifax
and FDR for card servicing and use their in-house application processing system
for access to application information. They also provide customers the ability
to make payments over the telephone.
MEDIATION. Nova Financial Systems and Key Financial Systems have
designated specialists to provide mediation between their bank clients and their
customers. They have established formal procedures for managing customer
complaints and have a formal reporting process to their client banks.
COLLECTIONS. Nova Financial Systems and Key Financial Systems provide
collection services for their portfolios. They use proprietary dialing software
and collections management techniques to effectively collect sub- prime credit
card accounts.
RISK MANAGEMENT. Nova Financial Systems and Key Financial Systems
monitor suspect authorization activity and unusually large or suspicious payment
activity. They provide all account control functions to minimize loss exposure
from payment and sales activity.
ACCOUNTING. Nova Financial Systems and Key Financial Systems process
exception payments and all payment returns. They control and process fee
adjustments pursuant to the client bank's policy. They perform the daily
settlement accounting for the credit card portfolio. They have developed a
proprietary commission accounting system to track compensation due their
marketing vendors.
MANAGEMENT INFORMATION SYSTEMS. Nova Financial Systems and Key
Financial Systems use cutting-edge technologies in hardware and software and
have their own internal software development capabilities. Their technology
resources include:
o Proprietary application processing system;
o Proprietary ACD (Automated Call Distribution) telephone
system;
o Proprietary dialing systems using Dialogic hardware;
o Customized reporting from any application system;
o FoxPro, Sequel Server and Microsoft Access Databases; and
o NT Network with interfaces to FDR and Equifax.
Support equipment includes:
o 8 servers;
o 250 personal computers; and
o DS3 (576 incoming and outbound telephone lines).
PRODUCT. Key Financial Systems currently offers an innovative product
to customers with poor or little credit histories. There are no credit checks or
credit turndowns. Key Financial Systems 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
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request or if the account is charged-off. There is an $8 monthly membership fee
and the balance is not subject to any interest charge. The account requires a
minimum payment of 3%, or $15 for each billing statement.
NOVA FINANCIAL SYSTEMS AND KEY FINANCIAL SYSTEMS TARGET MARKET. The
opinions on the size of the sub- prime market vary depending on the particular
label described, however, a 1996 survey from Faulkner and Gray, a respected
research firm, estimated the size of this market in the U.S. at 30 million and
growing. More recent surveys by MasterCard International indicate the number to
be at least twice as large. There are two basic segments in this market:
1. EMERGING/THIN FILES - includes ethnic/immigrants groups,
youth, elderly on fixed income, divorced, widows/widowers; and
2. RECOVERING/CREDIT IMPAIRED - includes credit abusers with a
history of credit problems including bankruptcies and those
who have experienced a catastrophic one-time life event that
destroyed their credit, such as death, illness or divorce.
According to MasterCard International, this large underdeveloped
segment includes 25-30% of U.S. households. This market has continuous segment
growth and a 50% higher profit potential than the industry average (i.e.
interest rates, processing fees, annual/membership fees, ancillary fees, etc.).
COMPETITION. Today, sub-prime credit cards continue to be marketed
successfully to consumers throughout the U.S. with poor or limited credit
histories. Generally, four types of credit cards are offered to sub-prime
consumers in the marketplace:
1. Fully secured;
2. Partially secured;
3. High fee unsecured; and
4. Low limit unsecured.
The fully secured credit card is collateralized by a savings account
equal to the credit limit. This type of credit card is difficult to sell and
therefore not marketed as aggressively today. The fully secured card has low
risk but has a high acquisition cost since a deposit has to be collected up
front, which creates a challenging marketing hurdle. Most of the major issuers
of traditional unsecured cards offer fully secured credit cards through their
branch systems and as an alternative to the unsuccessful applicants for a
regular card.
The partially secured credit card requires a collateral savings account
but is issued with some unsecured credit - usually $50 - $300. The major issuers
of these types of cards are Capital One, Providian, First National Bank of
Marin, First Consumers National Bank, Sterling Bank, and most others in the
sub-prime segment. The product is offered through all major distribution
channels, including direct mail, telemarketing, television and the Internet.
While the credit exposure per account is limited, issuers use credit based
underwriting and decline applicants for card issuance.
The high fee unsecured credit card generally has less credit exposure
than partially secured credit cards. A high non-refundable fee is charged on the
card in order to limit the amount of available credit. Most of these card
programs do not collect an up front processing fee. The high fee card programs
are usually offered by banks that specialize in arranging relationships with
marketing companies that sell the product and purchase the receivable from the
issuing banks.
Many issuers, based on credit scoring models that have been developed
in recent years, are now offering a low limit unsecured product. They are
targeting the "improving" segment of the sub-prime customer base. Most have
annual fees and many charge an application processing fee. Providian, Capital
One, First Consumers National Bank, First Premier Bank, NA and many others are
aggressively marketing this product. These programs have a significant number of
declined applications as a large segment of the sub-prime market will not
qualify.
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The Pay As You Go credit card was designed with the purpose of having a
low risk profile for Nova Financial Systems and Key Financial Systems 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' membership fee is less costly than the interest
and annual fee charged on other programs. Nova Financial Systems and Key
Financial Systems 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. Key Financial Systems shall receive a monthly fee equal to
$.50 per active account on file for all Pay As You Go credit cards issued by the
Bank of Hoven from the marketing efforts of Affinity Marketing.
MARKETING. Nova Financial Systems and Key Financial Systems 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. Nova Financial Systems and
Key Financial Systems manage and control all marketing programs related to the
products offered by them. In addition, Nova Financial Systems and Key Financial
Systems have access to proprietary methods of managing lists to identify the
best potential customers from lists available in the market.
Currently Nova Financial Systems and Key Financial Systems' most active
distribution channel is the Internet. Key Financial Systems markets through
alliances with a number of popular Internet web sites including: Creditland.com,
uproar.com, Mail.com, Spinway.com, GetSmart.com, NetCreations.com,
Lendingtree.com, winvite.com and USA.net. Internet customers are directed to the
Net 1st site by a combination of banner links displayed on thousands of web
sites, including those listed above, and approved e-mail programs. The Pay As
You Go card was recently ranked as the number five most popular credit card site
on the Internet by top9.com which reported over four million unique visitors
during the month of November 2000.
On November 15, 2000, Key Financial Systems temporarily suspended
marketing, including the Internet site, for Net 1st National Bank. This
suspension was at the request of the Bank to conform to the requirements of a
Consent Order between Net 1st National Bank and Office of the Comptroller of the
Currency. Net 1st National Bank was required to obtain legal opinions that Key
Financial Systems' credit card marketing and the Pay As You Go program conforms
to all applicable federal and state laws. The necessary opinions have been
prepared and have been forwarded to the Office of the Comptroller of the
Currency. On December 15, 2000, Net 1st National Bank notified Key Financial
Systems to resume marketing the Pay As You Go credit card on its behalf.
DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS OF NOVA FINANCIAL
SYSTEMS AND KEY FINANCIAL SYSTEMS. The directors, executive officers, and
control persons of Nova Financial Systems and Key Financial Systems are as
follows:
LENGTH OF
NAME AGE OFFICES HELD SERVICE
- ---- --- ------------ -------
Charles R. Darst 53 Director, Secretary Since inception as a director,
since September 2000 as
secretary
Scott A. Lucas 49 President, Chief Financial Since inception as a director,
Officer and Director since 1998 as president
CHARLES R. DARST. Mr. Darst has been a board director and Director of
Marketing of the Key Financial Systems, Inc. and Nova Financial Systems, Inc.
from their inception. He has been an owner, partner, and operating manager of
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several businesses over 25 years, including: Quintel Cellular, LC (a joint
venture with a public company to market prepaid cellular); Big Dog Management
(list brokerage); Account Services, Inc. (electronic funds transfer ACH and
SEAs); Direct Sources, Inc. (membership buying clubs); US Power Corp. (solar
energy); and Airport Flea Market. Mr. Darst serves as Chairman of the Ethics
Committee on National Automated Payment Associated Board of Directors.
SCOTT A. LUCAS. Mr. Lucas has been a director of Key Financial Systems,
Inc. and Nova Financial Systems, Inc. since their inception. Since September of
1998 he has served as President of Key Financial Systems, Inc. He has served in
the same capacities for Nova Financial Systems, Inc. since its inception. From
1993 through 1997 Mr. Lucas held various executive management positions with
First National Bank of Marin and its affiliates. In all, Mr. Lucas has more than
26 years experience in the financial services industry, where he has held
positions as President, COO, CFO, Vice President and other management positions
in banking and insurance. Mr. Lucas received a B.S. in Business Administration
from the University of California, Berkeley in 1973.
SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND AFFILIATES OF NOVA FINANCIAL
SYSTEMS, INC.
Set forth below is certain formation as of December 31, 2000, with
respect to ownership of Nova Financial Systems' common stock held of record or
beneficially by (i) Nova Financial Systems' executive officers, (ii) each
director of Nova Financial Systems, (iii) any affiliates; and (iv) all directors
and executive officers as a group:
NAME AND ADDRESS OF NUMBER OF SHARES OF PERCENTAGE OWNED
BENEFICIAL OWNER COMMON STOCK OWNED OF COMMON STOCK
Charles R. Darst 194 19.4%
734 Weedon Drive NE
St. Petersburg, FL 33702
Scott A. Lucas 120 12.0%
3406 Primrose Way
Palm Harbor, FL 34683
All officers an directors 314 31.4%
as a group (two persons)
SECURITY OWNERSHIP OF DIRECTORS, OFFICERS AND AFFILIATES OF KEY FINANCIAL
SYSTEMS
Set forth below is certain formation as of December 31, 2000, with
respect to ownership of Key Financial Systems' common stock held of record or
beneficially by (i) Key Financial Systems' executive officers, (ii) each
director of Key Financial Systems, (iii) any affiliates; and (iv) all directors
and executive officers as a group:
NAME AND ADDRESS OF NUMBER OF SHARES OF PERCENTAGE OWNED
BENEFICIAL OWNER COMMON STOCK OWNED OF COMMON STOCK
Charles R. Darst 388 19.4%
734 Weedon Drive NE
St. Petersburg, FL 33702
Scott A. Lucas 240 12.0%
3406 Primrose Way
Palm Harbor, FL 34683
All officers an directors 628 31.4%
as a group (two persons)
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PRINCIPAL OFFICE OF NOVA FINANCIAL SYSTEMS
Nova Financial Systems, Inc.
5770 Roosevelt Blvd., Suite 410
Clearwater, Florida 33760-3431
(727) 524-8410
PRINCIPAL OFFICE OF KEY FINANCIAL SYSTEMS
Key Financial Systems, Inc.
5770 Roosevelt Blvd., Suite 410
Clearwater, Florida 33760-3431
(727) 524-8410
SELECTED FINANCIAL DATA
The selected combined financial data set forth below as of and for the
periods ended December 31, 2000, 1999, 1998 and 1997 have been derived from the
financial statements of Nova Financial Systems and Key Financial Systems which
have been audited by McGladrey & Pullen, LLP.
Combined Balance Sheet Data (1)
(In thousands)
As of December 31,
-------------------------------------
2000 1999 1998 1997
------ ------ ------ ------
(2) (2)
Assets:
Cash and cash equivalents $ 74 $ 58 $ 337 --
Receivables 6,184 6,594 1,806 --
Property, plant and equipment (net) 267 304 213 $ 34
Other 638 624 40 5
Total assets 7,163 7,580 2,396 39
Liabilities:
Accounts payable and accrued expenses 1,876 1,690 1,047 2
Due to cardholders 4,389 4,324 1,409 --
Total liabilities 6,265 6,014 2,456 2
Stockholders' equity (deficit) 898 1,566 (60) 37
- -------
(1) The combined balance sheet data and statement of operations data
represents financial information from Nova Financial Systems and Key
Financial Systems on a combined basis. Intercompany balances have been
eliminated in combination.
(2) Key Financial Systems' date of inception was June 12, 1997 and Nova
Financial Systems' date of inception was October 10, 1998.
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COMBINED STATEMENT OF OPERATIONS DATA (1)
(in thousands)
Years Ended December 31,
------------------------------------
2000 1999 1998 1997
------ ------ ------ ------
(2) (2)
Revenues $14,513 $22,218 $ 5,205 $ --
Expenses 10,899 15,440 4,494 12
Provision for losses 57 1,188 260 --
------- ------- ------- -------
Net income (loss) $ 3,557 $ 5,590 $ 451 $ (12)
======= ======= ======= =======
- -------
(1) The combined balance sheet data and statement of operations data
represents financial information from Nova Financial Systems and Key
Financial Systems on a combined basis. Intercompany balances have been
eliminated in combination.
(2) Key Financial Systems' date of inception was June 12, 1997 and Nova
Financial Systems' date of inception was October 10, 1998.
NOVA FINANCIAL SYSTEMS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section containing Nova Financial Systems Management's Discussion
and Analysis of Financial Condition and Results of Operations should be read in
conjunction with the financial statements of Nova Financial Systems as of and
for the periods ended December 31, 2000, December 31, 1999 and December 31, 1998
attached as Exhibit 2 to this proxy statement.
INTRODUCTION
Nova Financial Systems designs and markets credit card products aimed
at the sub-prime market. Nova Financial Systems marketed a Pay As You Go credit
card program for Merrick Bank until September of 1999. The credit cards were
marketed under an agreement that provides Nova Financial Systems with a 100%
participation interest in the receivables and related rights associated with
credit cards issued and requires the payment of monthly servicing fees to the
client bank. Nova Financial Systems ceased marketing new credit cards in August
of 1999. The current revenues of Nova Financial Systems are the result of the
participation interest in the credit card portfolio. Most of Nova Financial
Systems' expenses are variable, related to the number of active credit card
accounts in the portfolio.
RESULTS OF OPERATIONS
2000 vs. 1999
- -------------
Credit Card Income
Credit card servicing fees, Nova Financial Systems' principal source of
earnings, are credit card fees accessed on credit card accounts owned by Nova
Financial Systems' client bank. These include monthly membership fees, late
charges, overlimit fees, and return check fees. The fees are paid to Nova
Financial Systems under a 100% loan participation agreement with the client
bank. Credit card servicing fees decreased 40.6% to $4,332,258 from 1999 as a
result of the decrease in active credit card accounts. The average number of
active accounts during the year 2000 was 44,636 versus 76,623 in 1999, a 41.7%
decrease.
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PROVISION FOR LOSSES
The provision for losses is the charge to operating earnings that
management feels is necessary to maintain the reserve for possible losses at an
adequate level. The provision is determined based on growth of the portfolio,
the net amount of losses incurred, and management's estimation of potential
future losses based on an evaluation of the portfolio risks and economic
conditions. The provision for the year 2000 was a net credit of $83,262 versus a
charge of $676,343 for 1999. The actual principal loss experienced for 2000 has
been significantly less that the projected loss exposure recorded at December
31, 1999. Some of the reduction in principal losses in 2000 was offset by an
increase in the fee reversals per account at charge-off. The reserve balance at
December 31, 2000 is 73.5% lower than the balance at December 31, 1999 due to
the reduction in credit card receivables. At December 31, 2000 and 1999, Nova
Financial Systems' allowance for losses was $124,358 or 30.5% of credit card
receivables, net of unearned income, compared to $469,032 or 43.1% of credit
card receivables, net of unearned income. Management believes that the reserve
for possible losses was adequate to provide for potential losses at December 31,
2000 and 1999.
OTHER INCOME
There were no new application fees in 2000. Nova Financial Systems
established 154,862 new credit card accounts in the year 1999.
OPERATING EXPENSES
Operating expenses for the year 2000 decreased to $3,978,329, a 52.3%
decrease from the year 1999. The decrease is due to lower third party servicing
fees and a decrease in collection fees paid to Nova Financial Systems'
affiliate. The decrease in operating expenses is directly related to the
decrease in active credit cards. In 1999, Nova Financial Systems incurred new
account processing costs that did not occur in 2000.
LIQUIDITY FOR 2000 VS. 1999
Cash flow provided by operations decreased to $221,924 from 1999 to
2000. Nova Financial Systems is debt free and funds operating expenses and
capital expenditures from current operating cash flow. Funds due under the loan
participation agreements are received on a monthly basis shortly after each
month end. Funds in excess of projected required cash flows for operating
expenses and capital expenditures for the period to the next receipt of the
monthly income distribution from the client banks are distributed to
shareholders.
INFLATION
The amounts presented in the financial statements do not provide for
the effect of inflation on Nova Financial Systems' operations or its financial
position. Nova Financial Systems' assets and liabilities are primarily monetary
in nature. However, the majority of the assets and liabilities are interest free
and not subject to any effect from increases or decreases in market interest
rates due to external economic factors.
1999 vs. 1998
- -------------
CREDIT CARD INCOME
Credit card servicing fees increased to $7,278,767 over $1,102 for 1998
as a result of an increase in active credit card accounts. The average number of
active accounts was 76,623 in 1999 versus 20 for 1998.
PROVISION FOR LOSSES
The provision in 1999 increased to $676,343 versus $192 for 1998. This
increase was due to the higher number of active accounts in 1999 versus 1998. At
December 31, 1999 and 1998, Nova Financial Systems' allowance for losses was
$469,032 or 43.10% of credit card receivables, net of unearned income, compared
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to $192 or 17.60% of credit card receivables, net of unearned income. Management
believes that the reserve for possible losses was adequate to provide for
potential losses at December 31, 1999 and 1998.
OTHER INCOME
Other income increased to $1,942,520 over the $2,751 in 1998 due to the
increase in application fees received on new credit card accounts in 1999.
OPERATING EXPENSES
During 1999, operating expenses increased from $7,377 to $8,349,475.
The increase is due to the costs associated with the new credit card volume
experienced in 1999. This included $2,112,092 in payments to Nova Financial
Systems' affiliate for application processing services, payments to third party
vendors of $5,934,125 for data processing and other portfolio services, and
other operating expenses of $303,258.
KEY FINANCIAL SYSTEMS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This section containing Key Financial Systems Management's Discussion
and Analysis of Financial Condition and Results of Operations should be read in
conjunction with the financial statements of Key Financial Systems as of and for
the periods ended December 31, 2000, December 31, 1999 and December 31, 1998
attached as Exhibit 3 to this proxy statement.
INTRODUCTION
Key Financial Systems designs and markets credit card products aimed at
the sub-prime market. Key Financial Systems marketed a Pay As You Go credit card
program for Key Bank & Trust until April of 1999 and has an active contract with
Net 1st National Bank. The credit cards are marketed under agreements that
provide Key Financial Systems with a 100% participation interest in the
receivables and related rights associated with credit cards issued and requires
the payment of monthly servicing fees to the client banks. Key Financial Systems
provides collection, customer service and other portfolio management services
for the credit cards issued.
RESULTS OF OPERATIONS
2000 vs. 1999
- -------------
CREDIT CARD INCOME
Credit card servicing fees, Key Financial Systems' principal source of
earnings, are credit card fees accessed on credit card accounts owned by Key
Financial Systems' client bank. These include monthly membership fees, late
charges, overlimit fees, and return check fees. The fees are paid to Key
Financial Systems under a 100% loan participation agreement with the client
bank. Credit card servicing fees decreased 59% to $6,892,015 from 1999 as a
result of the decrease in active credit card accounts, which was due to Key
Financial Systems ceasing new credit card marketing from April 1999 to January
of 2000. Key Financial Systems agreed to cease marketing of new accounts in
April of 1999 at the request of our initial client bank. The new card volume was
transferred to the client bank of Key Financial Systems' affiliate company, Nova
Financial Systems. The average number of active accounts during the year 2000
was 54,511 versus 102,076 in 1999, a 47% decrease. The new account volume in
2000 was 60,621 compared to 113,605 for 1999, a 47% decrease.
In June 2000, Key Financial Systems implemented a new account
activation procedure that will greatly reduce the number of credit cards issued
to individuals that historically never activate their accounts. This will result
-55-
in much lower closure, delinquency and charge-off rates on new accounts issued.
The data available since the new procedure was implemented supports the expected
result. Of the 1,655 accounts booked in June under the new procedure, 61% are
still active at the end of January 2001, as compared to 35.8% of the May 2000
sales that were still active at the end of December 2000.
An additional benefit of the new procedure is significantly reduced new
account and portfolio servicing costs. The historically high level of
"non-activated" accounts results in significant expenditures for new account
setup, data processing, customer service and collections associated with
accounts that Key Financial Systems received no credit card revenue.
In March of 2001, Key Financial Systems performed a detailed analysis
comparing the number of active accounts on file for three months and longer
between the two different card issuance methodologies. Key Financial Systems
found a significantly smaller percentage of active accounts on file in
relationship to applications for the new method versus the original card
issuance policy. While Key Financial Systems believes the expected reduction in
operating expenses on new card issuance has been experienced with the activation
procedures, the loss of revenue for those accounts that would have been
cardholders under the old procedure is much greater than the cost savings.
Therefore, effective April 2001, new applicants that have paid the processing
fee are issued credit cards without the need to return a signed activation
certificate. We expect a significant increase in active accounts on file in 2001
versus 2000.
On November 15, 2000 Key Financial Systems temporarily suspended
marketing for Net 1st National Bank. This suspension was at the request of Net
1st National Bank to conform to the requirements of a Consent Order between Net
1st National Bank and the Office of the Comptroller of the Currency. Net 1st
National Bank was required to obtain legal opinions that Key Financial Systems'
credit card marketing and the Pay As You Go program conform to all applicable
federal and state laws. The necessary opinions have been prepared and have been
forwarded to the Office of the Comptroller of the Currency. On December 15,
2000, Net 1st National Bank notified Key Financial Systems to resume marketing
the Pay As You Go credit card program.
PROVISION FOR LOSSES
The provision for losses is the charge to operating earnings that
management feels is necessary to maintain the reserve for possible losses at an
adequate level. The provision is determined based on growth of the portfolio,
the net amount of losses incurred, and management's estimation of potential
future losses based on an evaluation of the portfolio risks and economic
conditions. The provision for the year 2000 decreased 72.7% compared to the year
1999. This decrease was due to a significant reduction in actual losses in 2000.
The reserve balance at December 31, 2000 is 114.5% higher than the balance at
December 31, 1999 due to the higher required reserves on the new business booked
in 2000 on Net 1st National Bank. At December 31, 2000 and 1999, Key Financial
Systems' allowance for losses was $129,728 or 17.3% of credit card receivables,
net of unearned income, compared to $60,466 or 10.4% of credit card receivables,
net of unearned income. Management believes that the reserve for possible losses
was adequate to provide for potential losses at December 31, 2000 and 1999.
OTHER INCOME
Other income for the year 2000 decreased 25.6% to $3,590,476 compared
to the year 1999 primarily due to lower servicing fee charges paid by an
affiliate of Key Financial Systems for credit card processing services provided.
Application processing fee income increased 192.6% to $2,735,438. This increase
was due to higher new application volume for 2000 versus 1999.
OPERATING EXPENSES
Operating expenses for the year 2000 decreased $3,212,441 to
$7,593,725. The decrease is due to a 32.8% reduction in personnel related costs
to $2,686,033 and a 39.6% reduction in payments to third party service providers
to $3,007,077. The decrease in personnel related expenses is due to the lower
staff levels for servicing support for Key Financial Systems, Inc.'s credit card
portfolio and the other portfolio that is serviced on behalf of our affiliate.
The decrease in third party servicing fees is related to the reduction in active
credit card accounts. The increase in occupancy and equipment is due to
-56-
additional space acquired in June 1999 that is reflected the 2000 expenses. The
increase in other operating expenses is due to the increase in other credit card
expenses related to the Net 1st National Bank portfolio.
LIQUIDITY FOR 2000 VS. 1999
Cash flow provided by operations from 1999 to 2000 increased 7.6% to
$3,898,595 from $3,507,625. Key Financial Systems is debt free and funds
operating expenses and capital expenditures from current operating cash flow.
Funds due under the loan participation agreements are received on a monthly
basis shortly after each month end. Funds in excess of projected required cash
flows for operating expenses and capital expenditures for the period to the next
receipt of the monthly income distribution from the client banks are distributed
to shareholders.
INFLATION
The amounts presented in the financial statements do not provide for
the effect of inflation on Key Financial Systems' operations or its financial
position. Key Financial Systems' assets and liabilities are primarily monetary
in nature. However, the majority of the assets and liabilities are interest free
and not subject to any effect from increases or decreases in market interest
rates due to external economic factors.
1999 vs. 1998
- -------------
CREDIT CARD INCOME
Credit card servicing fees increased 229% to $11,628,340 over 1998 as a
result of an increase in active credit card accounts. The average number of
active accounts was 102,076 in 1999 versus 42,741 in 1998, a 139% increase. This
increase in average active accounts was due to the majority of the new account
volume in 1998 occurring in the second half of the year, 83% of the total annual
volume of 142,116, and the 105,806 new accounts booked in the first four months
of 1999.
PROVISION FOR LOSSES
The provision in 1999 increased 97% over 1998. This increase was due to
the higher number of active accounts in 1999 versus 1998. The reserve balance at
December 31, 1999 is 72% lower than December 31, 1998 due to the reduction in
credit card receivables of $30,047,059 or 57%, versus December 31, 1998. At
December 31, 1999 and 1998, Key Financial Systems' allowance for losses was
$60,466 or 10.42% of credit card receivables, net of unearned income, compared
to $217,872 or 16.27% of credit card receivables, net of unearned income.
Management believes that the reserve for possible losses was adequate to provide
for potential losses at December 31, 1999 and 1998.
OTHER INCOME
Other income for the year 1999 increased 198% to $4,827,558 over 1998
primarily due to servicing fee charges paid by an affiliate of Key Financial
Systems for credit card processing services provided during 1999 that did not
occur in 1998. The other significant component of other income is applications
fees, which declined 42% between 1999 and 1998. This decline was due to the
cessation of new card marketing during 1999. Key Financial Systems began
marketing with a new client bank in January of 2000.
OPERATING EXPENSES
During 1999 operating expenses increased $6,319,547 to $10,806,166. The
increase is due to significant increases in personnel related costs of
$3,447,910, payments to third party service providers of $1,942,711, occupancy
and equipment of $290,514, and other operating expenses of $638,412. The
increase in personnel related expenses is due to the increase in staff levels
for servicing support for Key Financial Systems' credit card portfolio and the
other portfolio that is serviced on behalf of our affiliate. The payment to
third party vendors is for data processing and other portfolio services provided
-57-
on Key Financial Systems' behalf. The increase in these costs is related to the
growth in active credit card accounts. The increase in occupancy and equipment
is directly related to the increase in staff. The increase in other operating
expenses is due to the increase in the serviced portfolios, with the largest
increase in telecommunications expense. These increases in operating expenses
are partially offset by the increase in other income representing the portfolio
servicing fee charges to our affiliate.
EQUITEX AND EQUITEX 2000 PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information sets forth
summary condensed consolidated historical and pro forma financial data of
Equitex and Equitex 2000. The summary historical data has been derived from and
should be read in conjunction with the audited consolidated financial statements
included in our Annual Report on Form 10-K for the year ended December 31, 2000,
which is incorporated herein by reference, as well as the historical financial
statements of Nova Financial Services and Key Financial Services attached to
this proxy statement as exhibits 2 and 3, respectively. You should read the
following table in conjunction with the other financial information included and
incorporated into this proxy statement.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
On June 29, 2000, we signed a definitive agreement with Nova Financial
Systems and Key Financial Systems, companies under common control with nearly an
identical ownership structure, to acquire all of the outstanding capital stock
of Nova Financial Systems and Key Financial Systems in exchange for the greater
of 7,140,000 shares of Equitex common stock or 50% of Equitex's post-acquisition
common stock outstanding and $5 million cash. Nova Financial Systems and Key
Financial Systems are both financial services companies, which specialize in
selling credit card programs designed for high credit risk clients. Prior to
Equitex's acquisition of Nova Financial Systems and Key Financial Systems,
Equitex has completed, or intends to complete, the following transactions:
1. Under an agreement signed September 7, 2000, Equitex, through a
newly-formed subsidiary, GR.com, acquired all of the issued and
outstanding common stock of the Meridian Residential Group in exchange
for 425,000 shares of Series F Convertible Preferred Stock valued at
approximately $2,762,000. Equitex also issued 35,000 shares of Series F
Convertible Preferred Stock valued at $228,000 as additional
consideration for costs of the acquisition. The acquisition was
completed on September 27, 2000. The value of the Series F Convertible
Preferred Stock was based upon the quoted market price of Equitex,
Inc.'s common stock underlying the Series F Convertible Preferred Stock
at the date of the acquisition, which was $6.50 per share at September
7, 2000. In addition, Equitex 2000, discussed below, is to issue
additional shares of common stock to the Meridian Residential Group
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 business
for each of the five years subsequent to closing, commencing with the
year ended December 31, 2000, subject to certain limitations as
defined.
Equitex, through its subsidiary nMortgage, also acquired the
proprietary business model, website, trademarks, corporate names and
all intellectual property rights related to the Meridian GreatRate.com
business, including the names GreatRate.com and GreatRate Mortgage.com
from Meridian Capital Group, LLC, a company affiliated with Meridian
Residential Group, Inc. through common ownership, for $850,000 cash.
2. In September 2000, Equitex issued 1,300 shares of 6% Series G Preferred
Stock for $1,000 per share, which is the stated value per share. The
Series G Preferred Stock is convertible, together with any accrued but
unpaid dividends, at any time into shares of Equitex'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 Equitex's common stock as specified in the
agreement.
The Series G Preferred Stock is redeemable at Equitex's option at any
time at a redemption price equal to $1,350 per share plus any accrued
but unpaid dividends. Equitex is required to redeem the Series G
Preferred Stock if its stockholders have not approved an increase in
-58-
the number of shares of authorized common stock from 7,500,000 to
50,000,000 effective on or before May 15, 2001 or a registration
statement relating to the resale of certain shares of Equitex's common
stock underlying the Series G Preferred Stock is not declared effective
on or before 180 days of its filing.
3. As provided in proposal number one, we intend to increase the number of
authorized shares of its common stock from 7,500,000 shares to
50,000,000 shares.
4. Subsequent to the transactions described above, Equitex intends to
distribute all of its assets (which primarily consist of its
investments in subsidiaries) to Equitex 2000, a newly formed subsidiary
of Equitex. Equitex 2000 also is to assume all liabilities of Equitex.
The outstanding common shares of Equitex 2000 are then to be
distributed to the stockholders of Equitex based on proportional
ownership of the shares held by Equitex's stockholders in a spin-off
transaction.
As a result of the transactions described above, Equitex will be a
publicly-traded, non-operating entity immediately prior to the date of
Equitex's acquisition of Nova Financial Systems and Key Financial
Systems. Equitex plans to record the acquisitions of Nova Financial
Systems and Key Financial Systems as an acquisition of Equitex and a
recapitalization of Nova Financial Systems and Key Financial Systems.
5. We intend to issue up to 5,500 shares of a new series of preferred
stock in exchange for net proceeds of $5,000,000 (net of $500,000 issue
costs), which is to be used to finance the cash portion of our
acquisition of Nova Financial Systems and Key Financial Systems. No
shares have been issued yet. The new series of preferred stock will
contain a beneficial conversion feature similar to the Series G
Preferred Stock in which the preferred stock may be converted at any
time at a price per share of common stock equal to the lesser of (a)
$6.50 or (b) 65% of the market price of our common stock.
The following unaudited pro forma condensed statements of operations
for Equitex and Equitex 2000 for the year ended December 31, 2000, give effect
to the transactions as if they had occurred on January 1, 2000. The following
unaudited pro forma condensed balance sheets of Equitex and Equitex 2000 as of
December 31, 2000, give effect to the transactions as if they had occurred on
December 31, 2000.
These unaudited pro forma condensed financial statements do not purport
to present results which would actually have been obtained if the transactions
had been in effect during the periods covered or any future results which may in
fact be realized. These unaudited pro forma condensed financial statements
should be read in conjunction with the accompanying notes and the separate
historical financial statements of the companies referred to above.
-59-
EQUITEX AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
DECEMBER 31, 2000
Distribution of Pro forma Acquisition
assets/assumption combined of Key/Nova
Equitex and of liabilities prior (combined
subsidiaries to/by to Key/Nova balance Pro forma
historical Equitex 2000 acquisition sheets) combined
----------- ------------- ----------- ----------- -----------
ASSETS (See A)
Cash and cash equivalents $ 337,234 $ (337,234) $ $ 73,611 (C) $ 73,611
Receivables 1,822,177 (1,822,177) 6,184,381 (C) 6,184,381
Inventories 70,084 (70,084)
Investments 1,470,687 (1,470,687)
Fixed assets, net 261,071 (261,071) 266,643 (C) 266,643
Intangible and other assets 5,470,374 (5,470,374) 638,829 (C) 638,829
----------- ------------- ----------- ----------- -----------
Total assets $ 9,431,627 $ (9,431,627) $ 0 $ 7,163,464 $ 7,163,464
=========== ============ =========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable $ 377,763 (377,763) $680,635 (C) $ 680,635
Accrued expenses and other liabilities 882,096 (882,096) 1,195,221 (C) 1,195,221
Notes payable 1,957,258 (1,957,258)
Due to cardholders 4,389,443 (C) 4,389,443
Payable to Seller 5,000,000 (C) 5,000,000
----------- ------------- ----------- ----------- -----------
Total liabilities 3,217,117 (3,217,117) 11,265,299 11,265,299
----------- ------------- ----------- ----------- -----------
Minority interest 631,070 (631,070)
----------- ------------- ----------- ----------- -----------
Mandatory redeemable Series G Preferred
Stock 1,536,000 $ 1,536,000 1,536,000
----------- ------------- ----------- ----------- -----------
Stockholders' equity:
Preferred stock - Series D 1,200,000 $ 1,200,000 1,200,000
Preferred stock - Series E 250,000 250,000 250,000
Preferred stock - Series F 2,990,000 2,990,000 2,990,000
Preferred stock - Series E to be issued 368,750 368,750 368,750
Receivable from Series E
preferred stockholder (553,645) 553,645
Common stock 142,806 142,806 142,806 (C) 285,612
Additional paid-in capital 18,497,547 (6,137,085) 12,360,462 (23,591,989) (C) (11,231,527)
Treasury stock (284,037) (284,037) 284,037 (C)
Retained earnings (loss) (18,563,981) (18,563,981) 19,063,311 (C) 499,330
----------- ------------- ----------- ----------- -----------
Total stockholders' equity (deficit) 4,047,440 (5,583,440) (1,536,000) (4,101,835) (5,637,835)
----------- ------------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 9,431,627 $ (9,431,627) $ 0 $ 7,163,464 $ 7,163,464
=========== ============ =========== =========== ===========
See notes to unaudited pro forma condensed financial statements.
-60-
EQUITEX AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
Adjustment to reflect the acquisitions
of Key and Nova
Adjustments ---------------------------------------
to reflect
distribution
of assets/
Equitex and liabilities Adjustments
subsidiaries to Equitex Key Nova and Pro forma
historical 2000 historical historical Eliminations combined
----------- ----------- ----------- ----------- ----------- -----------
(See C) (See C)
Product sales $ 376,394 $ (376,394)
Credit card income $ 7,123,814 $ 4,471,004 $11,594,818
Interest and dividend income 269,276 (269,276)
Loan production and processing 1,173,148 (1,173,148)
Secondary market, net 871,134 (871,134)
Application fees, net of direct
marketing costs 2,735,438 2,735,438
Servicing fee income 672,420 (672,420) (B) 0
Other 179,339 (179,339) 182,618 182,618
----------- ----------- ----------- ----------- ----------- -----------
Total income 2,869,291 (2,869,291) 10,714,290 4,471,004 (672,420) 14,512,874
Cost of sales 233,228 (233,228)
----------- ----------- ----------- ----------- ----------- -----------
Gross profit 2,636,063 (2,636,063) 10,714,290 4,471,004 (672,420) 14,512,874
----------- ----------- ----------- ----------- ----------- -----------
Selling, general and administrative 8,594,478 (8,594,478) 4,586,648 635,345 5,221,993
Loan production and processing 739,735 (739,735)
Application processing fees and third
party servicing fees 3,007,077 3,342,984 (672,420) (B) 5,677,641
Provision for credit card losses 139,782 (83,262) 56,520
Impairment loss 807,250 (807,250)
Unusual gain on subsidiary stock
transaction (5,132,000) 5,132,000
Realized (gains) losses on investment sales 87,087 (87,087)
Equity in (earnings) losses of affiliates 364,415 (364,415)
Interest expense 736,749 (736,749)
Loss on First Bankers Mortgage Services
rescission 3,979,000 (3,979,000)
Other (income) expense (186,707) 186,707
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 9,990,007 (9,990,007) 7,733,507 3,895,067 (672,420) 10,956,154
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (7,353,944) 7,353,944 2,980,783 575,937 3,556,720
Provision for income taxes 13,457 (13,457) 1,448,000 (D) 1,448,000
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) (7,367,401) 7,367,401 2,980,783 575,937 (1,448,000) 2,108,720
Beneficial conversion features (700,000) (700,000)
Accretion of redemption value on Series G
Preferred Stock (453,000) (453,000)
Deemed preferred stock dividends, Series D,
G and other (97,000) (97,000)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
stockholders $(8,617,401) $ 7,367,401 $ 2,980,783 $ 575,937 $(1,448,000) $ 858,720
=========== =========== =========== =========== =========== ===========
Basic net income (loss) per common share $ (1.21) $ 0.06
=========== ===========
Diluted net income (loss)per common share $ (1.21) $ 0.04
=========== ===========
Weighted average number of common shares
outstanding 7,106,749 14,247,042
=========== ===========
See notes to unaudited pro forma condensed financial statements.
-61-
EQUITEX AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
1. Description of Equitex transactions:
On June 29, 2000, we signed a definitive agreement with Nova Financial
Systems and Key Financial Systems, companies under common control with
nearly an identical ownership structure, to acquire all of the
outstanding capital stock of Nova Financial Systems and Key Financial
Systems in exchange for the greater of 7,140,000 shares of Equitex
common stock or 50% of Equitex's post-acquisition common stock
outstanding, $5 million cash and a warrant. Nova Financial Systems and
Key Financial Systems are both financial services companies, which
specialize in selling credit card programs designed for high credit
risk clients. Prior to Equitex's acquisition of Nova Financial Systems
and Key Financial Systems, Equitex has completed or intends to complete
the following transactions:
A. Under agreement dated September 7, 2000, Equitex, through a
newly-formed subsidiary, GR.com, acquired all of the issued
and outstanding common stock of The Meridian Residential Group
in exchange for 425,000 shares of Series F Convertible
Preferred Stock valued at approximately $2,762,000. Equitex
also issued 35,000 shares of Series F Convertible Preferred
Stock valued at $228,000 as additional consideration for costs
of the acquisition. The acquisition was completed on September
27, 2000. The value of the Series F Convertible Preferred
Stock was based upon the quoted market price of Equitex,
Inc.'s common stock underlying the Series F Convertible
Preferred Stock at the date of acquisition, which was $6.50
per share at September 7, 2000. In addition, Equitex 2000,
discussed below, is to issue additional shares of common stock
to the Meridian Residential Group 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 business for
each of the five years subsequent to closing, commencing with
the year ended December 31, 2000, subject to certain
limitations as defined.
In addition, Equitex, through its subsidiary nMortgage,
acquired the proprietary business model, website, trademarks,
corporate names and all intellectual property rights related
to the Meridian GreatRate.com business, including the names
GreatRate.com and GreatRate Mortgage.com from Meridian Capital
Group, LLC, a company affiliated with Meridian Residential
Group through common ownership, for $850,000 cash.
B. In September 2000, Equitex issued 1,300 shares of 6% Series G
Preferred Stock for $1,000 per share, which is the stated
value per share. The Series G Preferred Stock is convertible,
together with any accrued but unpaid dividends, at any time
into shares of Equitex'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 Equitex's common stock as specified in
the agreement.
The Series G Preferred Stock is redeemable at Equitex's option
at any time at a redemption price equal to $1,350 per share
plus any accrued but unpaid dividends. Equitex is required to
redeem the Series G Preferred Stock if its stockholders have
not approved an increase in the number of shares of authorized
common stock from 7,500,000 to 50,000,000 effective on or
before May 15, 2001 or a registration statement relating to
the resale of certain shares of Equitex's common stock
underlying the Series G Preferred Stock is not declared
effective on or before 180 days of its filing.
C. As provided in proposal number one, we intend to increase the
number of authorized shares of its common stock from 7,500,000
shares to 50,000,000 shares.
-62-
EQUITEX AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL STATEMENTS (CONTINUED)
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
D. Subsequent to the transactions described above, Equitex
intends to distribute all of its assets (which primarily
consists of its investments in subsidiaries) to Equitex 2000,
a newly-formed subsidiary of Equitex. Equitex 2000 also is to
assume all liabilities of Equitex. The outstanding common
shares of Equitex 2000 are then to be distributed to the
stockholders of Equitex based on proportional ownership of the
shares held by Equitex's the stockholders in a spin-off
transaction.
As a result of the transactions described above, Equitex will
be a publicly-traded, non-operating entity immediately prior
to the date of Equitex's acquisition of Nova Financial Systems
and Key Financial Systems. Equitex plans to record the
acquisitions of Nova Financial Systems, Inc. and Key Financial
Systems as an acquisition of Equitex and a recapitalization of
Nova Financial Systems and Key Financial Systems.
E. We intend to issue up to 5,500 shares of a new series of
preferred stock in exchange for net proceeds of $5,000,000
(net of $500,000 issue costs), which is to be used to finance
the cash portion of our acquisition of Nova Financial Systems
and Key Financial Systems. No shares have been issued yet. The
new series of preferred stock will contain a beneficial
conversion feature similar to the Series G Preferred Stock in
which the preferred stock may be converted at any time at a
price per share of common stock equal to the lesser of (a)
$6.50 or (b) 65% of the market price of our common stock.
The unaudited pro forma condensed statements of operations for the year
ended December 31, 2000, gives effect to the transactions as if it had
occurred effective January 1, 2000. The following unaudited pro forma
condensed balance sheet as of December 31, 2000 gives effect to the
transactions as if it had occurred on December 31, 2000.
2. Description of Equitex pro forma adjustments:
(A) To reflect the distribution of certain assets of Equitex, net
of certain related liabilities to Equitex, 2000.
(B) To eliminate intercompany account balances between Nova
Financial Systems and Key Financial Systems.
(C) To reflect the acquisition of all of the outstanding common
shares of Nova Financial Systems and Key Financial Systems,
companies under common control with nearly an identical
ownership structure, and a consolidation of Nova Financial
Systems and Key Financial Systems. The purchase price consists
of 7,140,000 shares of Equitex's common stock (which
represents 50% of the outstanding common shares of Equitex,
after giving effect to the consummation of the merger), cash
of $5,000,000 and warrants for the purchase of common stock of
Equitex equal to 100% of any warrants, options, preferred
stock or other securities outstanding at the closing date and
exchangeable for or convertible into Equitex's common shares.
The transaction is recorded as a reverse acquisition. The
purchase price applied to the reverse acquisition has been
based on the net book value of the underlying assets of
Equitex prior to the transaction plus $5,000,000 recorded as a
payable to seller, which is expected to be paid upon the
issuance of a new series of preferred stock as discussed
above.
(D) To reflect estimated federal and state income tax effects of
the transactions described above.
-63-
EQUITEX 2000 AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
DECEMBER 31, 2000
Contribution of
Equitex assets and
assumed liabilities
-------------------
(See AA)
ASSETS
Current Assets:
Cash and cash equivalents $ 337,234
Receivables 1,377,763
Inventories 70,084
Marketable securities 238,216
-----------
Total current assets 2,023,297
-----------
Investments 1,232,471
Receivables 444,414
Fixed assets, net 261,071
Intangible and other assets 5,470,374
-----------
7,408,330
-----------
Total assets $ 9,431,627
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 377,763
Accrued expenses and other liabilities 882,096
Notes payable 1,877,631
-----------
Total current liabilities 3,137,490
-----------
Notes payable 79,627
-----------
Total liabilities 3,217,117
-----------
Minority interest 631,070
-----------
Stockholders' equity 5,583,440
-----------
Total liabilities and stockholders' equity $ 9,431,627
===========
See notes to unaudited pro forma condensed financial statements.
-64-
EQUITEX 2000 AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
Meridian Residential
Group for the Period
Equitex and January 1, through
subsidiaries September Adjustments and Pro forma
Historical 26, 2000 Eliminations combined
------------ ------------ ------------ ------------
(See BB) (See CC)
Product sales $ 376,394 $ 376,394
Interest and dividend income 269,276 $ 3,653 272,929
Loan production and processing 1,173,148 1,791,363 2,964,511
Secondary market, net 871,134 871,134
Other 179,339 179,339
------------ ------------ ------------ ------------
Total income 2,869,291 1,795,016 4,664,307
Cost of sales 233,228 233,228
------------ ------------ ------------ ------------
Gross profit 2,636,063 1,795,016 4,431,079
------------ ------------ ------------ ------------
Selling, general and administrative 8,594,478 1,779,196 $ 213,000 10,719,674
133,000
Loan production and processing 739,735 739,735
Realized (gains) losses on investment sales 87,087 87,087
Equity in (earnings) losses of affiliates 364,415 364,415
Interest expense 736,749 736,749
Impairment losses 807,250 807,250
Unusual gain on subsidiary stock transaction (5,132,000) (5,132,000)
Loss on First Banker's Mortgage Services rescission 3,979,000 3,979,000
Other (income) expense (186,707) (186,707)
------------ ------------ ------------ ------------
Total operating expenses 9,990,007 1,779,196 346,000 12,115,203
------------ ------------ ------------ -----------
Income (loss) before income taxes (7,353,944) 15,820 (346,000) (7,684,124)
Provision for income taxes 13,457 8,917 22,374
------------ ------------ ------------ ------------
Net income (loss) $ (7,367,401) $ 6,903 $ (346,000) $ (7,706,498)
============ ============ ============ ============
Net income (loss) applicable to common stockholders $ (8,617,401) $ (8,945,498)
============ ============
Basic and diluted net income (loss) per common share$ $ (1.21) $ (1.26)
============ ============
Weighted average number of common shares outstanding 7,106,749 7,106,749
============ ============
See notes to unaudited pro forma condensed financial statements.
-65-
EQUITEX 2000 AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2000
1. Description of Equitex 2000 transactions:
Upon the successful completion of certain transactions (described in
the notes to the unaudited pro forma condensed financial statements for
Equitex) Equitex intends to distribute all of its assets (which
primarily consist of its investments in subsidiaries) to Equitex 2000.
Equitex 2000 also is to assume all liabilities of Equitex. The
outstanding common shares of Equitex 2000 are to then be distributed to
the stockholders of Equitex based on proportional ownership of the
shares held by the Equitex stockholders in a spin-off transaction.
The preceeding unaudited pro forma condensed statement of operations
for the year ended December 31, 2000, gives effect to the transactions
as if it they occurred on January 1, 2000. The preceeding unaudited pro
forma condensed balance sheet as of December 31, 2000 gives effect to
the transactions as if they had occurred on December 31, 2000.
2. Description of Equitex 2000 pro forma adjustments:
(AA) To reflect the contribution of Equitex operating assets to
Equitex 2000, and Equitex 2000's assumption of Equitex
liabilities.
(BB) Equitex acquired Meridian effective September 27, 2000. The
transaction was accounted for as a purchase, and the results
of operations of Meridian are included in Equitex's 2000
consolidated financial statements from the date of
acquisition. These pro forma adjustments are to reflect the
consolidation of Meridian, which includes Meridian operations
prior to the date of acquisition (January 1, 2000 through
September 26, 2000), contributed by Equitex as if the
transactions occurred on January 1, 2000. The excess of the
purchase price over the fair value of the Meridian Residential
Group net assets acquired of approximately $2,648,000 was
allocated to goodwill, which is to be amortized over a 15-year
period. In connection with Equitex's Meridian Residential
Group acquisition, Equitex acquired certain intellectual
property rights from Meridian Capital Group, LLC for $850,000,
which was also contributed to Equitex 2000. This asset is
being amortized over 3 years.
(CC) To reflect amortization related to goodwill and intellectual
property rights recorded in connection with the Meridian
Residential Group acquisition and the acquisition of
intellectual property rights by Equitex from Meridian
Residential Group.
-66-
FINANCIAL STATEMENTS
Financial statements of Nova Financial Systems as of and for the
periods ended December 31, 2000 and December 31, 1999 and the period from
inception October 10, 1998 through December 31, 1998 are attached hereto as
Exhibit 2.
Financial statements of Key Financial Systems as of and for the periods
ended December 31, 2000, December 31, 1999 and December 31, 1998 are attached
hereto as Exhibit 3.
VOTE REQUIRED
The affirmative vote of the majority of the total votes cast on the
proposal in person or by proxy, at the stockholders' meeting will be required to
approve the proposal to acquire all the outstanding capital stock of Nova
Financial Systems and Key Financial Systems in exchange for the greater of
7,140,000 shares or 50%, of our outstanding common stock on a post acquisition
basis, cash consideration of $5 million and a warrant. Abstentions on a proposal
will be counted as votes against that proposal. Broker non-votes will not be
counted as shares represented at the meeting. THE BOARD OF DIRECTORS RECOMMENDS
A VOTE FOR THE PROPOSAL TO ACQUIRE ALL THE OUTSTANDING CAPITAL STOCK OF NOVA
FINANCIAL SYSTEMS AND KEY FINANCIAL SYSTEMS IN EXCHANGE FOR THE GREATER OF
7,140,000 SHARES OR 50%, OF OUR OUTSTANDING COMMON STOCK ON A POST ACQUISITION
BASIS, CASH CONSIDERATION OF $5 MILLION AND A WARRANT.
FINANCIAL INFORMATION
A copy of our Annual Report on Form 10-K, for the year ended December
31, 2000 will be made available upon request. See Documents Incorporated By
Reference.
STOCKHOLDER PROPOSALS
Any stockholder proposing to have any appropriate matter brought before
the 2001 Annual Meeting of Stockholders, tentatively scheduled for July 27,
2001, must submit such proposal in accordance with the proxy rules of the
Securities and Exchange Commission. Such proposals should be sent to Thomas B.
Olson, Secretary, Equitex, Inc., 7315 East Peakview Avenue, Englewood, Colorado
80111, for receipt no later than _______, 2001. All proposals received after the
______, 2001 deadline will be considered untimely.
OTHER MATTERS
Management does not know of any other matters to be brought before the
meeting. However, if any other matters properly come before the meeting, it is
the intention of the appointee named in the enclosed form of proxy to vote in
accordance with his best judgment on such matters.
By Order of the Board of Directors:
Equitex, Inc.
Date: ___________ __, 2001 Thomas B. Olson
Secretary
-67-
EXHIBIT 1
The total number of shares of stock which the corporation shall have
authority to issue is fifty-two million (52,000,000) shares, of which fifty
million (50,000,000) shares shall be common stock having a par value of $.02 per
share, and two million (2,000,000) shares shall be preferred stock, having a par
value of $.01 per share (the "Preferred Stock").
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof are as follows:
(I) The Board of Directors is expressly authorized at any time,
and from time-to-time, to provide for the issuance of shares
of Preferred Stock in one or more series, with such voting
powers, full or limited, or without voting powers and with
such designations, preferences and relative, participating,
optional or other special rights, and qualifications,
limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions providing for the
issue thereof adopted by the Board of Directors, and as are
not stated and expressed in this Certificate of Incorporation,
or any amendment thereto, including (without limiting the
generality of the foregoing) the following:
(a) The designation of the number of shares of such series.
(b) The dividend rate of such series, the conditions and
dates upon which such dividends shall be payable, the
preference or relation which such dividends shall bear
to the dividends payable on any other class or classes
or of any other series of capital stock, whether such
dividends may be paid in cash, shares of common stock or
Preferred Stock or in assets of the corporation, and
whether such dividends shall be cumulative or
noncumulative.
(c) Whether the shares of such series shall be subject to
redemption by the corporation and, if made subject to
such redemption, the times, prices and other terms and
conditions of such redemption.
(d) The terms and amount of any sinking fund provided for
the purchase or redemption of the shares of such series.
(e) Whether or not the shares of such series shall be
convertible into or exchangeable for any other class or
classes or for any other series of any class or classes
or capital stock of the Corporation and, if provision be
made for conversion or exchange, the times, prices,
rates, adjustments and other terms and conditions of
such conversion or exchange.
(f) To the extent, if any, to which the holders of the
shares of such series shall be entitled to vote as a
class or otherwise with respect to the election of
directors or otherwise.
(g) The restrictions, if any, on the issue or reissue of any
additional Preferred Stock.
(h) The rights of the holders of the shares of such series
upon the dissolution or winding up of, or upon the
distribution of assets of, the corporation.
(II) Except as otherwise required by law and except for such voting
powers with respect to the election of directors or other
matters as may be stated in the resolutions of the Board of
Directors creating any series of Preferred Stock, the holders
of any such series shall have no voting power whatsoever.
EXHIBIT 2
Nova Financial Systems, Inc.
Financial Statements
for the year ended December 31, 2000 and
December 31, 1999, and the period from
inception October 10, 1998 through December 31, 1998
NOVA FINANCIAL SYSTEMS, INC.
FINANCIAL REPORT
DECEMBER 31, 2000
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 2
Statements of operations 3
Statements of stockholders' equity 4
Statements of cash flows 5
Notes to financial statements 6 - 10
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Nova Financial Systems, Inc.
Clearwater, Florida
We have audited the accompanying balance sheets of Nova Financial Systems, Inc.
as of December 31, 2000 and 1999 and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 2000 and
1999, and for the period from inception, October 10, 1998 through December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nova Financial Systems, Inc. as
of December 31, 2000 and 1999, and the results of its operations and its cash
flows for the year ended December 31, 2000 and 1999, and for the period from
inception, October 10, 1998 through December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Fort Lauderdale, Florida
March 30, 2001
NOVA FINANCIAL SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS 2000 1999
- --------------------------------------------------------------------------------
Cash $ 1,738 $ 26,756
Credit card receivables, net (Note 2) 283,353 619,149
Due from Merrick Bank 1,490,231 2,580,665
Deferred tax asset -- 606,500
Due from shareholders 606,500 --
---------- ----------
$2,381,822 $3,833,070
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 85,085 $ 265,197
Due to cardholders (Note 4) 1,286,517 1,921,769
Due to affiliate (Note 3) 81,138 685,464
Accrued expenses and other liabilities 792,769 734,264
---------- ----------
2,245,509 3,606,694
---------- ----------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, par value $1 per share,
authorized 7,500 shares; issued and
outstanding 1,000 shares 1,000 1,000
Additional paid-in capital 24,000 24,000
Retained earnings 111,313 201,376
---------- ----------
136,313 226,376
---------- ----------
$2,381,822 $3,833,070
========== ==========
See Notes to Financial Statements.
NOVA FINANCIAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND
PERIOD FROM INCEPTION, OCTOBER 10, 1998, THROUGH DECEMBER 31, 1998
2000 1999 1998
- -----------------------------------------------------------------------------------------------
Credit card income:
Servicing fees $ 4,322,258 $ 7,278,767 $ 1,102
Other 148,746 127,115 8
----------- ----------- -----------
4,471,004 7,405,882 1,110
Provision for (recovery of) losses (Note 2) (83,262) 676,343 192
----------- ----------- -----------
Net credit card income after
provision for losses 4,554,266 6,729,539 918
----------- ----------- -----------
Other income:
Application fees, net of direct marketing costs
2000 none, 1999 $11,307,984, 1998 $32,653
(Note 3)
-- 1,942,520 2,751
----------- ----------- -----------
Operating expenses:
Application processing fees (Note 3) -- 2,112,092 --
Third party servicing fees (Note 3) 3,342,984 5,934,125 580
Other operating expenses (Note 6) 635,345 303,258 6,797
----------- ----------- -----------
3,978,329 8,349,475 7,377
----------- ----------- -----------
Income (loss) before income taxes 575,937 322,584 (3,708)
Provision for income taxes (Note 5) -- 117,500 --
----------- ----------- -----------
Net income (loss) $ 575,937 $ 205,084 $ (3,708)
=========== =========== ===========
See Notes to Financial Statements.
NOVA FINANCIAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND
PERIOD FROM INCEPTION, OCTOBER 10, 1998, THROUGH DECEMBER 31, 1998
Additional Retained
Common Paid In Earnings
Stock Capital (Deficit) Total
- -------------------------------------------------------------------------------
Issuance of shares at inception,
October 10, 1998 $ 1,000 $ 24,000 $ - $ 25,000
Net loss - - (3,708) (3,708)
-------- --------- ---------- ---------
Balance, December 31, 1998 1,000 24,000 (3,708) 21,292
Net income - - 205,084 205,084
-------- --------- ---------- ---------
Balance, December 31, 1999 1,000 24,000 201,376 226,376
Net income - - 575,937 575,937
Dividends - - (666,000) (666,000)
-------- --------- ---------- ---------
Balance, December 31, 2000 $ 1,000 $ 24,000 $ 111,313 $ 136,313
======== ========= ========== =========
See Notes to Financial Statements.
NOVA FINANCIAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000 AND 1999 AND
PERIOD FROM INCEPTION, OCTOBER 10, 1998, THROUGH DECEMBER 31, 1998
2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income (loss) $ 575,937 $ 205,084 $ (3,708)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Provision for (recovery of) losses (83,262) 676,343 192
Deferred income taxes 606,500 (606,500) --
Decrease (increase) in other receivables 1,090,434 (2,580,646) (19)
Decrease (increase) in due from affiliates -- 22,761 (22,761)
Increase in due from shareholders (606,500) -- --
(Decrease) increase in accounts payable and accrued
expenses (121,606) 977,074 22,387
(Decrease) increase in due to cardholders (635,252) 1,921,769 --
(Decrease) increase in due to affiliates (604,327) 685,464 --
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 221,924 1,301,349 (3,909)
----------- ----------- -----------
Cash Flows Provided By (Used In) Investing
Activities, Net (increase) decrease in credit
card receivables 419,058 (1,294,593) (1,091)
----------- ----------- -----------
Cash Flows From Financing Activities
Dividends paid (666,000) -- --
Capital contributed -- -- 25,000
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES (666,000) -- 25,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (25,018) 6,756 20,000
Cash:
Beginning 26,756 20,000 --
----------- ----------- -----------
Ending $ 1,738 $ 26,756 $ 20,000
=========== =========== ===========
See Notes to Financial Statements.
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Nova Financial Systems, Inc. (the "Company") designs and
markets credit card products aimed at the sub-prime market. The credit card
products are marketed for an unaffiliated bank under an agreement that provides
the Company with a 100% participation interest in the credit cards issued and
requires the payment of monthly servicing fees to the bank.
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES: The
accounting and reporting policies of the Company conform to generally accepted
accounting principles and general practices within the financial services
industry. In preparing the accompanying financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and the reported amounts of revenue and expenses
for the period. Actual results could differ from those estimates.
PRESENTATION OF CASH FLOWS: Cash flows from credit card receivables are reported
net.
CREDIT CARD RECEIVABLES: Credit card receivables are stated at cost plus
refundable and earned fees (the balance reported to customers), reduced by
allowances for refundable fees and losses.
Fees are accrued monthly on active credit card accounts and included in credit
card receivables, net of estimated uncollectible amounts. Accrual of income is
discontinued on credit card accounts that have been closed or charged off.
Accrued fees on credit card loans are charged off with the card balance,
generally when the account becomes 90 days past due.
The allowance for losses is established through a provision for losses charged
to expense. Credit card receivables are charged against the allowance for losses
when management believes that collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
estimated losses on existing receivables, based on evaluation of the
collectibility of the accounts and prior loss experience. This evaluation also
takes into consideration such factors as changes in the volume of the loan
portfolio, overall portfolio quality and current economic conditions that may
affect the borrowers' ability to pay. While management uses the best information
available to make its evaluation, this estimate is susceptible to significant
change in the near term.
DUE TO AFFILIATES: The amount due to affiliate in the accompanying balance
sheets represents amounts paid on behalf of the Company by Key Financial
Systems, Inc. ("Key"), a company affiliated through common ownership, and the
balance of unpaid servicing fees payable in connection with Nova's card
activity. Effective July 1, 2000, the Company no longer receives such services
from Key.
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DUE FROM MERRICK BANK AND DUE TO CARDHOLDERS: The Company charges a fully
refundable reservation fee equal to each cardholder's borrowing limit upon
issuance of a credit card. The amount due to cardholders represents the balance
of reservation fees that would have to be refunded to cardholders should they
close their accounts at the balance sheet date. Funds held in trust to secure
payment of this liability are reflected in due from Merrick Bank in the
accompanying balance sheets.
INCOME TAXES: The Company, with the consent of its stockholders, elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code
effective January 1, 2000, which provides that in lieu of corporate income tax
the stockholders separately account for their pro rata shares of the Company's
items of income, deductions, losses and credits. As of December 31, 2000, the
Company's reported net assets exceed their tax bases by approximately $155,000.
Accordingly, if the election was terminated on that date, a deferred tax
liability of approximately $58,000 would be recognized by a charge to income tax
expense. Funds received in excess of projected required cash requirements for
the next month are generally distributed to the stockholders.
Note 2. Credit Card Receivables
The composition of credit card receivables at December 31, 2000, 1999 and 1998
is as follows:
2000 1999
------------------ ------------------
Credit card receivables $ 7,001,194 $ 29,407,412
Refundable reservation fees (6,593,483) (28,319,231)
------------------ ------------------
407,711 1,088,181
Less allowance for losses 124,358 469,032
------------------ ------------------
$ 283,353 $ 619,149
================== ==================
Changes in the allowance for losses for the year ended December 31, 2000 and
1999, and the period from inception, October 10, 1998, through December 31,
1998, are as follows:
2000 1999 1998
---------- ---------- -----------
Balance, beginning $ 469,032 $ 192 $ -
Provision for (recovery of) losses (83,262) 676,343 192
Recoveries of amounts charged-off - - -
Amounts charged-off (261,412) (207,503) -
---------- ---------- -----------
Balance, ending $ 124,358 $ 469,032 $ 192
========== ========== ===========
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. TRANSACTIONS WITH RELATED PARTIES
The Company had an informal agreement with Key under which Key provided
marketing and preprocessing of credit card applications, customer service and
collection services for Nova. Expenses were charged to the Company for
application processing and customer service based on set fee per application
processed and for collections based on a set fee per delinquent account on file.
The Company believes the method and per unit price charged was consistent with
the methods and rates of similar third party credit card processors. The Company
recognized processing fee and servicing expense of $672,420 and $3,832,736
associated with Key's activities during 2000 and 1999. No significant services
were received form Key in 1998. As of December 31, 2000 and 1999, the Company
owed Key $81,138 and $685,464, respectively, in connection with services
performed and amounts paid for Nova by Key.
The Company has entered into an agreement with Paragon Water Services, Inc.
(Paragon), a company affiliated through common ownership, whereby Paragon
provides credit card marketing services for the Company. Paragon earns
commissions for card applications that are not subsequently refunded. The
Company paid Paragon approximately $6,631,608 in commissions during 1999, and
none in 2000 or 1998.
NOTE 4. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
A credit limit has been established for each card holder account acquired by the
Company. By agreement, the credit limit can be terminated at any time for any
reason. Because the initial reservation fee charged to all account holders is
fully refundable, the total of accounts with credit limits in excess of
cardholder balances is reflected as a liability in the amount of $1,286,517 and
$1,921,769 as of December 31, 2000 and 1999, respectively, in the accompanying
balance sheets.
Contingencies: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
financial statements.
Credit card loans are issued throughout the United States to customers that are
considered high credit risks. The Company evaluates each customer's credit
worthiness on a case-by-case basis. Because of the reservation fee charged upon
issuance of credit cards, charges for purchases or cash advances are generally
limited to the amount of payments collected from each customer less fees
charged.
The Company issues its credit cards under membership terms with VISA.
Modification of these terms by VISA could adversely affect operating results.
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. INCOME TAXES
All active card accounts are charged monthly membership fees, late charges,
overlimit fees and other charges according to the card agreements. The Company
has not recognized certain of these monthly charges as income for financial
reporting purposes because the charges are not believed to be collectible. A
deferred tax asset in the amount of $606,500 has been recognized as of December
31, 1999, related to the excess of the estimated tax basis of credit card
receivables over the reported receivables.
The Company elected S Corporation status effective January 1, 2000. Upon
converting to S Corporation status, the Company eliminated deferred tax assets
in the amount of $606,500 as a charge against income from operations. This
charge against income was offset by the recognition of a receivable from
shareholders in the amount of $606,500 due to a commitment from the shareholders
to reimburse the Company for income taxes paid by the Company related to losses
recognized by the Company for financial reporting purposes in 1999, but passed
through to the shareholders in years subsequent to 1999 for income tax purposes.
The provision for income taxes charged to operations for the years ended
December 31, 2000 and 1999, and the period from inception, October 10, 1998,
through December 31, 1998, consist of the following:
2000 1999 1998
----------- ------------ -----------
Currently payable or paid:
Federal $ - $ 618,000 $ -
State - 106,000 -
Deferred income taxes 606,500 (606,500) -
Reimbursement (606,500) - -
----------- ------------ -----------
$ - $ 117,500 $ -
=========== ============ ===========
The income tax provision differs from the amount of income tax determined by
applying the U. S. federal income tax rate to pretax income for the years ended
December 21, 2000 and 1999, and the period from inception, October 10, 1998,
through December 31, 1998, due to the following:
2000 1999 1998
--------- ---------- ---------
Computed "expected" tax expense (benefit) $ - $ 109,679 $ (1,261)
Increase resulting from state income
taxes, net of federal tax benefit - 11,710 -
Effect of lower tax brackets and other - (3,889) 1,261
--------- ---------- ---------
$ - $ 117,500 $ -
========= ========== =========
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. OTHER OPERATING EXPENSES
Other operating expenses for the years ended December 31, 2000 and 1999, and the
period from inception, October 10, 1998, through December 31, 1998 included the
following:
2000 1999 1998
----------- ----------- -----------
Cardholder expense-other $ 146,438 $ 96,206 $ -
Professional fees 391,391 20,128 1,121
Printing and supplies - 21,742 676
Other 97,516 165,182 5,000
----------- ----------- -----------
$ 635,345 $ 303,258 $ 6,797
=========== =========== ===========
NOTE 7. PLAN OF REORGANIZATION
The Company has entered into an Agreement and Plan of Reorganization with
Equitex, Inc. (Equitex) under which the Company's stockholders would exchange
all of the issued and outstanding shares of the Company for a) 25% of the
outstanding common shares of Equitex, after giving effect to the consummation of
this merger and a similar planned merger of Key, b) warrants for the purchase of
common stock of Equitex equal to 50% of any warrants, options, preferred stock
or other securities outstanding at the closing date and exchangeable for or
convertible into Equitex common shares, and c) $2,500,000.
NOTE 8. SUBSEQUENT EVENT
On March 5, 2001, the Company agreed to issue 20.41 shares of common stock,
representing 2% of the outstanding common stock of the Company on a fully
diluted basis to three individual investors for $100,000. Mr Henry Fong,
President and Chairman of Equitex, Inc. purchased 10.20 of the shares and owns
1% of the Company.
EXHIBIT 3
Key Financial Systems, Inc.
Financial Statements
for the years ended December 31, 2000,
December 31, 1999 and December 31, 1998
KEY FINANCIAL SYSTEMS, INC.
FINANCIAL REPORT
DECEMBER 31, 2000
CONTENTS
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 2
Statements of income 3
Statements of stockholders' equity 4
Statements of cash flows 5
Notes to financial statements 6 - 10
- --------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Key Financial Systems, Inc.
Clearwater, Florida
We have audited the accompanying balance sheets of Key Financial Systems, Inc.
as of December 31, 2000 and 1999, and the related statements of income,
stockholders' equity, and cash flows for the years ended December 31,
2000, 1999 and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Key Financial Systems, Inc. as
of December 31, 2000 and 1999, and the results of its operations and its cash
flows for the years ended December 31, 2000, 1999, and 1998, in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Fort Lauderdale, Florida
March 30, 2001
KEY FINANCIAL SYSTEMS, INC.
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
ASSETS 2000 1999
------------------------------------------------------------------------
Cash $ 71,873 $ 30,908
Credit card receivables, net (Note 2) 622,943 519,929
Other receivables (Note 3) 3,787,854 2,874,293
Due from affiliates (Note 5) 81,138 685,464
Leaseholds and equipment, net (Note 4) 266,643 303,976
Other assets 32,329 17,917
----------- -----------
$ 4,862,780 $ 4,432,487
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Due to cardholders (Note 6) $ 3,102,926 $ 2,402,377
Accounts payable (Note 5) 595,550 311,029
Accrued expenses and other liabilities 402,452 379,012
----------- -----------
4,100,928 3,092,418
----------- -----------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, par value $1 per share,
Authorized 7,500 shares; issued and
outstanding 2,000 shares 2,000 2,000
Additional paid-in capital 371,835 371,835
Retained earnings 388,017 966,234
----------- -----------
761,852 1,340,069
----------- -----------
$ 4,862,780 $ 4,432,487
=========== ===========
See Notes to Financial Statements.
KEY FINANCIAL SYSTEMS, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
-----------------------------------------------------------------------------------------------------
Credit card income:
Card servicing fees $ 6,892,015 $11,628,340 $ 3,529,187
Other 231,799 246,767 51,283
----------- ----------- -----------
7,123,814 11,875,107 3,580,470
Provision for losses (Note 2) 139,782 511,645 260,332
----------- ----------- -----------
NET CREDIT CARD INCOME
AFTER PROVISION FOR LOSSES 6,984,032 11,363,462 3,320,138
----------- ----------- -----------
Other income:
Application fees, net of direct marketing costs; 2000
$10,366,826, 1999 $7,153,144, 1998 $9,721,837 (Note 5)
2,735,438 935,015 1,621,815
Servicing fee income (Note 5) 672,420 3,832,736 -
Other 182,618 59,807 -
----------- ----------- -----------
3,590,476 4,827,558 1,621,815
----------- ---------- -----------
Operating expenses:
Salaries and wages 2,686,033 3,997,724 1,015,019
Employee benefits 333,843 466,540 1,335
Third party servicing fees (Note 8) 3,007,077 4,978,279 3,035,568
Occupancy and equipment (Note 6) 426,930 351,647 61,133
Other operating expenses (Note 7) 1,139,842 1,011,976 373,564
----------- ----------- -----------
7,593,725 10,806,166 4,486,619
----------- ----------- -----------
NET INCOME $ 2,980,783 $ 5,384,854 $ 455,334
=========== =========== ===========
See Notes to Financial Statements.
KEY FINANCIAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Additional Retained
Common Paid In Earnings
Stock Capital (Deficit) Total
-------------------------------------------------------------------------------
Balance, January 1, 1998 $ 1,000 $ 22,835 $ (11,954) $ 11,881
Net income - - 455,334 455,334
Issuance of 1,000 shares 1,000 249,000 - 250,000
Dividends paid - - (798,112) (798,112)
-------- --------- ----------- -----------
Balance, December 31, 1998 2,000 271,835 (354,732) (80,897)
Net income - - 5,384,854 5,384,854
Capital contributed - 100,000 - 100,000
Dividends paid - - (4,063,888) (4,063,888)
-------- --------- ----------- -----------
Balance, December 31, 1999 2,000 371,835 966,234 1,340,069
Net income - - 2,980,783 2,980,783
Dividends paid - - (3,559,000) (3,559,000)
-------- --------- ----------- -----------
Balance, December 31, 2000 $ 2,000 $ 371,835 $ 388,017 $ 761,852
======== ========= =========== ===========
See Notes to Financial Statements.
KEY FINANCIAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
- ---------------------------------------------------------------------------------------------------
Cash Flows From Operating Activities
Net income $ 2,980,783 $ 5,384,854 $ 455,334
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for losses 139,782 511,645 260,332
Depreciation and amortization 93,167 117,349 23,597
Increase in other receivables (913,561) (2,501,580) (372,713)
Decrease (increase) in due from affiliates 604,326 (685,464) --
(Increase) decrease in other assets (14,412) 21,960 (34,573)
Increase in due to cardholders 700,549 993,684 1,408,693
Increase (decrease) in accounts payable, accrued
expenses and other liabilities 307,961 (334,823) 1,022,864
----------- ----------- -----------
NET CASH PROVIDED BY (USED
IN) OPERATING ACTIVITIES 3,898,595 3,507,625 2,763,534
----------- ----------- -----------
Cash Flows From Investing Activities
Net (increase) decrease in credit card receivables (242,796) 89,823 (1,381,729)
Advances to stockholders -- -- (288,888)
Collection of advances to stockholders -- 288,888 --
Purchase of property and equipment (55,834) (208,370) (228,308)
----------- ----------- -----------
NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES (298,630) 170,341 (1,898,925)
----------- ----------- -----------
Cash Flows From Financing Activities
Capital contributions -- 100,000 250,000
Dividends paid (3,559,000) (4,063,888) (798,112)
----------- ----------- -----------
NET CASH PROVIDED BY (USED
IN) FINANCING ACTIVITIES (3,559,000) (3,963,888) (548,112)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
40,965 (285,922) 316,497
Cash:
Beginning 30,908 316,830 333
----------- ----------- -----------
Ending $ 71,873 $ 30,908 $ 316,830
=========== =========== ===========
See Notes to Financial Statements.
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Note 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Key Financial Systems, Inc. (the "Company") designs and
markets credit card products aimed at the sub-prime market. The credit card
products are marketed for unaffiliated banks under agreements that provide the
Company with a 100% participation interest in the receivables and related rights
associated with credit cards issued and requires the payment of monthly
servicing fees to the banks. The Company provides collection and customer
service related to the credit cards issued.
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES: The
accounting and reporting policies of the Company conform to generally accepted
accounting principles and general practices within the financial services
industry. In preparing the accompanying financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and the reported amounts of revenue and expenses
for the period. Actual results could differ from those estimates.
PRESENTATION OF CASH FLOWS: Cash flows from credit card receivables are reported
net.
CREDIT CARD RECEIVABLES: Credit card receivables are stated at cost plus
refundable and earned fees (the balance reported to customers), reduced by
allowances for refundable fees and losses.
Fees are accrued monthly on active credit card accounts and included in credit
card receivables, net of estimated uncollectible amounts. Accrual of income is
discontinued on credit card accounts that have been closed or charged off.
Accrued fees on credit card loans are charged off with the card balance,
generally when the account becomes 90 days past due.
The allowance for losses is established through a provision for losses charged
to expense. Receivables are charged against the allowance for losses when
management believes that collectibility of principal is unlikely. The allowance
is an amount that management believes will be adequate to absorb estimated
losses on existing accounts, based on evaluation of the collectibility of the
accounts and prior loss experience. This evaluation also takes into
consideration such factors as changes in the volume of the credit card
receivable portfolio, overall portfolio quality, and current economic conditions
that may affect the borrowers' ability to pay. While management uses the best
information available to make its evaluation, this estimate is susceptible to
significant change in the near term.
DUE FROM AFFILIATES: The amount due from affiliate in the accompanying balance
sheets represents amounts paid by the Company for Nova Financial Systems, Inc.
("Nova"), a company affiliated though common ownership, and the balance of
unpaid servicing fees receivable in connection with Nova's card activity. The
Company provided credit card marketing, customer service and collection services
for Nova in exchange for a fee. Effective July 1, 2000, the Company no longer
provides such services for Nova.
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER RECEIVABLES AND DUE TO CARDHOLDERS: The Company charges a fully refundable
reservation fee equal to each cardholder's borrowing limit upon issuance of a
credit card. The amount due to cardholders represents the balance of reservation
fees that would have to be refunded to cardholders should they close their
accounts at the balance sheet date. Funds held in trust at Key Bank & Trust to
secure payment of this liability are reflected in other receivables in the
accompanying balance sheets.
LEASEHOLDS AND EQUIPMENT: Leaseholds and equipment are stated at cost less
accumulated depreciation. Depreciation is computed principally by the double
declining-balance method over the assets' estimated useful lives.
INCOME TAXES: The Company, with the consent of its stockholders, elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code
effective January 1, 1998, which provides that in lieu of corporate income tax
the stockholders separately account for their pro rata shares of the Company's
items of income, deductions, losses and credits. As a result of this election,
no income taxes have been recognized in the accompanying financial statements.
As of December 31, 2000, the Company's reported net assets exceed their tax
bases by approximately $330,000. Accordingly, if the election was terminated on
that date, a deferred tax liability of approximately $122,000 would be
recognized by a charge to income tax expense. Funds received in excess of
projected required cash requirements for the next month are generally
distributed to the stockholders.
NOTE 2. CREDIT CARD RECEIVABLES
The composition of credit card receivables at December 31, 2000 and 1999 is as
follows:
2000 1999
-------------- --------------
Credit card receivables $ 24,993,671 $ 22,274,017
Refundable reservation fees (24,241,000) (21,693,622)
-------------- --------------
752,671 580,395
Less allowance for losses 129,728 60,466
-------------- --------------
$ 622,943 $ 519,929
============== ==============
Changes in the allowance for losses for years ended December 31, 2000, 1999 and
1998 are as follows:
2000 1999 1998
------------ ------------ ------------
Balance, beginning $ 60,466 $ 217,872 $ -
Provision for losses 139,782 511,645 260,332
Recoveries of amounts charged-off - 4,231 67,274
Amounts charged-off (70,520) (673,282) (109,734)
------------ ------------ ------------
Balance, ending $ 129,728 $ 60,466 $ 217,872
============ ============ ============
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. OTHER RECEIVABLES
The composition of other receivables at December 31, 2000 and 1999 is as
follows:
2000 1999
------------ ------------
Due from Key Bank & Trust $ 1,532,254 $ 2,785,624
Due from Net 1st National Bank 2,150,410 -
Other 105,190 88,669
------------ ------------
$ 3,787,854 $ 2,874,293
============ ============
The amounts due from Key Bank and Trust and Net First National Bank are held in
trust accounts by the respective bank.
NOTE 4. LEASEHOLDS AND EQUIPMENT
The major classes of leaseholds and equipment and total accumulated depreciation
at December 31, 2000, and 1999, are as follows:
2000 1999
------------ -------------
Leasehold improvements $ 116,202 $ 104,304
Furniture and equipment 360,011 332,019
Software 15,944 -
------------ -------------
492,157 436,323
Less accumulated depreciation 225,514 132,347
------------ -------------
$ 266,643 $ 303,976
============ =============
NOTE 5. TRANSACTIONS WITH RELATED PARTIES
The Company had an informal agreement with Nova under which the Company provided
marketing and preprocessing of credit card applications, customer service and
collection services for Nova. Expenses were charged to Nova for application
processing and customer service based on a set fee per application processed and
for collections based on a set fee per delinquent account on file. The Company
believes the method and per unit price charged was consistent with the methods
and rates of similar third party credit card processors. As of July 1, 2000, the
Company is no longer providing these services to Nova. The Company recognized
processing fee and servicing income of $672,420 and $3,832,736 associated with
Nova's activities during 2000 and 1999, respectively. No significant services
were performed for Nova in 1998. These amounts are included in other operating
income. As of December 31, 2000 and 1999, Nova owed the Company $81,138 and
$685,464 in connection with services performed and amounts paid for Nova by the
Company.
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
Accrued expenses and other liabilities include $325,000 and $200,000 at December
31, 2000 and 1999, respectively, of short-term borrowings from shareholders.
Such amounts were borrowed in December of each year to provide working capital
and repaid in January of the following year in each instance.
The Company has entered into an agreement with Paragon Water Member Services
("Paragon"), a company affiliated through common ownership, whereby Paragon
provides credit card marketing services for the Company and for Nova. Paragon
earns commissions for card applications that are not subsequently refunded. The
Company paid Paragon $897,521 and $5,662,026 in commissions during 2000 and
1999. No amount was due to Paragon at December 31, 2000 and 1999.
NOTE 6. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
A credit limit has been established for each cardholder account acquired by the
Company. By agreement, the credit limit can be terminated at any time for any
reason. Because the initial reservation fee charged to all account holders is
fully refundable, the total of accounts with credit limits in excess of
cardholder balances is reflected as a liability in the amount of $3,102,926 and
$2,402,377 as of December 31, 2000 and 1999, respectively, in the accompanying
balance sheets.
Lease commitments: The Company rents office space under an operating lease with
initial terms through September 30, 2004. The office lease has a five-year
renewal option. The future minimum rental payments due under the lease is as
follows:
Year Ending
December 31, Amount
- --------------------------------------------------------------------------------
2001 $ 292,130
2002 306,737
2003 322,074
2004 250,502
------------------
$ 1,171,443
==================
Total rent expense under operating leases was approximately $299,000 and
$229,000 for the years ended December 31, 2000 and 1999, respectively.
Contingencies: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
financial statements.
Credit cards are issued throughout the United States to customers that are
considered high credit risks. The Company evaluates each customer's credit
worthiness on a case-by-case basis. Because of the reservation fee charged upon
issuance of credit cards, charges for purchases or cash advances are generally
limited to the amount of payments collected from each customer less fees
charged.
The Company's credit card receivables were initiated under membership terms with
VISA and MasterCard. Modification of these terms by VISA or MasterCard could
adversely affect operating results.
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. OTHER OPERATING EXPENSES
Other operating expense for the years ended December 31, 2000, 1999 and 1998
included the following:
2000 1999 1998
----------- ----------- -----------
Telecommunications $ 402,038 $ 648,111 $ 259,105
Professional fees 341,444 166,005 2,869
Printing and supplies 15,007 41,461 63,049
Bank charges 101,183 3,461 -
Other 280,170 152,938 48,541
----------- ----------- -----------
$ 1,139,842 $ 1,011,976 $ 373,564
=========== =========== ===========
NOTE 8. SETTLEMENT WITH BANK
In April 1999, the Company reached a settlement with Key Bank & Trust that
resulted in a) a significant increase in the amount of collected funds held in
trust by the Bank pending payment to the Company, b) the cessation of marketing
credit cards for the Bank, c) a reduction in the monthly fees charged by the
Bank to the Company, and d) mutual releases from any and all claims against each
other through the date of the release. In connection with the settlement, the
Bank paid the Company $1,016,928, which has been recognized as a reduction in
third party servicing fees for the year ended December 31, 1999 in the
accompanying statements of operations.
NOTE 9. PLAN OF REORGANIZATION
The Company has entered into an Agreement and Plan of Reorganization with
Equitex, Inc. (Equitex) under which the Company's stockholders would exchange
all of the issued and outstanding shares of the Company for a) 25% of the
outstanding common shares of Equitex, after giving effect to the consummation of
this merger and a similar planned merger of Nova, b) warrants for the purchase
of common stock of Equitex equal to 50% of any warrants, options, preferred
stock or other securities outstanding at the closing date and exchangeable for
or convertible into Equitex common shares, and c) $2,500,000.
NOTE 10. SUBSEQUENT EVENT
On March 5, 2001, the Company agreed to issue 40.82 shares of common stock,
representing 2% of the outstanding common stock of the Company on a fully
diluted basis to three individual investors for $900,000. Mr Henry Fong,
President and Chairman of Equitex, Inc. purchased 20.41 of the shares and owns
1% of the Company.