U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A-2
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended:
DECEMBER 31, 1999
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For transition period from _______ to _______.
Commission File Number: 0-12374
EQUITEX, INC.
(Name of small business issuer in its charter)
DELAWARE 84-0905189
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7315 EAST PEAKVIEW AVENUE, ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)(Zip Code)
Issuer's telephone number: (303) 796-8940
Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK, $.02 PAR VALUE
(Title of Class)
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Exchange during the past 12 months
(or for such shorter period that the Registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
Days: Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained in this form, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB: /X/
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was $51,466,792 based on the last sale price of the Registrant's
common stock on April 10, 2000, ($8.25 per share) as reported by the Nasdaq
Stock Market.
The issuer had 7,106,943 shares of common stock outstanding as of April 10,
2000.
Documents incorporated by reference: NO
EQUITEX, INC.
INDEX
PAGE
----
PART II.
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 1
Signatures 7
PART IV.
Item 14. Financial statements 8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(d) Recent sales of unregistered securities
On August 13, 1998, the Company issued 625,000 shares of its common
stock to the shareholders of First Teleservices Corp. in exchange for all of the
issued and outstanding common stock of First Teleservices Corp. The Company
valued the shares issued in this transaction at an aggregate amount of $565,639.
The Company relied upon the exemptions from registration provided by Sections
3(b) or 4(2) of the Securities Act and Rules 505 and 506 promulgated thereunder
based upon (i) representations from each of the shareholders of First
Teleservices Corp. that they are accredited or sophisticated investors with
experience in investing in securities such that they could evaluate the merits
and risks related to the Company's securities; (ii) that no general solicitation
of the securities was made by the Company; were informed in writing of the
restricted nature of the securities, provided with all information regarding the
Company as required under Rule 502 of Regulation D and were given the
opportunity to ask questions of and receive additional information from the
Company regarding its financial condition and operations. the securities issued
to the shareholders of First Teleservices Corp. were "restricted securities" as
that term is defined under Rule 144 promulgated under the Securities Act; (iv)
the Company placed appropriate restrictive legends and stop transfer
instructions with its transfer agent regarding the restricted nature of these
securities; and (v) prior to completion of the transaction, the First
Teleservices Corp. shareholders were informed in writing of the restricted
nature of the securities, provided with all information regarding the Company as
required under Rule 502 of Regulation D and were given the opportunity to ask
questions of and receive additional information from the Company regarding its
financial condition and operations. The Company did not pay any fees or
commissions to third parties with respect to this transaction.
On April 8, 1999, the Company issued 145,788 shares of its common stock
to holders of the Company's Series A Convertible Preferred Stock (the "Series A
Shares") upon conversion of 900 Series A Shares. Under the terms of the Series A
Shares, conversion does not require the payment of any consideration. The
Company relied upon the exemption provided under Section 3(a)(9) of the
Securities Act for the issuance of the common stock upon conversion, based upon
the following factors: (i) the Company was the issuer of the Series A Shares and
the common stock issued upon conversion; (ii) the conversion right is only
available to holders of the Series A Shares; (iii) no additional consideration
was paid to the Company by the holders of the Series A Shares to complete the
conversion, nor were the terms of the Series A Shares modified to provide for
the conversion; and (iv) no commission or other remuneration was paid in
connection with the conversion.
On April 8, 1999, the Company issued 77,941 shares of its common stock
to holders of the Company's Series B Convertible Preferred Stock (the "Series B
Shares") upon conversion of 600 Series B Shares. Under the terms of the Series B
Shares, conversion does not require the payment of any consideration. The
Company relied upon the exemption provided under Section 3(a)(9) of the
Securities Act for the issuance of the common stock upon conversion, based upon
the following factors: (i) the Company was the issuer of the Series B Shares and
the common stock issued upon conversion; (ii) the conversion right is only
available to holders of the Series B Shares; (iii) no additional consideration
was paid to the Company by the holders of the Series B Shares to complete
1
the conversion, nor were the terms of the Series B Shares modified to provide
for the conversion; and (iv) no commission or other remuneration was paid in
connection with the conversion.
On April 8, 1999, the Company issued 96,799 shares of its common stock
to holders of the Company's Series C Convertible Preferred Stock (the "Series C
Shares") upon conversion of 600 Series C Shares. Under the terms of the Series C
Shares, conversion does not require the payment of any consideration. The
Company relied upon the exemption provided under Section 3(a)(9) of the
Securities Act for the issuance of the common stock upon conversion, based upon
the following factors: (i) the Company was the issuer of the Series C Shares and
the common stock issued upon conversion; (ii) the conversion right is only
available to holders of the Series C Shares; (iii) no additional consideration
was paid to the Company by the holders of the Series C Shares to complete the
conversion, nor were the terms of the Series C Shares modified to provide for
the conversion; and (iv) no commission or other remuneration was paid in
connection with the conversion.
On April 19, 1999, the Company issued 50,000 shares of its common stock
to Quest Capital upon the exercise of warrants issued to Quest. The aggregate
consideration received by the Company upon exercise was $187,500. The Company
relied upon the exemptions from registration provided by Sections 4(6) or 4(2)
of the Securities Act and Rule 506 promulgated thereunder based upon (i)
representations provided by Quest at the time of exercise that it was an
accredited investor; (ii) that no general solicitation of the securities was
made by the Company; (iii) the securities issued upon exercise of the warrants
were "restricted securities" as that term is defined under Rule 144 promulgated
under the Securities Act, however, because the securities were registered for
resale by Quest pursuant to an effective registration statement, no restrictive
legend was placed on the certificates or stop transfer instructions noted by the
Company's transfer agent; (vi) written representations by Quest to the Company
that it would comply with the manner of sale provisions described in the
registration statement covering its resale of the securities and (vii) prior to
completion of the transaction, Quest was provided with all information regarding
the Company as required under Rule 502 of Regulation D and was given the
opportunity to ask questions of and receive additional information from the
Company regarding its financial condition and operations. The Company did not
pay any fees or commissions to third parties with respect to this transaction.
On April 19, 1999, the Company issued 40,000 shares of its common stock
to the holders of its outstanding Series B Warrants, upon the exercise of 40,000
of those warrants. The aggregate consideration received by the Company upon
exercise was $335,800. The Company relied upon the exemptions from registration
provided by Sections 4(6) or 4(2) of the Securities Act and Rule 506 promulgated
thereunder based upon (i) representations provided by the warrant holders at the
time of exercise that they were accredited investors; (ii) that no general
solicitation of the securities was made by the Company; (iii) the securities
issued upon exercise of the warrants were "restricted securities" as that term
is defined under Rule 144 promulgated under the Securities Act, however, because
the securities were registered for resale by the holders of the Series B
Warrants pursuant to an effective registration statement, no restrictive legend
was placed on the certificates or stop transfer instructions noted by the
Company's transfer agent; (vi) written representations by the holders of the
Series B Warrants to the Company that they would comply with the manner of sale
provisions described in the registration statement covering their resale of the
securities; and (vii) prior to completion of the transaction, the holders of the
warrants were provided with all information
2
regarding the Company as required under Rule 502 of Regulation D and were given
the opportunity to ask questions of and receive additional information from the
Company regarding its financial condition and operations. The Company did not
pay any fees or commissions to third parties with respect to this transaction.
On April 23, 1999, the Company issued 90,000 shares of its common stock
to the holders of its outstanding Series A Warrants, upon the exercise of 90,000
of those warrants. The aggregate consideration received by the Company upon
exercise was $738,450. The Company relied upon the exemptions from registration
provided by Sections 4(6) or 4(2) of the Securities Act and Rule 506 promulgated
thereunder based upon (i) representations provided by the warrant holders at the
time of exercise that they were accredited investors; (ii) that no general
solicitation of the securities was made by the Company; (iii) the securities
issued upon exercise of the warrants were "restricted securities" as that term
is defined under Rule 144 promulgated under the Securities Act however, because
the securities were registered for resale by the holders of the Series A
Warrants, pursuant to an effective registration statement, no restrictive legend
was placed on the certificates or stop transfer instructions noted by the
Company's transfer agent; (vi) written representations by the holders of the
Series A Warrants to the Company that they would comply with the manner of sale
provisions described in the registration statement covering their resale of the
securities; and (vii) prior to completion of the transaction, the holders of the
warrants were provided with all information regarding the Company as required
under Rule 502 of Regulation D and were given the opportunity to ask questions
of and receive additional information from the Company regarding its financial
condition and operations. The Company did not pay any fees or commissions to
third parties with respect to this transaction.
On April 23, 1999, the Company issued 20,000 shares of its common stock
to Alan Gainsford upon the exercise of warrants issued to Mr. Gainsford. The
aggregate consideration received by the Company upon exercise was $145,000. The
Company relied upon the exemptions from registration provided by Sections 4(6)
or 4(2) of the Securities Act and Rule 506 promulgated thereunder based upon (i)
representations provided by Mr. Gainsford at the time of exercise that he was an
accredited investor; (ii) that no general solicitation of the securities was
made by the Company; (iii) the securities issued upon exercise of the warrants
were "restricted securities" as that term is defined under Rule 144 promulgated
under the Securities Act, however, because the securities were registered for
resale by Mr. Gainsford pursuant to an effective registration statement, no
restrictive legend was placed on the certificates or stop transfer instructions
noted by the Company's transfer agent; (vi) written representations by Mr.
Gainsford to the Company that he would comply with the manner of sale provisions
described in the registration statement covering his resale of the securities;
and (vii) prior to completion of the transaction, Mr. Gainsford was provided
with all information regarding the Company as required under Rule 502 of
Regulation D and was given the opportunity to ask questions of and receive
additional information from the Company regarding its financial condition and
operations. The Company did not pay any fees or commissions to third parties
with respect to this transaction.
On April 27, 1999, the Company issued 60,000 shares of its common stock
to the holders of its outstanding Series C Warrants, upon the exercise of 60,000
of those warrants. The aggregate consideration received by the Company upon
exercise was $703,800. The Company relied upon
3
the exemptions from registration provided by Sections 4(6) or 4(2) of the
Securities Act and Rule 506 promulgated thereunder based upon (i)
representations provided by the warrant holders at the time of exercise that
they are accredited investors; (ii) that no general solicitation of the
securities was made by the Company; (iii) the securities issued upon exercise of
the warrants were "restricted securities" as that term is defined under Rule 144
promulgated under the Securities Act, however, because the securities were
registered for resale by the holders of the Series C Warrants pursuant to an
effective registration statement, no restrictive legend was placed on the
certificates or stop transfer instructions noted by the Company's transfer
agent; (vi) written representations by the holders of the Series C Warrants to
the Company that they would comply with the manner of sale provisions described
in the registration statement covering their resale of the securities; and (vii)
prior to completion of the transaction, the holders of the warrants were
provided with all information regarding the Company as required under Rule 502
of Regulation D and were given the opportunity to ask questions of and receive
additional information from the Company regarding its financial condition and
operations. The Company did not pay any fees or commissions to third parties
with respect to this transaction.
On May 6, 1999, the Company issued 20,000 shares of its common stock to
Alan Gainsford upon the exercise of warrants issued to Mr. Gainsford. The
aggregate consideration received by the Company upon exercise was $145,000. The
Company relied upon the exemptions from registration provided by Sections 4(6)
or 4(2) of the Securities Act and Rule 506 promulgated thereunder based upon (i)
representations provided by Mr. Gainsford at the time of exercise that he is an
accredited investor; (ii) that no general solicitation of the securities was
made by the Company; (iii) the securities issued upon exercise of the warrants
were "restricted securities" as that term is defined under Rule 144 promulgated
under the Securities Act, however, because the securities were registered for
resale by Mr. Gainsford pursuant to an effective registration statement, no
restrictive legend was placed on the certificates or stop transfer instructions
noted by the Company's transfer agent; (vi) written representations by Mr.
Gainsford to the Company that he would comply with the manner of sale provisions
described in the registration statement covering his resale of the securities;
and (vii) prior to completion of the transaction, Mr. Gainsford was provided
with all information regarding the Company as required under Rule 502 of
Regulation D and was given the opportunity to ask questions of and receive
additional information from the Company regarding its financial condition and
operations. The Company did not pay any fees or commissions to third parties
with respect to this transaction.
On May 19, 1999, the Company issued 22,500 shares of its common stock
to Alan Gainsford upon the exercise of warrants issued to Mr. Gainsford. The
aggregate consideration received by the Company upon exercise was $163,125. The
Company relied upon the exemptions from registration provided by Sections 4(6)
or 4(2) of the Securities Act and Rule 506 promulgated thereunder based upon (i)
representations provided by Mr. Gainsford at the time of exercise that he is an
accredited investor; (ii) that no general solicitation of the securities was
made by the Company; (iii) the securities issued upon exercise of the warrants
were "restricted securities" as that term is defined under Rule 144 promulgated
under the Securities Act, however, because the securities were registered for
resale by Mr. Gainsford pursuant to an effective registration statement, no
restrictive legend was placed on the certificates or stop transfer instructions
noted by the Company's transfer agent; (vi) written representations by Mr.
Gainsford to the Company that he would comply with the
4
manner of sale provisions described in the registration statement covering his
resale of the securities; and (vii) prior to completion of the transaction, Mr.
Gainsford was provided with all information regarding the Company as required
under Rule 502 of Regulation D and was given the opportunity to ask questions of
and receive additional information from the Company regarding its financial
condition and operations. The Company did not pay any fees or commissions to
third parties with respect to this transaction.
On July 7, 1999, the Company issued 35,000 shares of its common stock
to Jeffrey Werbalowsky upon the exercise of warrants issued to Mr. Werbalowsky.
The aggregate consideration received by the Company upon exercise was $253,750.
The Company relied upon the exemptions from registration provided by Sections
4(6) or 4(2) of the Securities Act and Rule 506 promulgated thereunder based
upon (i) representations provided by Mr. Werbalowsky at the time of exercise
that he is an accredited investor; (ii) that no general solicitation of the
securities was made by the Company; (iii) the securities issued upon exercise of
the warrants were "restricted securities" as that term is defined under Rule 144
promulgated under the Securities Act, however, because the securities were
registered for resale by Mr. Werbalowsky pursuant to an effective registration
statement, no restrictive legend was placed on the certificates or stop transfer
instructions noted by the Company's transfer agent; (vi) written representations
by Mr. Werbalowsky to the Company that he would comply with the manner of sale
provisions described in the registration statement covering his resale of the
securities; and (vii) prior to completion of the transaction, Mr. Werbalowsky
was provided with all information regarding the Company as required under Rule
502 of Regulation D and was given the opportunity to ask questions of and
receive additional information from the Company regarding its financial
condition and operations. The Company did not pay any fees or commissions to
third parties with respect to this transaction.
On August 23, 1999, the Company issued 250 shares of its Series E
Convertible Preferred Stock (the "Series E Shares") to the shareholders of First
Bankers Mortgage Services, Inc. ("First Bankers"), in exchange for all of the
issued and outstanding common stock of First Bankers. The Company valued the
shares issued in this transaction at an aggregate amount of $2,531,000. Each
Series E Share automatically converts, without the payment of additional
consideration, into 1,000 shares of the Company's common stock upon the approval
by the Company's shareholders of an increase in the number authorized shares of
the Company's common stock. The Company relied upon the exemptions from
registration provided by Section 4(2) of the Securities Act and Rule 506
promulgated thereunder based upon (i) representations from each of the
shareholders of First Bankers that they are accredited or sophisticated
investors with experience in investing in securities such that they could
evaluate the merits and risks related to the Company's securities; (ii) that no
general solicitation of the securities was made by the Company; (iii) each of
the First Bankers shareholders represented to the Company that they were
acquiring the shares for their own account and not with a view towards further
distribution; (iv) the securities issued to the shareholders of First Bankers.
were "restricted securities" as that term is defined under Rule 144 promulgated
under the Securities Act; (v) the Company placed appropriate restrictive legends
and stop transfer instructions with its transfer agent regarding the restricted
nature of these securities; and (vi) prior to completion of the transaction, the
First Bankers shareholders were informed in writing of the restricted nature of
the securities, provided with all information regarding the Company as required
under Rule 502 of Regulation D and were given the opportunity to ask questions
of and receive
5
additional information from the Company regarding its financial condition and
operations. The Company did not pay any fees or commissions to third parties
with respect to this transaction.
On August 27, 1999, the Company sold 3,500 shares of its Series D 6%
Convertible Preferred Stock (the "Series D Shares") to The Shaar Fund Ltd, for
aggregate consideration of $3,500,000. Of the aggregate gross proceeds,
$2,300,000 has been placed into escrow along with 2,300 Series D Shares to be
released upon satisfaction of certain conditions, including an increase in the
number of authorized common shares of the company from 7,500,000 to 50,000,000.
The Series D Shares are convertible without the payment of additional
consideration at any time, and from time to time at a conversion price per share
of common stock equal to 65% of the then market price of the common stock. The
Company relied upon the exemptions from registration provided by Sections 4(6)
or 4(2) of the Securities Act and Rule 506 promulgated thereunder based upon (i)
representations from each of the purchasers of the Series D Shares accredited or
sophisticated investors with experience in investing in securities such that
they could evaluate the merits and risks related to the Company's securities;
(ii) that no general solicitation of the securities was made by the Company;
(iii) representations form the Shaar Fund that it was acquiring the securities
for its own account and not with a view towards further distribution; (iv) the
Series D Shares were "restricted securities" as that term is defined under Rule
144 promulgated under the Securities Act; (v) the Company placed appropriate
restrictive legends on the certificates representing the securities regarding
the restricted nature of these securities; and (vi) prior to completion of the
transaction, the purchasers of the Series D Shares were informed in writing of
the restricted nature of the securities, provided with all information regarding
the Company as required under Rule 502 of Regulation D and were given the
opportunity to ask questions of and receive additional information from the
Company regarding its financial condition and operations.
6
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: May 14, 2001 EQUITEX, INC.
(Registrant)
By /S/ HENRY FONG
-----------------------------------
Henry Fong, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: May 14, 2001 /S/ HENRY FONG
-----------------------------------
Henry Fong, President,
Treasurer and Director
(Principal Executive, Financial,
and Accounting Officer)
Date: May 14, 2001 /S/ RUSSELL L. CASEMENT
-----------------------------------
Russell L. Casement, Director
Date: May 14, 2001 /S/ AARON A. GRUNFELD
-----------------------------------
Aaron A. Grunfeld, Director
7
EQUITEX, INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Independent auditors' report - Gelfond Hochstadt Pangburn, P.C. F-1
Report of Independent Certified Public Accountants -
Davis & Co., CPA's, P.C. F-2
Financial statements:
Consolidated balance sheet - December 31, 1999 F-3
Statement of assets and liabilities - December 31, 1998 F-4
Schedule of investments - December 31, 1998 F-5 - F-7
Consolidated statement of operations - year ended
December 31, 1999 F-8
Statements of operations - years ended December 31, 1998
and 1997 F-9
Statements of stockholders' equity - years ended
December 31, 1999, 1998, and 1997 F-10 - F-13
Consolidated statement of cash flows - year ended
December 31, 1999 F-14 - F-15
Statements of cash flows - years ended December 31, 1998 and 1997 F-16 - F-17
Notes to consolidated financial statements F-18 - F- 46
INDEPENDENT AUDITORS' REPORT
----------------------------
Board of Directors
Equitex, Inc.
We have audited the accompanying consolidated balance sheet of Equitex, Inc. and
subsidiaries as of December 31, 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Equitex, Inc. and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 1999, the Company changed its method of accounting for its
majority-owned subsidiaries, its equity investments, and its investments in debt
and equity securities.
Our audit referred to above included an audit of the 1999 financial statement
schedule listed under Item 14.2. In our opinion, this 1999 financial statement
schedule presents fairly, in all material respects, the 1999 information stated
therein, when considered in relation to the 1999 information required to be
stated therein.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
April 10, 2000
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Equitex, Inc.
We have audited the accompanying statement of assets and liabilities and
schedule of investments of Equitex, Inc. as of December 31, 1998, and the
related statements of changes in stockholders' equity, operations and cash flows
for each of the years in the two-year period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our 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 1998 and 1997 financial statements referred to above present
fairly, in all material respects, the financial position of Equitex, Inc. as of
December 31, 1998, and the results of its operations and its cash flows each of
the years in the two-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
As explained more fully in Note 2, the financial statements at December 31, 1998
include securities and receivables, valued at $2,799,145 (68.2% of net assets)
whose values have been estimated by the Board of Directors in the absence of
readily attainable market values. We have reviewed the procedures used by the
Board of Directors in arriving at its estimate of value of such securities and
receivables and have inspected underlying documentation, and, in the
circumstances, we believe the procedures are reasonable and the documentation
appropriate. However, because of the inherent uncertainty of valuation of
restricted securities and receivables, those estimated values may differ
significantly from the values that would have been used had a ready market for
the restricted securities and receivables existed, and had the precise
recoverability of the receivables been determinable; and the differences could
be material.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule on S-1 is presented for the
purpose of complying with the Securities and Exchange Commission's rules and is
not a required part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audit of the basic financial
statements and, in our opinion, fairly states in all material respects the 1998
and 1997 financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
Davis & Co., CPAs, P.C.
Certified Public Accountants
Englewood, Colorado
March 27, 1999
F-2
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
ASSETS
Cash and cash equivalents ...................................... $ 783,606
Mortgage loans held for sale, net .............................. 14,787,080
Receivables, net:
Related parties ........................................... 958,810
Other ..................................................... 504,571
Inventories .................................................... 167,346
Investments
Equity investments ........................................ 1,707,898
Other investments ......................................... 1,767,537
Furniture, fixtures and equipment, net ......................... 1,058,032
Intangible and other assets, net ............................... 20,010,057
------------
$ 41,744,937
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Warehouse loans ........................................... $ 18,582,351
Accounts payable .......................................... 1,584,926
Accrued liabilities:
Related parties ......................................... 454,235
Others .................................................. 2,773,989
Notes and advances payable:
Related parties ......................................... 832,000
Others .................................................. 1,941,954
------------
Total liabilities .............................................. 26,169,455
------------
Minority interest .............................................. 6,473,070
------------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock; par value $1,000;
4,500 shares authorized:
Series D, 6%, 1,200 shares issued and outstanding;
liquidation preference $1,585,000 ................... 1,200,000
Series E, 250 shares issued and outstanding ........... 250,000
Common stock, par value $.02; 7,500,000
shares authorized; 7,140,293 shares issued;
7,106,943 shares outstanding ........................... 142,806
Additional paid-in capital ................................ 18,820,223
Accumulated deficit ....................................... (11,196,580)
Less treasury stock at cost (33,350 shares) ............... (114,037)
------------
Total stockholders' equity ..................................... 9,102,412
------------
$ 41,744,937
============
See notes to consolidated financial statements.
F-3
EQUITEX, INC. AND SUBSIDIARIES
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
ASSETS
Investments, at fair value:
Securities (cost of $4,917,848) ........................... $ 4,226,541
Notes receivable, net of allowance for
uncollectible accounts of $100 .......................... 1,225,232
Accrued interest receivable, net of
allowance for uncollectible interest of $1,830 .......... 32,134
Trade receivables, net of allowance for
uncollectible accounts of $57,705 ....................... 108,286
------------
5,592,193
Cash ........................................................... 32,490
Accounts receivable - brokers .................................. 22,798
Contract deposit receivable, net of allowance for
uncollectibility of $150,000 ................................. 150,000
Income taxes refundable ........................................ 2,150
Furniture and equipment, net ................................... 26,220
Other assets ................................................... 33,224
------------
$ 5,859,075
============
LIABILITIES AND NET ASSETS
Liabilities:
Notes payable - officer ................................... $ 142,328
Notes payable - others .................................... 220,000
Accounts payable and other accrued liabilities ............ 76,290
Accounts payable to brokers ............................... 656,060
Accrued bonus to officer .................................. 676,168
------------
1,770,846
------------
Net assets:
Preferred stock, par value $.01; 2,000,000 shares
authorized; no shares issued
Common stock, par value $.02; 7,500,000 shares authorized;
5,417,665 shares issued; 5,384,315 shares outstanding ... 108,353
Additional paid-in capital ................................ 7,368,624
Retained earnings
Accumulated deficit prior to becoming a BDC ............. (118,874)
Accumulated net investment loss ......................... (15,698,055)
Accumulated net realized gains from sales and permanent
write-downs of investments ............................. 13,233,525
Unrealized net gains (losses) on investments .............. (691,307)
Less treasury stock (33,350 shares) ....................... (114,037)
------------
4,088,229
------------
$ 5,859,075
============
See notes to consolidated financial statements.
F-4
EQUITEX, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
Number Cost
of and/or Fair
Company shares owned equity value
- ------------------------------ ------------ ------ -----
CONTROLLED COMPANIES
COMMON STOCKS - PRIVATE
MARKET METHOD OF VALUATION (a)(d):
VP Sports, Inc.
Entity formed to seek acquisitions in the
manufacturing segment of the sporting
goods and leisure-time industry 2,000,000 $ 250,000 $ 1,000,000
COMMON STOCKS - BOARD APPRAISAL
METHOD OF VALUATION (a):
First TeleServices Corporation
Fee-based financial services 1,000 565,639 565,639
COMMON STOCKS - COST METHOD OF
VALUATION:
Triumph Sports Group
Entity formed to seek acquisitions in the
non-manufacturing licensed and supplemental
segments of the sporting goods and leisure-
time industry 1,500,000 375,000 375,000
First TeleBanc Corporation
Bank holding company 40,000 400,000 350,000
AFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION (c)(d):
RDM Sports Group
Manufacturer of fitness equipment and
juvenile products 4,979,437 1,088,815 8,963
OTHER-PUBLIC MARKET METHOD OF
VALUATION:
RDM Sports Group 8% Convertible
Manufacturer of fitness equipment and Subordinated
juvenile products Debentures 50,681 -
---------- -----------
Sub-total, controlled and affiliated companies 2,730,135 2,299,602
---------- -----------
(Continued)
F-5
EQUITEX, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
Number Cost
of and/or Fair
Company shares owned equity value
- ------------------------------ ------------ ------ -----
UNAFFILIATED COMPANIES
COMMON STOCKS - PUBLIC MARKET
METHOD OF VALUATION:
Intranet Solutions, Inc. (formerly MacGregor
Sports & Fitness, Inc.)
Document management services, web-
based internet software, electronic docu-
ment management and demand printing 188,585 1,053,200 919,351
Zamba (formerly Racotek)
Medical technology 275,000 961,013 532,813
NevStar Gaming Corporation
Gaming development 7,000 38,500 6,562
COMMON STOCKS - PRIVATE MARKET
METHOD OF VALUATION (a)(d):
All Systems Go
Software development 20,000(b) 25,000 25,000
Ocean Power Technology
Alternative energy 35,714(b) 40,000 98,213
research and development 100,000 - 275,000
Gain, Inc.
Male vascular devices 20,000(b) 50,000 50,000
Juice Island
Health food stores 10,000(b) 20,000 20,000
WARRANTS (e)(d):
Juice Island
Health food stores 2,500 - -
---------- -----------
Sub-total, unaffiliated companies 2,187,713 1,926,939
---------- -----------
Total, all companies $4,917,848 $ 4,226,541
========== ===========
(Continued)
F-6
EQUITEX, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1998
Restriction as to resale:
(a) Non-public company whose securities are privately owned. The Board of
Directors determines fair value in good faith using cost information, but
also taking into consideration the impact of such factors as available
financial information of the investee, the nature and duration of any
restrictions on resale, and other factors which influence the market in
which a security is purchased and sold.
(b) May be sold under the provisions of Rule 144 of the Securities Act of 1933
after an initial holding period expires.
(c) Since the Company is an affiliate, it may be affected by sales limitations
of one percent of the investee's outstanding common stock during any
three-month period, or four-week average trading volume during any
three-month period.
(d) Since certain of these securities have certain restrictions as to resale,
the Board of Directors determines fair value in good faith using public
market information, but also taking into consideration the impact of such
factors as a available financial information of the investee, the nature
and duration of restrictions on the disposition of securities, and other
factors which influence the market in which a security is purchased and
sold.
(e) Valued at higher of cost or fair market value of underlying stock less
exercise price, subject to valuation adjustments as determined in good
faith by the Board of Directors, taking into consideration the impact of
such factors as available financial information of the investee, the nature
and duration of any restrictions on resale, and other factors which
influence the market in which a security is purchased and sold.
See notes to consolidated financial statements.
F-7
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
Revenues:
Product sales ............................................. $ 738,456
Loan production and processing revenues ................... 302,811
Secondary marketing revenues, net ......................... 395,034
Interest and dividend income .............................. 878,998
Other ..................................................... 103,965
------------
2,419,264
------------
Expenses:
Cost of product sales ..................................... 488,767
Loan production and processing ............................ 728,501
Selling, general and administrative:
Officer's bonus ......................................... 883,164
Other ................................................... 6,250,365
------------
8,350,797
------------
(5,931,533)
------------
Other income (expenses):
Investment loss, net ...................................... (571,267)
Equity in losses of affiliates ............................ (418,209)
Interest expense:
Related parties ......................................... (10,357)
Other ................................................... (785,193)
------------
(1,785,026)
------------
Net loss ....................................................... (7,716,559)
------------
Amortization of discount on preferred stock .................... (3,217,713)
Deemed preferred stock dividends ............................... (51,300)
------------
Net loss applicable to common shareholders ..................... $(10,985,572)
============
Basic and diluted net loss per common share .................... $ (1.64)
============
Weighted average number of common shares outstanding ........... 6,718,170
============
See notes to consolidated financial statements.
F-8
EQUITEX, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
Revenues:
Interest and dividends ........................... $ 70,445 $ 34,784
Consulting and transaction fees .................. 375,000 250,000
Administrative fees .............................. 2,371 26,495
Miscellaneous .................................... 24 67,112
----------- -----------
447,840 378,391
----------- -----------
Expenses:
Salaries and consulting fees ..................... 300,613 300,164
Officers' bonus .................................. 1,208,042 151,153
Office rent ...................................... 31,188 38,575
Advertising and promotion ........................ 48,612 2,951
Legal and accounting ............................. 276,359 69,502
Loss on indemnity agreement ...................... 509,054
Other general and administrative ................. 266,129 190,261
Interest ......................................... 101,002 87,005
Bad debt expense ................................. (34,435) 240,991
Depreciation and amortization .................... 12,833 11,388
Employee benefits ................................ 207,902 212,882
----------- -----------
2,418,245 1,813,926
----------- -----------
Net investment (loss) ................................. (1,970,405) (1,435,535)
----------- -----------
Net realized gain on investments and
net unrealized gain on investments:
Proceeds from sales of investments ............... 1,712,802 1,508,629
Less: cost of investments sold ................... (604,462) (504,678)
----------- -----------
Realized gain from sales of investments ........ 1,108,340 1,003,951
Permanent write down of investments .............. -- --
----------- -----------
Realized gain on investments before income taxes 1,108,340 1,003,951
----------- -----------
Net investment (loss) and realized gain on
investments before income taxes ................ (862,065) (431,584)
Less: income taxes (provision) benefit
Current ........................................ -- (56,307)
Deferred ....................................... (63,180) 86,242
----------- -----------
(63,180) 29,935
Income tax benefit of NOL carryforward ........... -- --
----------- -----------
Net investment (loss) and realized gain
on investments after income taxes .............. (925,245) (401,649)
(Decrease) in unrealized appreciation of investments .. (1,056,054) (5,773,305)
Less: income tax benefit applicable to (decrease)
in unrealized appreciation of investments ........... 431,361 2,251,587
Add: allowance for income tax benefit ................. (431,361) --
----------- -----------
(1,056,054) (3,521,718)
----------- -----------
Net (decrease) in net assets resulting from operations $(1,981,299) $(3,923,367)
=========== ===========
(Decrease) in net assets per share - primary .......... $ (.45) $ (1.25)
=========== ===========
Weighted average number of common shares .............. 4,416,988 3,192,600
=========== ===========
See notes to consolidated financial statements.
F-9
EQUITEX, INC., AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Convertible preferred Common stock
stock
------------------------ ------------------------- Additional
Treasury paid in
Shares Amount Shares Amount stock capital Deficit
----------- ---------- ----------- ----------- ----------- -------------- --------------
Balance at December 31,
1996 3,224,465 $ 64,489 $ (114,037) $ 4,447,175 $ (118,874)
Common stock sold to
officer/director at $.75
per share 270,000 5,400 197,100
Net investment (loss)
Net realized gain on
investments
Unrealized gain (loss) on
investmentments
----------- ---------- ----------- ----------- ----------- -------------- --------------
Balance at December 31,
1997 3,494,465 69,889 (114,037) 4,644,275 (118,874)
Common stock sold to
officer at $1.16 per share 10,000 200 11,400
Common stock sold to o/s
directors at $1.16 per
share 139,200 2,784 158,688
Common stock sold to
officers pursuant to
option conversions at:
$3.00 per share 74,000 1,480 220,520
$3.19 per share 29,000 580 91,930
Common stock sold to
others at :
$ .75 per share 330,000 6,600 240,900
$1.16 per share 350,000 7,000 399,000
$3.25 per share 366,000 7,320 1,182,180
Stock issued in exchange
for First TeleServices
Corporation 625,000 12,500 553,139
Commissions/fees paid
on 1998 private placement
sales (133,408)
Net investment (loss)
Net realized gain (loss)
on investments
Unrealized gain (loss) on
investments
----------- ---------- ----------- ----------- ----------- -------------- --------------
(Continued)
F-10
EQUITEX, INC., AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Accumulated
Accumulated appreciation on
realized investments (1998,
net gains 1997) other Total
Accumulated net from sales comprehensive stockholders'
investment loss of investment income (1999) equity
--------------- ---------------- --------------- ---------------
Balance at December 31,
1996 $(12,025,669) $11,121,234 $3,886,465 $7,260,783
Common stock sold to
officer/director at $.75
per share 202,500
Net investment (loss) (1,405,600) (1,405,600)
Net realized gain on
investments 1,003,951 1,003,951
Unrealized gain (loss)
investments (3,521,718) (3,521,718)
--------------- ---------------- --------------- ---------------
Balance at December 31,
1997 (13,431,269) 12,125,185 364,747 3,539,916
Common stock sold to
officer at $1.16 per share 11,600
Common stock sold to o/s
directors at $1.16 per
share 161,472
Common stock sold to
officers pursuant to
option conversions at:
$3.00 per share 222,000
$3.19 per share 92,510
Common stock sold to
others at :
$ .75 per share 247,500
$1.16 per share 406,000
$3.25 per share 1,189,500
Stock issued in exchange
for First TeleServices
Corporation 565,639
Commissions/fees paid
on 1998 private placement
sales (133,408)
Net investment (loss) (2,266,786) (2,266,786)
Net realized gain (loss)
on investments 1,108,340 1,108,340
Unrealized gain (loss) on
investments (1,056,054) (1,056,054)
--------------- ---------------- --------------- ---------------
(Continued)
F-11
EQUITEX, INC., AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Convertible preferred Common stock
stock
------------------------ ------------------------- Additional
Treasury paid in
Shares Amount Shares Amount stock capital Deficit
----------- ---------- ----------- ----------- ----------- -------------- --------------
Balances, December 5,417,665 108,353 (114,037) 7,368,624 (118,874)
31, 1998
Cumulative effect of
accounting change (3,361,147)
Reclassification adjustment
on unrealized loss on
investments
Issuance of Series A
preferred stock (net
of offering costs) 900 9 769,991
Issuance of Series B
preferred stock (net
of offering costs) 600 6 521,994
Issuance of Series C
preferred stock (net
of offering costs) 600 6 509,994
Private placement of common
stock (net
of offering costs) 350,312 7,006 936,984
Conversion of Series
A, B and C preferred stock
to common stock (2,100) (21) 320,528 6,411 (6,390)
Conversion of note payable
and accrued interest to
common stock 48,688 974 157,262
Exercises of stock options
issued to employees 665,600 13,312 2,081,234
Exercises of warrants 337,500 6,750 2,606,925
Issuance of warrants
for services 150,000
Issuance of Series D
preferred stock 1,200 1,200,000 (180,000)
Issuance of Series E
preferred stock 250 250,000 2,281,000
Subsidiary stock
transactions 1,622,605
Net loss (7,716,559)
----------- ---------- ----------- ----------- ----------- -------------- --------------
Balances, at December 31,
1999 1,450 $1,450,000 7,140,293 $ 142,806 $ (114,037) $ 18,820,223 $ (11,196,580)
=========== ========== =========== =========== =========== ============== ==============
(Continued)
F-12
EQUITEX, INC., AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Accumulated
Accumulated appreciation on
realized investments (1998,
net gains 1997) other Total
Accumulated net from sales comprehensive stockholders'
investment loss of investment income (1999) equity
--------------- ---------------- --------------- ---------------
Balances, December
31, 1998 (15,698,055) 13,233,525 (691,307) 4,088,229
Cumulative effect of
accounting change 15,698,055 (13,233,525) (896,617)
Reclassification adjustment
on unrealized loss on
investments 691,307 691,307
Issuance of Series A
preferred stock (net
of offering costs) 770,000
Issuance of Series B
preferred stock (net
of offering costs) 522,000
Issuance of Series C
preferred stock (net
of offering costs) 510,000
Private placement of
common stock (net of
offering costs) 943,990
Conversion of Series
A, B and C preferred stock
to common
Conversion of note payable
and accrued interest into
common stock 158,236
Exercises of stock options
issued to employees 2,094,546
Exercises of warrants 2,613,675
Issuance of warrants
for services 150,000
Issuance of Series D
preferred stock 1,020,000
Issuance of Series E
preferred stock 2,531,000
Subsidiary stock
transactions 1,622,605
Net loss (7,716,559)
--------------- ---------------- --------------- ---------------
Balances, at December 31,
1999 $9,102,412
=============== =============== =============== ===============
See notes to consolidated financial statements.
F-13
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999
Cash flows used in operating activities:
Net loss ....................................................... $ (7,716,559)
------------
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ............................. 838,359
Warrants issued for services .............................. 150,000
Provision for bad debts on notes receivable ............... 19,248
Investment loss, net ...................................... 571,267
Equity in losses of affiliates ............................ 418,209
Changes in assets and liabilities, net of business acquisitions:
Investments in trading securities............................ 852,128
Receivables ................................................. 40,500
Mortgage loans held for sale ................................ 3,545,354
Inventories ................................................. (109,797)
Other assets ................................................ 1,093,098
Accounts payable and accrued liabilities .................... (3,961,145)
------------
Total adjustments ........................................... 3,457,221
------------
Net cash used in operating activities .......................... (4,259,338)
------------
Cash flows from investing activities:
Purchase of other investments ............................... (410,000)
Cash used in business acquisition ........................... (2,327,500)
Purchase of furniture fixtures and equipment................. (278,025)
Repayment of loans and notes receivable ..................... 1,017,630
Issuance of loans and notes receivable ...................... (2,903,242)
------------
Net cash used in investing activities .......................... (4,901,137)
------------
Cash flows from financing activities:
Common stock issued for cash ................................ 5,652,211
Preferred stock issued for cash ............................. 2,822,000
Issuance of notes payable ................................... 758,897
Repayment of warehouse lines and other notes payable ........ (2,826,517)
Proceeds from subsidiary stock transactions ................. 3,505,000
------------
Net cash provided by financing activities ...................... 9,911,591
------------
(Continued)
F-14
EQUITEX, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
Increase in cash and cash equivalents .......................... 751,116
Cash and cash equivalents, beginning of year ................... 32,490
------------
Cash and cash equivalents, end of year ......................... $ 783,606
============
Supplemental disclosure of cash flow information:
Cash paid for interest: ..................................... $ 2,939,873
============
Supplemental disclosure of non-cash investing and
financing activities:
Common stock issued in satisfaction of
note payable and accrued interest ......................... $ 158,236
============
Conversion of preferred stock to common
stock ..................................................... $ 1,802,000
============
Amortization of discount on preferred
stock ..................................................... $ 3,217,713
============
Subsidiary stock transactions ............................... $ 1,622,605
============
Purchase of FBMS, net of cash acquired:
Fair value of assets acquired ............................. $ 12,392,600
Intangible assets ......................................... 18,900,000
Liabilities assumed ....................................... (29,541,600)
Fair value of Series E preferres stock .................... (2,531,000)
------------
Cash acquired ............................................. $ (780,000)
============
Purchase of Victoria Precision, Inc.:
Fair value of assets acquired ............................. $ 5,769,500
Intangible assets ......................................... 3,166,000
Liabilities assumed ....................................... (4,969,000)
Fair value of assets exchanged ............................ (859,000)
------------
Cash paid ................................................. $ 3,107,500
============
See notes to consolidated financial statements.
F-15
EQUITEX, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
Cash flows used in operating activities:
Net loss ............................................. $(1,981,299) $(3,923,367)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization ................... 12,833 11,388
Provision for bad debts on notes receivable ..... (40,193) 40,193
Realized gain on sale of investments ............ (1,108,340) (1,003,951)
Unrealized loss on investments .................. 1,056,054 5,773,305
Donation of stock of investee company ........... 4,136
Proceeds form sales of investments ................... 1,712,802 1,508,629
Purchases of investments ............................. (1,388,626) (309,551)
Issuance of notes receivable ......................... (943,365) (458,402)
Collections of notes receivable ...................... 177,083 20,250
Changes in assets and liabilities:
(Increase) in interest receivable ................. (26,433) (3,799)
(Increase) decrease in accounts receivable - broker 50,943 (68,975)
(Increase) decrease in other assets ............... (23,119) (3,671)
(Increase) decrease in trade receivables .......... 2,668 (71,331)
(Increase) in contract deposit receivable ......... (150,000)
Decrease in income taxes refundable ............... 164,459
Increase (decrease) in accounts payable and other
accrued expenses ................................ (45,059) 65,908
(Decrease) increase in accounts payable to brokers 5,758 (88,721)
(Decrease) increase in deferred income taxes ...... 63,180 (2,337,830)
Increase in bonus due to officer .................. 376,909 151,153
----------- -----------
Net cash (used) by operating activities .............. (2,098,204) (672,835)
----------- -----------
Cash flows from investing activities:
Purchase of fixed assets .......................... (10,396) (1,872)
----------- -----------
Net cash (used) by investing activities .............. (10,396) (1,872)
----------- -----------
Cash flows from financing activities:
Common stock issued for cash ...................... 2,197,174 202,500
Issuance of notes payable - officer ............... 165,000 531,000
Issuance of notes payable - other ................. 250,000 250,000
Repayment of notes payable ........................ (480,271) (353,401)
----------- -----------
Net cash provided by financing activities ............ 2,131,903 630,099
----------- -----------
(Continued)
F-16
EQUITEX, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998 AND 1997
1998 1997
----------- -----------
Change in cash and cash equivalents .................. 23,303 (44,608)
Cash and cash equivalents, beginning of
period ............................................. 9,187 53,795
----------- -----------
Cash and cash equivalents, end of period ............. $ 32,490 $ 9,187
=========== ===========
Supplemental disclosures of cash flow information:
Interest paid ..................................... $ 95,677 $ 79,305
=========== ===========
Interest received ................................. $ 42,217 $ 30,985
=========== ===========
Income taxes paid (refunded) ...................... $ -- $ (116,496)
=========== ===========
Non-cash financing activities:
Common stock issued for common stock of
previously unrelated entity ..................... $ 565,639 $ --
=========== ===========
Supplemental disclosure of non-cash investing
activities:
On August 13, 1998, the Company acquired all of the
outstanding stock of First TeleServices Corp. in
exchange for 625,000 shares of the Company's common
stock.
See notes to consolidated financial statements.
F-17
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. Organization:
Business history:
Equitex, Inc. (the "Company"), a Delaware Corporation, was incorporated on
January 19, 1983. On July 30, 1984, the Company elected to become a
"Business Development Company", as defined in the Small Business
Investment Incentive Act of 1980, an amendment to the Investment Company
Act of 1940. This change resulted in the Company becoming a specialized
type of investment company.
Decertification as a Business Development Company ("BDC"):
On January 4, 1999, the Company withdrew its election to be treated as a
BDC subject to the Investment Company Act. As a result of this
withdrawal, the Company is now required to present its financial
statements consistent with those of a normal operating company as opposed
to a BDC. Because the Company was a BDC during the years ended December
31, 1998 and 1997, the 1998 and 1997 financial statements reflect the BDC
format.
Accounting change:
In connection with the Company's January 4, 1999 withdrawal of its election
to be treated as a BDC, effective January 1, 1999, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 115, ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIEs, Accounting
Principles Board ("APB") Opinion No. 18, THE EQUITY METHOD OF ACCOUNTING
FOR INVESTMENTS IN COMMON STOCK, and SFAS No. 94, CONSOLIDATION OF ALL
MAJORITY-OWNED SUBSIDIARIES. The cumulative effect of the accounting
change was to decrease stockholders' equity by $896,617. There was no
effect on the 1999 Consolidated statement of operations. These standards
were not applicable to the Company is prior years, operating as a BDC.
SFAS No. 115 requires that certain debt and equity securities be carried at
market value and requires management to re-evaluate the appropriate
classification of securities at each balance sheet date, based on its
intent to trade or hold the securities. APB 18 requires the use of the
equity method of accounting for investments in which the investor has the
ability to exercise significant influence over operating and financial
policies of the investee enterprise. That ability is presumed to exist
for investments of 20% or more and is presumed not to exist for
investments of less than 20%. SFAS No. 94 provides that consolidated
financial statements generally shall include enterprises in which the
parent has a controlling financial interest.
Principles of consolidation:
The consolidated financial statements as of December 31, 1999 include the
accounts of Equitex, Inc., and the following significant subsidiaries;
all significant intercompany accounts and transactions have been
eliminated in consolidation:
Financial services segment:
NMORTGAGE, INC. ("nMortgage"); a Delaware corporation formed in
September 1999 to acquire First Bankers Mortgage Services, Inc.
and its wholly-owned subsidiary, United Appraisal Services, Inc.
F-18
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
1. Organization (continued):
Principles of consolidation (continued):
Financial services segment (continued):
FIRST BANKERS MORTGAGE SERVICES, INC. ("FBMS"); a Florida
corporation incorporated in 1990 and acquired by the Company on
August 23, 1999 (Note 3). FBMS, a mortgage banking company, is
wholly-owned by the Company and engages in the origination and
sale of residential mortgages. In addition to conventional
mortgage products, FBMS also provides FHA and VA assisted
mortgages under the U.S. HUD lending program. Mortgages are
originated through retail branches and wholesale lending centers
located principally in Florida.
FIRST TELESERVICES CORPORATION ("FTC"); a Florida corporation
incorporated in 1997 and acquired by the Company in August 1998
(Note 3). FTC, wholly-owned by the Company, is a consumer finance
company offering financial products and services to the sub-prime
market
Sporting goods/product related segment:
TRIUMPH SPORTS GROUP, INC. ("Triumph"); a Florida corporation
formed in January 1998 for the purpose of acquiring operating
entities in the non-manufacturing licensed and supplemental
segments of the sporting goods and leisure-time industry. Between
February and June of 1998, the Company acquired an 88% ownership
interest in Triumph (Note 3). Triumph owns and operates four
retail vitamin/health supplement centers in south Florida.
VP SPORTS, INC. ("VP Sports"); a Delaware corporation formed in
December 1997 for the purpose of acquiring an operating entity in
the sporting goods/recreation industry. In December 1997, the
Company acquired an 88% ownership interest in VP Sports (Notes 3
and 6). Effective July 27, 1999, VP Sports acquired all of the
outstanding common shares of Victoria Precision Inc. ("Victoria
Precision"), a Canadian bicycle manufacturer. In connection with
a private placement of VP Sports' common stock, the Company's
ownership interest in VP Sports was reduced from approximately
88% at December 31, 1998 to approximately 35.7% at December 31,
1999. Due to the change in ownership percentage, the Company
changed its method of accounting for its investment in VP Sports
in 1999 from consolidation to the equity method of accounting.
Minority interest at December 31, 1999, represents preferred stock of FBMS
and nMortgage (Note 17). During the year ended December 31, 1999, net
losses incurred by the Company's majority-owned subsidiaries exceeded the
minority interest in the common equity (deficiency) of the subsidiaries.
As a result, the excess of losses applicable to the minority interest
have been charged against the Company, and no minority interest is
reflected in the Company's 1999 statement of operations.
F-19
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies:
Use of accounting estimates in financial statement preparation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates, and it is reasonably possible that significant changes could
occur in the near term.
Cash and cash equivalents:
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with an original maturity date of three months
or less to be cash equivalents.
Mortgage loans held for sale, net:
Mortgage loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate.
Net unrealized losses, if any, are recognized through a valuation
allowance by charges to income. Gain or loss on sales of loans is
recognized at the time of the sale. Origination fees and loan origination
costs on such loans are recognized when the mortgage is sold, which is
normally within 30 days of the origination of the loan. Interest earned
on these mortgages is recognized as income from the time the mortgage is
closed to the time the mortgage is sold.
The Company generally sells the servicing rights on mortgages. The Company
has adopted the provisions of SFAS No. 122, ACCOUNTING FOR MORTGAGE
SERVICING RIGHTS, and accordingly capitalizes the fair value (quoted
market price) of retained mortgage servicing rights on loans sold.
Capitalized mortgage servicing rights on such loans are amortized in
proportion to and over the period of estimated net servicing income. The
carrying amount of capitalized mortgage servicing rights is evaluated for
impairment based upon quoted market prices of similar loans. At December
31, 1999, there were no retained mortgage servicing rights.
Mortgage loans:
The Company periodically grants mortgage loans to customers. Loans that
management has the intent and ability to hold for the foreseeable future
or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances adjusted for charge-offs, the allowance for
loan losses, and any deferred fees or costs on originated loans. Interest
income is accrued on the unpaid principal balance. Loan origination fees,
net of certain direct origination costs, are deferred and recognized as
an adjustment to the related loan yield using the interest method.
F-20
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Mortgage loans (continued):
The accrual of interest on mortgage and commercial loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well-secured
and in process of collection. Loans are placed on non-accrual or
charged-off status at an earlier date if collection of principal or
interest is considered doubtful. All interest accrued but not collected
for loans that are placed on non-accrual or charged-off status is
reversed against interest income. The interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying
for return to accrual status. Loans are returned to accrual status when
all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
Allowance for loan losses:
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of
the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's ability
to repay, estimated value of any underlying collateral and prevailing
economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant revision as more
information becomes available. Loan losses are charged against the
allowance when management believes the uncollectibility of a loan balance
is confirmed. Subsequent recoveries, if any, are credited to the
allowance.
A loan is considered impaired when, based on current information and
events, it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value, and
the probability of collecting scheduled principal and interest payments
when due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management
determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay,
the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and
construction loans by either the present value of expected future cash
flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.
Inventories:
Inventories consist primarily of vitamin and health supplement products
held for sale by Triumph and are valued at the lower of cost (first-in,
first-out) or market value.
F-21
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Investment valuation in 1998 and 1997 as a BDC:
Investments at December 31, 1998 consist of holdings of securities in and
receivables of publicly and privately held companies. The Company had
representation on the boards of directors of four of its investee
companies during 1998, and several investments were in companies in which
there was either direct or indirect ownership or control of 5% or more of
the outstanding voting shares. Through December 31, 1998, as a BDC, the
Company utilized the fair value method adopted in 1984, which provides
for the Company's Board of Directors to be responsible for the valuation
of the Company's investments, including notes receivable and interest
receivable. Fair value is the value which could reasonably be expected to
be realized in a current arms-length sale. Investments through December
31, 1998 were carried at fair value using the following four basic
methods of valuation:
1. Cost - The cost method is based on the original cost to the
Company adjusted for amortization of original issue discounts,
accrued interest for certain capitalized expenditures of the
corporation, and other adjustments as determined to be
appropriate by the Board of Directors in good faith taking into
consideration such factors as available financial information of
the investee, the nature of and duration of any restriction as to
resale, and other factors which influence the market in which a
security is purchased and sold. Such method is to be applied in
the early stages of an investee's development until significant
positive or adverse events subsequent to the date of the original
investment require a change to another method.
2. Private market - The private market method uses actual or
proposed third party transactions in the investee's securities as
a basis of valuation, utilizing actual firm offers as well as
historical transactions, provided that any offer used is
seriously considered and well documented by the investee, and
adjusted (if applicable) by the Board of Directors in good faith
taking into consideration such factors as available financial
information of the investee, the nature and duration of any
restrictions as to resale, and other factors which influence the
market in which a security is purchased and sold.
3. Public market - The public market method is the preferred method
of valuation when there is an established public market for the
investee's securities. In determining whether the public market
method is sufficiently established for valuation purposes, the
Company examines the trading volume, the number of shareholders
and the number of market makers in the investee's securities,
along with the trend in trading volume as compared to the
Company's proportionate share of the investee's securities.
Investments in unrestricted securities that are traded in the
over-the-counter market are generally valued at the high bid
price on the last day of the year. If the security is restricted
as to resale or has significant escrow provisions or other
significant restrictions, appropriate adjustments are determined
in good faith by the Board of Directors taking into consideration
such factors as available financial information of the investee,
the nature and duration of restrictions on the ultimate
disposition of securities, and other factors which influence the
market in which security is purchased and sold.
4. Appraisal - The appraisal method is used to value an investment
position after analysis of the best available outside information
where there is not established public or private market in the
investee's securities.
F-22
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Investment valuation in 1998 and 1997 as a BDC (continued):
Purchases and sales of securities transactions are accounted for on the
trade date which is the date the securities are purchased or sold. The
cost of securities sold is reported on the first-in first-out cost basis
for financial statement purposes.
Furniture, fixtures, equipment and depreciation:
Furniture, fixtures, and equipment are stated at cost, and depreciation is
provided by use of the straight-line method over the estimated useful
lives of the assets. The cost of leasehold improvements is depreciated
over the estimated useful lives of the assets or the length of the
respective leases, whichever period is shorter. Estimated useful lives of
furniture, fixtures and equipment are as follows:
Vehicle 5 years
Office equipment and furniture 3 to 7 years
Computer hardware and software 3 to 5 years
Leasehold improvements 7 years
Website development costs and amortization:
Website development costs related to the development of major interactive
mortgage banking systems are capitalized and amortized over the estimated
useful life of the related project, not to exceed three years.
Impairment of long-lived assets:
The Company reviews long-lived assets, goodwill and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Based
on management's review, the Company does not believe that any impairments
have occurred on long-lived assets during 1999.
Revenue recognition, product sales:
Product sales represent retail sales of vitamin/health supplement products.
Sales are recognized at the time of the sales transaction with the
customer.
Comprehensive income:
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, establishes requirements for
disclosure of comprehensive income which includes certain items
previously not included in the statements of operations, including
unrealized gains and losses on certain investments in debt and equity
securities, among others. In 1999, net income and comprehensive income
were the same. In 1998 and 1997, SFAS No. 130 had no effect on the
Company since it was following the fair value accounting guidelines
required for BDC's.
F-23
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This
statement, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. Currently, the Company does not have any
derivative financial instruments and does not participate in hedging
activities. Therefore, management believes that SFAS No. 133 will not
have an impact on its financial position or results of operations.
Stock-based compensation:
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION defines a fair-value
based method of accounting for stock-based employee compensation plans
and transactions in which an entity issues its equity instruments to
acquire goods or services from non-employees, and encourages but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB No. 25") and related interpretations.
Accordingly, compensation cost for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the
date of the grant over the amount an employee must pay to acquire the
stock.
Net loss per share (net assets per share in 1998 and 1997):
In 1999, in connection with the Company's withdrawal as a BDC, the Company
adopted the provisions of SFAS No. 128, EARNINGS PER SHARE. SFAS No. 128
requires dual presentation of basic and diluted earnings per share (EPS)
for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation. Basic EPS excludes dilution; diluted EPS reflects the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings
of the entity.
Basic loss per share is computed by dividing net loss applicable to common
shareholders by the weighted-average number of common shares outstanding
for the year. In arriving at net loss applicable to common shareholders,
amortization of the beneficial conversion features related to the
preferred stock and dividends on the preferred stock (Note 18) increased
this amount. Diluted loss per share reflects the potential dilution that
could occur if dilutive securities and other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Company,
unless the effect is to reduce a loss or increase earnings per share. The
Company had no potential common stock instruments which would result in
diluted loss per share in 1999, 1998 and 1997. At December 31, 1999 and
1998, the total number of common shares issuable under the exercise of
outstanding options and warrants and upon the conversion of convertible
preferred stock was 1,370,281 and 749,000, respectively.
F-24
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
2. Significant accounting policies (continued):
Net loss per share (net assets per share in 1998 and 1997 (Continued):
In 1998 and 1997, in accordance with the fair value accounting method used
by regulated investment companies, net assets (total stockholders'
equity) per share at December 31, 1998 and 1997 were as follows:
Number of shares
Basis 1998 1997 1998 1997
----- ---------------------- ----------------------
Primary 5,384,315 3,461,115 $ .74 $ 1.03
========= ========= ========= =========
Fully diluted 6,156,015 3,772,660 $ .65 $ .95
========= ========= ========= =========
3. Business acquisitions:
Acquisition of FBMS:
On August 23, 1999, the Company, through its wholly-owned subsidiary FBMS
Acquisition Corp., entered into an Agreement and Plan of Reorganization
(the "Acquisition Agreement") with FBMS to acquire all of the outstanding
common stock of FBMS in exchange for 250 shares of the Company's Series E
convertible preferred stock (the "Series E Preferred Stock") valued at
approximately $2,531,000, and contingent consideration consisting of up
to 750 shares of Series E Preferred Stock, which include potential "Bonus
Shares" issuable by the Company, as specified in the Acquisition
Agreement. The transaction was accounted for as a purchase, and the
results of operations of FBMS are included in the Company's 1999
consolidated statement of operations from the date of acquisition. The
total purchase price was allocated to the assets and liabilities acquired
based on their estimated fair values, including goodwill of approximately
$18,900,000 (Note 20), which is being amortized by the use of the
straight-line method over ten years.
In accordance with the terms of the Acquisition Agreement, FBMS Acquisition
Corp. was merged into FBMS. Subsequent to the merger, the Company formed
nMortgage, Inc. as the Company's subsidiary holding company for FBMS.
Investment in VP Sports:
Effective July 27, 1999, the Company, through its majority-owned subsidiary
VP Sports and VP Sports' wholly-owned subsidiary, 9066-8609 Quebec Inc.,
a Canadian corporation, acquired all of the outstanding common shares of
Victoria Precision Inc. ("Victoria Precision"), also a Canadian
corporation, as well as the future rights to a four-year international
consulting and non-compete agreement. The transaction was accounted for
as a purchase. Total consideration of approximately $3,966,600
($6,000,000 CDN) was required. The purchase price for the common stock
was $2,000,000 Canadian and was allocated to the assets and liabilities
acquired based on their estimated fair values, including intangible
assets of approximately $3,166,000, which are being amortized by the use
of the straight-line method over two to ten years.
F-25
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
3. Business acquisitions (continued):
Investment in VP Sports (continued):
In order to finance the acquisition, in 1999 VP Sports completed a
$4,500,000 private placement of 36 units; each unit consisting of 100
shares of $1,000 per share, 8% convertible preferred stock, 12,500 shares
of VP Sports common shares, and warrants to purchase 287,500 shares of VP
Sports common stock at $.10 per share. As a result of the placement of
units, the Company's ownership interest in VP Sports was reduced from
approximately 88% at December 31, 1998 to approximately 35.7% at December
31, 1999.
Pro forma financial information:
The following unaudited pro forma financial information for the years ended
December 31, 1999 and 1998, give effect to the above acquisitions as if
they had occurred at the beginning of each respective period.
Years ended December 31,
---------------------------
1999 1998
------------ ------------
Revenue $ 10,678,000 $ 22,933,000
Net loss $(14,372,000) (12,021,000)
Net loss applicable to common shareholders $(17,641,000) $(12,021,000)
Basic and diluted loss per common share $ (2.63) $ (2.72)
Shares used in per share calculation 6,718,170 4,416,988
The unaudited pro forma financial information above does not purport to
represent the results which would actually have been obtained if the
acquisitions had been in effect during the periods covered or any future
results which may in fact be realized.
Acquisitions of FTC and Triumph:
In August 1998, the Company acquired all of FTC's outstanding common stock
in exchange for 625,000 shares of the Company's common stock valued at
$565,639. In February and June 1998, the Company acquired a total of
1,500,000 shares of Triumph common stock in exchange for consulting
services valued at $375,000, which represented an ownership interest of
approximately 88% at December 31, 1998. Both of these investments were
accounted for and presented as investments in controlled companies as of
and for the year ended December 31, 1998. At December 31, 1998, the fair
value of these investments was $940,639. In 1999, in connection with the
Company's change from a BDC to an operating company, the Company changed
its method of accounting for FTC and Triumph to consolidation.
4. Mortgage loans held for sale, net:
The inventory of mortgage loans consists primarily of first trust deed
mortgages on residential properties located throughout the United States.
As of December 31, 1999, the Company has mortgage loans held for sale of
$14,787,080, which is net of an allowance for loan losses of $1,386,000.
All mortgage loans are pledged as collateral for the warehouse loans at
December 31, 1999 (Note 9).
F-26
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
5. Receivables:
Receivables at December 31, 1999 consist of the following:
Related parties:
Notes receivable from officers of the
Company; interest rates ranging from 8.25%
to 10%; notes collateralized in part by
shares of the Company's stock; maturing at
various dates through October 2001 $ 577,800
Note receivable from affiliate; interest at
8%; unsecured; due on demand at December
31, 1999 300,000
Advances receivable from employees and
affiliates; non- interest bearing;
unsecured 81,010
----------
958,810
----------
Other:
Accounts receivable, trade; non-interest
bearing; unsecured 167,390
Mortgage loans receivable from customers;
interest rates ranging from 7.25% to
13.75%, maturing at various dates through
2030; collateralized by real estate 374,500
Notes receivable; interest at 10%; unsecured;
due on demand 125,017
----------
666,907
Less allowance for uncollectible receivables (162,336)
----------
504,571
----------
$1,463,381
==========
Receivables at December 31, 1998, are due from the following types
of companies:
Controlled Affiliated Other Total
---------- ---------- ---------- ----------
Notes receivable $1,123,284 $ 56,575 $ 45,473 $1,225,332
Interest receivable 29,843 1,829 2,292 33,964
Trade receivables 111,287 11,427 43,277 165,991
Less allowances
for uncollectible
receivables (5,527) (7,685) (46,423) (59,635)
---------- ---------- ---------- ----------
$1,258,887 $ 62,146 $ 44,619 $1,365,652
========== ========== ========== ==========
F-27
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
5. Receivables (continued):
Sources of revenue during 1998 and 1997 are from the following types of
companies:
Controlled Affiliated Other Total
---------- ---------- ---------- ----------
1998
----
Interest and other
income $ 68,043 $ 10 $ 2,416 $ 70,469
Consulting/transaction
fees 375,000 375,000
Administrative fees 2,371 2,371
---------- ---------- ---------- ----------
$ 443,043 $ 2,381 $ 2,416 $ 447,840
========== ========== ========== ==========
1997
----
Interest and other
income $ 3,917 $ 88,967 $ 9,012 $ 101,896
Consulting/transaction
fees 250,000 250,000
Administrative fees 26,176 319 26,495
---------- ---------- ---------- ----------
$ 253,917 $ 115,143 $ 9,331 $ 378,391
========== ========== ========== ==========
During 1998, one investee company accounted for 96% of the Company's total
revenues of $447,840.
6. Investments:
At December 31, 1999, the Company's investments consist of the following:
Investment
Investment balance
------------------------ ------------
Equity investments:
V.P. Sports [A] $ 1,472,898
Net 1 Capital, LLC [B] 235,000
------------
$ 1,707,898
============
Other Investments:
Trading securities:
Intranet Solutions, Inc. [C] $ 786,250
Other 116,287
------------
902,537
------------
Cost basis investments:
First TeleBanc Corporation [D] 800,000
Other 65,000
------------
865,000
------------
$ 1,767,537
============
F-28
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
6. Investments (continued):
[A] Investment in VP Sports
In December 1997, the Company received 2,000,000 shares (88%) of
the common stock of VP Sports. The stock was received in exchange
for consulting services and an acquisition letter of intent valued
at $250,000. At December 31, 1998, these common shares were valued
using the private market valuation method. The valuation reflected
the price at which the most recent common stock sales occurred in
1998. The Company's president is also the President and a director
of VP Sports. During 1998, the Company loaned $103,131 to VP
Sports for working capital purposes, of which $38,865 was repaid.
Effective January 1, 1999, the Company began consolidating VP
Sports. In connection with a private placement of VP Sports'
common stock, the Company's ownership interest in VP Sports was
reduced from approximately 88% at December 31, 1998 to
approximately 35.7% at December 31, 1999. Due to the change in
ownership percentage, the Company changed its method of accounting
for its investment in VP Sports in 1999 from consolidation to the
equity method of accounting. During 1999, the receivable of
$64,266 at December 31, 1998 was repaid.
[B] Investment in Net 1 Capital, LLC
In March 1999, FTC entered into a joint-venture agreement with Net
1 Capital, LLC ("Net 1 Capital"), a Florida Limited Liability
Company, formed for the purpose of acquiring pre-existing
portfolios of consumer debt and servicing and/or marketing these
portfolios. The Company invested $250,000 for a 50% interest in
Net 1 Capital. The Company also loaned Net 1 Capital $317,629,
which was repaid in 1999. The Company is accounting for Net 1
Capital under the equity method of accounting.
[C] Investment in Intranet Solutions, Inc. ("Intranet", formerly
MacGregor Sports & Fitness, Inc.)
On July 31, 1996, MacGregor Sports & Fitness, Inc. merged with
Technical Publishing Solutions, Inc. (TPSI) through a tax-free
exchange of common stock. As part of the merger agreement, the
Company agreed to indemnify the new entity up to a maximum limit
of $2,000,000 against any subsequent claims relating to MacGregor
(pre-merger).
On October 31, 1997, the Company entered into an agreement with
IntraNet relative to this indemnification agreement whereby the
Company agreed to purchase a note receivable of $564,755 which
IntraNet was owned by a subsidiary of RDM Sports Group, Hutch
Sports USA (Hutch). Hutch had filed for bankruptcy on August 29,
1997. The Company paid $414,755 of the purchase amount to IntraNet
during 1997. The remaining balance of $150,000 was paid on January
21, 1998. Also, the Company's President agreed to resign from the
Board of IntraNet and both IntraNet and the Company agreed to
terminate the indemnification agreement under which the Company's
maximum exposure was $2,000,000, and agreed to mutually release
each other from any claims relating to this agreement and certain
other items.
During 1997, the Company sold and/or forfeited 171,835 shares of
IntraNet common stock for $814,653 used to pay the above mentioned
indemnity settlement and also raise working capital, resulting in
an ownership position of 473,250 shares (or 5.7%) at December 31,
1997. During 1998, the Company sold 284,665 shares of IntraNet for
proceeds of $1,240,613, which was used to provide working capital
and resulted in an ownership position of 188,585 shares (less than
5%) at December 31, 1998. These shares were valued using the
public market valuation method at December 31, 1998.
F-29
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
6. Investments (continued):
[C] Investment in Intranet Solutions, Inc. ("Intranet", formerly
MacGregor Sports & Fitness, Inc.) (continued):
Effective January 1, 1999, the Company classified its investment
in IntraNet as a trading security pursuant to SFAS No. 115. As of
December 31, 1999, the fair value of the IntraNet investmet, based
on quoted market prices is $786,250 and the cost of the IntraNet
investment is $216,159 (an unrealized gain of $570,091). During
1999, the Company realized gains on the sale of IntraNet
securities of $638,764.
[D] During 1998, the Company acquired a 9.9% interest in First
TeleBanc Corporation ("First TeleBanc"), a closely-held Florida
corporation, for $300,000. First TeleBanc was incorporated in
March 1997 for the purpose of becoming a one-bank holding company
and to acquire 100% of the outstanding stock of Boca Raton First
National Bank. The acquisition by First TeleBanc of all of the
outstanding stock of Boca Raton First National Bank was completed
on December 30, 1998. As a one-bank holding company, First
TeleBanc may engage in any activity which the Board of Governors
of the Federal Reserve System has previously approved or approves
subsequent to an application.
During 1999, the Company continued to account for its investment
in First TeleBanc at cost. The Company's total investment of
$800,000 includes FTC's $500,000 investment balance.
The Company's equity in the net losses of its equity investments was
$418,209 for the year ended December 31, 1999. Summarized unaudited
combined financial information for these investments as of and for the
year ended December 31, 1999, is as follows:
Current assets $ 6,834,574
Non-current assets 7,552,862
------------
Total assets $ 14,387,436
============
Current liabilities $ 6,070,949
Non-current liabilities 2,144,775
------------
Total liabilities 8,215,724
Total equity 6,171,712
------------
Total liabilities and equity $ 14,387,436
============
Revenues $ 4,142,540
Gross profit $ 611,100
Operating losses $ (1,134,212)
Net loss $ (1,026,292)
Investment in RDM Sports Group (formerly Roadmaster Industries):
On August 29, 1997, RDM Sports Group (RDM) and all of its operating
subsidiaries filed concurrent Chapter 11 petitions with the U.S.
Bankruptcy Court. As a result of this, the fair market value (as measured
using the public market valuation method) of this investee company
dropped to near $0 as reflected in the December 31, 1998 schedule of
Investments. The company also reserved 100% of its $7,685 trade
receivable from RDM at December 31, 1998. During July 1997, prior to the
bankruptcy filing, the Company sold 127,600 shares of RDM on the open
market for cash proceeds of $126,366.
F-30
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
6. Investments (continued):
Investment in RDM Sports Group (formerly Roadmaster Industries)(continued):
During 1998 and 1997, the Company recorded administrative fees from RDM
totaling $25,893 and $649, respectively. At December 31, 1998, the
Company held a note receivable from Hutch Sports USA (an RDM subsidiary)
with a face value of $564,755. At December 31, 1998, the note was
recorded at an estimated net realizable value from bankruptcy proceeds of
$56,475.
Effective January 1, 1999, the Company classified its investment in RDM as
an available for sale security pursuant to SFAS No. 115. During 1999, in
connection with the Company's evaluation of investments for impairment,
management determined that the decline in the value of its investment in
RDM was other than temporary. As a result, the Company adjusted the
unrealized loss on this investment of $1,201,355, previously recorded
as a component of stockholders' equity, to a realized loss, and fully
reserved the note receivable from RDM. These adjustments resulted in a
charge to the 1999 statement of operations of $1,233,209 (Note 20).
Investment in FTC and Triumph:
On August 13, 1998, the Company acquired all of the outstanding stock of
FTC in exchange for 625,000 shares of the Company's common stock. As a
result of this transaction, FTC became a wholly-owned subsidiary of the
Company. The Board of Directors used the Board appraisal method of
valuation for this investment and recorded FTC at $565,639, which was the
net asset value of FTC's underlying assets and liabilities at the
acquisition date. From the date of the acquisition through December 31,
1998, the Company loaned $160,000 to FTC for working capital purposes.
During 1998, the Company received 1,500,000 shares of the common stock of
Triumph in exchange for consulting services valued at $375,000. The
Company's president was also the President and a director of Triumph. At
December 31 1998, the investment was valued using the cost valuation
method because no more recent common stock sales had occurred. During
1997 and 1998, the Company loaned $401,927 and $561,569, respectively, to
Triumph, which was used by Triumph primarily to acquire four retail
vitamin/health supplement centers in south Florida. Triumph repaid
$64,478 of these notes and $39,939 of interest during 1998, resulting in
balances due the Company at December 31, 1998 of $899,018 and $23,088 for
note principal and accrued interest, respectively.
Effective January 1, 1999, and through December 31, 1999, the Company has
consolidated FTC and Triumph pursuant to SFAS No. 94.
Other investments:
During 1999, the Company determined that two investments which were
accounted for at cost basis and which totaled $70,000 at December 31,
1998 were impaired, and were written off in the 1999 statement of
operations (Note 20).
Other trading securities at December 31, 1999 were recorded at estimated
fair value, based on quoted market prices, of $116,287, which is
$38,517 less than cost. During 1999, the Company realized gains of
$158,752 from the sale of certain other trading securities held by the
Company.
F-31
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
7. Furniture, fixtures and equipment:
Furniture, fixtures, and equipment are stated at cost and consist of the
following at December 31, 1999 and 1998:
1999 1998
----------- -----------
Vehicle $ 30,542 $ 30,542
Office equipment and furniture 1,410,699 120,608
Computer hardware and software 430,082
Leasehold improvements 76,759 4,994
----------- -----------
1,948,082 156,144
Less accumulated depreciation (890,050) (129,924)
----------- -----------
$ 1,058,032 $ 26,220
=========== ===========
8. Intangible and other assets:
Intangible and other assets consist of the following at December 31, 1999
and 1998:
1999 1998
----------- -----------
Goodwill $19,072,300
Foreclosed assets 299,400
Tradename and franchise rights 172,800
Restricted cash 269,263
Deposits 395,000 $ 23,750
Other 472,872 9,474
----------- -----------
20,681,635 33,224
Less accumulated amortization (671,578)
----------- -----------
$20,010,057 $ 33,224
=========== ===========
Goodwill represents the cost of the Company's investments in subsidiaries
in excess of the net tangible assets acquired, and is amortized on the
straight-line method over ten years. Foreclosed assets acquired through,
or in lieu of, loan foreclosure are held for sale by FBMS and are
initially recorded at fair value at the date of foreclosure, establishing
a new cost basis. Tradename and franchise rights are related to Triumph
and are amortized on the straight-line method over ten years.
Restricted cash primarily consists of funds held in escrow in connection
with certain contingent matters. Deposits include a contract deposit
receivable whereby the Company is the plaintiff in an action in which it
is seeking to recover $300,000 deposited into an escrow account pending
the receipt of documentation needed pursuant to a contractual agreement.
The defendant has not delivered the required documents. This deposit has
been recorded at an estimated net realizable value of $150,000 at
December 31, 1999 and 1998.
F-32
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
9. Warehouse loans:
Under the terms of the Company's warehouse agreements, all mortgage loans
held for sale are pledged as collateral for the warehouse notes payable.
The weighted average interest rate for total warehouse loans was 9.7%.
Warehouse loans consist of the following as of December 31, 1999:
Warehouse line with a mortgage lending group;
total line, $15,000,000; advances under the
line bear interest at the Wall Street
Journal published prime rate of U.S. money
center commercial banks plus 1.5% (9.5% at
December 31, 1999); the Company is required
to maintain a cash pledging account;
restricted cash at December 31, 1999 under
the pledge agreement was $210,169 $ 13,014,121
Warehouse line with a bank; total line,
$15,000,000; advances under the line bear
interest at the one month LIBOR rate plus
4% (10.48% at December 31, 1999); maturity
date May 15, 2000; renewable annually at
the lender's discretion 1,627,393
Warehouse line with a bank; total line,
$500,000; advances under the line bear
interest at the note rate of the
originated mortgage (7.25% to 8.37% at
December 31, 1999); this facility matures
March 2000 481,723
Warehouse line with a bank; total line,
$400,000; advances under the line bear
interest at the note rate of the originated
mortgage (8.5% at December 31, 1999); this
facility matures May 2000 84,211
Warehouse line with a bank; total line
$10,000,000; advances under the line bear
interest at the lender's prime rate plus a
margin determined by the lender's fee and
cost schedule in effect on the closing date
of the advance (9.75% at December 31,
1999); line may be terminated by bank at
bank's discretion 488,569
Warehouse line with a bank; total line
$2,886,334; advances under the line bear
interest at the lender's prime rate plus
the applicable margin determined by the
lender's fee schedule (10.5% at December
31, 1999); due on demand 2,886,334
------------
$ 18,582,351
============
F-33
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
10. Notes and advances payable:
At December 31, 1999 and 1998, notes and advances payable consist of the
following:
1999 1998
---------- ----------
Related parties:
Notes payable to affiliates; interest at 8%;
unsecured; notes mature at various dates
through December 2000 $ 542,000
Advances payable to affiliate, non-interest
bearing, due on demand 240,000
Notes payable to officers; interest at 12%;
unsecured; due on demand 50,000 $ 142,328
---------- ----------
832,000 142,328
---------- ----------
Others:
Note payable to bank; interest at 18%;
unsecured; originally due November 1999;
due on demand 477,000
Notes payable to individuals; interest rates
ranging from 8% to 18%, unsecured; notes
mature at various dates through August
2000; at December 31, 1999, $454,473 of the
notes payable were in default 723,160 220,000
Note payable to bank; interest at 1.5% over
bank's prime rate (10% at December 31,
1999) loan is collateralized by property
and equipment 250,000
Capital lease obligations, maturities at
various dates through October 2002 398,391
Other 93,403
---------- ----------
1,941,954 220,000
---------- ----------
$2,773,954 $ 362,328
========== ==========
F-34
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
11. Commitments and contingencies:
Leases:
The Company leases its Florida corporate facilities from a related entity
under a non-cancelable operating lease which expires in September 2003.
The Company also leases production offices in other states under
non-cancellable operating leases which expire through February 2004.
Future minimum lease payments under these operating leases are as
follows:
Year ending Related
December 31, parties Others Total
----------- ----------- ----------- -----------
2000 $ 155,000 $ 335,000 $ 490,000
2001 155,000 181,000 336,000
2002 104,000 81,000 185,000
2003 47,000 47,000
2004 3,000 3,000
----------- ----------- -----------
$ 414,000 $ 647,000 $ 1,061,000
=========== =========== ===========
In addition, the Company leases office space in Colorado on a
month-to-month basis for $2,500 per month from Beacon Investments, a
partnership owned by the Company's president.
Total rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $272,000, $30,000 and $30,000, respectively.
The Company has also entered into certain capital lease agreements. The
capitalized cost of all assets under capital lease obligations is
$766,609, less accumulated depreciation of $277,552 at December 31, 1999,
and is included in furniture, fixtures and equipment in the accompanying
financial statements. Deprecation expense incurred on these leased assets
during the year ended December 31, 1999 was $68,500.
The future minimum lease payments under capital leases and the net present
value of the future minimum lease payments are as follows:
Year ending
December 31,
------------
2000 $ 225,000
2001 205,000
2002 39,000
-----------
Total lease payments 469,000
Amount representing interest (71,000)
-----------
$ 398,000
===========
F-35
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
11. Commitments and contingencies:
Litigation:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact
either individually or in the aggregate on consolidated results of
operations, financial position or cash flows of the Company.
Indemnification and mortgage loan repurchases:
Under the terms of the Company's various agreements with third party
investors who purchase mortgage loans from the Company in the secondary
market, the Company may be required to indemnify the investor for certain
losses as a result of the mortgage loan borrower's non-performance.
Additionally, under certain circumstances, the Company may be required to
repurchase loans previously sold. Management believes it has made
adequate provision for these items, which is included in the mortgage
loans held for sale less the loan loss reserve.
Minimum regulatory capital requirements:
FBMS is subject to various regulatory capital requirements administered by
the various state banking agencies in certain states in which the Company
is licensed to do business. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary
actions by regulators that, if undertaken, could have a direct material
effect on the Company's consolidated results of operations, financial
position and/or cash flows. At December 31, 1999, FBMS is not in
compliance with all regulatory requirements in certain states.
12. Off-balance sheet risk and concentrations of credit risk:
During 1998 and 1997, the Company was party to financial instruments with
off-balance-sheet risk in the normal course of business to meet financing
needs of the portfolio companies. These financial instruments consisted
primarily of financial guarantees including pledges of the Company's
investment portfolio. These instruments involved, to varying degrees,
elements of credit risk in excess of the amount recognized in the
financial statements.
At December 31, 1998, the Company's primary concentration of credit risk
related to its investments in certain portfolio companies, certain of
which were highly leveraged companies within the United States and which
were involved in the sporting goods and manufacturing industries.
Consideration was given to the financial position of these portfolio
companies when determining the appropriate fair values at December 31,
1998 and 1997.
13. Income taxes:
The Company recognizes deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement carrying amounts and tax bases of assets and
liabilities using enacted tax rates in effect in the years in which the
differences are expected to reverse.
F-36
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
13. Income taxes (continued):
The Company did not incur income tax expense for the year ended December
31, 1999. The difference between the expected tax benefit computed at the
federal statutory income tax rate of 34% and the effective tax rate for
the year ended December 31, 1999 was due primarily to the tax effect of
the valuation allowance. The provision (benefit) for income taxes for the
years ended December 31, 1998, and 1997 is as follows:
1998 1997
----------- -----------
Current:
Federal and state $ - $ (56,307)
----------- -----------
Deferred:
Accrued unpaid bonus (48,930)
Bad debt expense 93,948
Other 63,180 41,224
----------- -----------
63,180 86,242
----------- -----------
Net tax provision $ 63,180 $ 29,935
=========== ===========
The following is a summary of the Company's deferred tax assets and
liabilities at December 31, 1999 and 1998:
1998 1997
----------- -----------
Deferred tax assets:
Accrued items not currently deductible $ 281,260 $ 263,140
Tax benefit of unrealized loss
on investments 465,390 431,361
Allowance for loan losses 592,690
Net operating loss carryforwards 2,531,000
----------- -----------
Total deferred tax assets 3,870,340 694,501
Valuation allowance (3,870,340) (694,501)
----------- -----------
Net deferred tax asset (liability) $ - $ -
=========== ===========
Net operating loss carryforwards of approximately $7,444,000 are
available to offset future taxable income, if any, through 2019. The
net operating loss carryforwards may be subject to certain limitations
due to the FBMS acquisition and other transactions. A valuation
allowance has been provided to reduce the deferred tax assets, as
realization of the assets is not assured.
F-37
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
14. Related party transactions:
Bonuses to officers:
In November 1989, the Board of Directors adopted a bonus arrangement
whereby the Company's President is entitled to an annual bonus equal to
3% of the Company's total assets as of each year end. All bonuses are
paid out of the Company's cash flow. In August 1998, the Company's Board
of Directors approved a new bonus arrangement with the Company's
president, with the annual bonus to be calculated quarterly based on a
combination of 1% of the Company's assets and 5% of the increase in the
market value of the Company's common stock each quarter. The new bonus
arrangement is effective January 1, 1998. The bonus accrual at December
31, 1998 was adjusted to reflect the terms of the new bonus arrangement.
The unpaid portion of these bonuses was $454,235 and $676,168 at December
31, 1999 and 1998, respectively. During 1997, the Company's corporate
secretary received a bonus of $6,744.
Directors' fees:
During 1999, 1998 ,and 1997, the Company paid $12,500 to each of its two
outside directors for their attendance at meetings held each year.
15. Benefit plans:
Officer retirement plan:
As part of the President's total compensation package, the Company
purchased a whole life insurance policy on April 1, 1992 in order to
provide for the President's retirement. The Company pays an annual
premium on behalf of the President and also reimburses the President each
year for the personal income tax on this additional compensation. Should
the Present die prior to age sixty-five, the policy pays a $2,600,000
death benefit to his beneficiary. Upon retirement, provided the president
is at least sixty-five, the cash surrender value and death benefit rider
become the President's property. For the years ended December 31, 1999,
1998, and 1997, the Company paid $105,413 per year in premiums and
$59,586 per year of additional compensation to the President for related
income taxes.
Employee benefit plan:
FBMS has a defined contribution plan covering all full-time employees of
FBMS who have three months of service and are at least twenty-one years
of age. For the period ended December 31, 1999, the FBMS matching
contribution equaled 50% of the portion of the participant's salary
reduction which does not exceed 2% of the participant's compensation .
The Company incurred contribution expense of $21,200 for the period ended
December 31, 1999.
F-38
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
16. Fair value of financial instruments:
The fair value of a financial instrument is the current amount that would
be exchanged between willing parties, other than in a forced liquidation.
Fair value is best determined based upon quoted market prices. However,
in many instances, there are no quoted market prices for the Company's
various financial instruments. In cases where quoted market prices are
not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected
by the assumptions used, including the discount rate and estimates of
future cash flows. Accordingly, the fair value estimates may not be
realized in an immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments
from its disclosure requirements. Accordingly, the aggregate fair value
amounts presented may not necessarily represent the underlying fair value
of the Company.
The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:
Mortgage loans held for sale:
The fair value of mortgage loans held for sale is based on commitments on
hand from investors or prevailing market prices. For variable-rate loans
that re-price frequently and with no significant change in credit risk,
fair values are based on carrying values. Fair values for certain
mortgage loans are based on quoted market prices of similar loans sold
(adjusted for differences in loan characteristics). Fair values for
non-performing loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable. The fair value of
mortgage loans held for sale at December 31, 1999 was $14,923,000
(carrying value of $14,787,080).
Receivables:
The fair values of notes receivable from non-related parties approximates
their carrying values because of the short maturities of the notes. The
fair values of notes receivable from related parties are not practicable
to estimate, based upon the related party nature of the underlying
transactions.
Warehouse and other notes and advances payable:
The fair values of warehouse notes payable and notes payable to
non-related parties approximates their carrying values because of the
short maturities of the notes. The fair values of notes payable to
related parties are not practicable to estimate, based upon the related
party nature of the underlying transactions.
Other financial instruments:
The fair value of other financial instruments (cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses) approximate
their carrying amount because of the short maturity of those instruments.
F-39
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
17. Subsidiary stock transactions:
During 1999, in connection with the Company's acquisition of FBMS,
nMortgage issued 35,050 shares of its Series A , 5% convertible preferred
stock and 400 shares of Series B, 5% convertible preferred stock for
$3,966,070. The amounts recorded as subsidiary preferred stock have been
presented as minority interest at December 31, 1999. Minority interest
also includes shares of FBMS, 12% cumulative, callable preferred stock of
$2,507,000.
In connection with VP Sports' private placement of common stock, the
Company's underlying equity in its investment increased by $1,622,605,
which was accounted for as an increase to paid-in capital in 1999.
18. Stockholders' equity:
Series A, B, and C convertible preferred stock:
In January and February 1999, the Company issued a total of 2,100 shares of
6% Series A, B, and C convertible preferred stock for $1,000 cash per
share, which is the stated value per share. Each series of stock was
convertible into common stock at any time by the holders at a conversion
price equal to 65% of the average closing bid price of the Company's
common stock as specified in the agreement.
Because this preferred stock contained an immediate beneficial conversion
feature, both additional paid-in capital and the accumulated deficit were
increased by $1,333,098, the amount of the discount due to this
beneficial conversion feature. The holders were entitled to receive a
cumulative annual dividend of $60 per share, payable quarterly, and had
preference to any other dividends which might have been paid by the
Company. The dividend was payable either in cash or in shares of the
Company's common stock, at the Company's option. The preferred
stockholders also received warrants to purchase a total of 250,000 shares
of the Company's common stock at 120% of the market price as of the grant
date. In addition, the placement agent was issued 20,000 shares of the
Company's common stock, valued at $200,000 in exchange for services in
connection with the preferred stock sales.
In April 1999 all 2,100 shares of the Series A, B and C convertible
preferred stock, plus accrued dividends on those shares, were converted
into approximately 320,528 shares of common stock, at an average
conversion price of $6.63 per share.
Series D convertible preferred stock:
In May 1999, the Company reached an agreement with an accredited investor
to sell 3,500 shares of Series D, 6% convertible preferred stock (the
"Series D Preferred Stock") for $1,000 cash per share, which is the
stated value per share. In August 1999, the Company issued a total of
1,200 shares of the Series D Preferred Stock in consideration for
$1,200,000. The balance of $2,300,000 for the remaining 2,300 shares of
Series D Preferred Stock is being held in escrow pending authorization by
the Company's stockholders of a sufficient number of shares of the
Company's common stock to cover those shares underlying the Series D
Preferred Stock.
The holder of the Series D Preferred Stock is entitled to 6% annual
dividends, payable quarterly. The Series D Preferred Stock contains a
liquidation preference equal to the sum of the stated value of each share
plus an amount equal to 30% of the stated value plus the aggregate of all
accrued and unpaid dividends on each share of Series D Preferred Stock
until the most recent dividend payment date or date of liquidation,
dissolution or winding up of the Company.
F-40
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
18. Stockholders' equity (continued):
Series D convertible preferred stock (continued):
The Series D Preferred Stock is convertible into common stock at any time
at a conversion price per share of common stock, equal to 65% of the
average closing bid price of the Company's common stock as specified in
the agreement. Because this preferred stock contained an immediate
beneficial conversion feature, both additional paid-in capital and the
accumulated deficit were increased by $1,884,615, the amount of discount
resulting form the beneficial conversion feature. The holder is entitled
to receive a cumulative annual dividend of $60 per share, payable
quarterly, and has preference to any other dividends which might be paid
by the Company. The dividend is payable either in cash or in shares of
the Company's common stock, at the discretion of the Company.
Series E convertible preferred stock:
In connection with the FBMS acquisition, the Company issued 250 shares of
Series E Convertible Preferred Stock (the "Series E Preferred Stock")
valued at approximately $2,531,000, and contingent consideration
consisting of up to 750 shares of Series E Preferred Stock, which include
potential "Bonus Shares" issuable by the Company, as specified in the
Acquisition Agreement.
The holders of the Series E Preferred Stock are not entitled to dividends,
do not have a liquidation preference and do not have voting rights. The
Series E Preferred stock, if fully issued, automatically converts to
1,000,000 shares of common stock upon the approval of an increase in the
authorized shares of common stock from 7,500,000 shares to 50,000,000
shares, or the subsequent merger of the Company with or into another
company, or the sale of substantially all the Company's assets.
Common stock:
During 1999, the Company sold 350,312 shares of common stock in a private
placement for cash of $3.25 per share. In addition a note holder
exchanged a note and accrued interest totaling $158,236 for 48,688 shares
of the Company's common stock.
During 1999, employees and officers of the Company exercised options to
purchase 665,600 shares of common stock for $2,094,546. In addition,
337,500 shares were issued pursuant to warrant exercises for $2,613,675.
F-41
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
18. Stockholders' equity (continued):
Common stock (continued):
During 1998, the Company sold to an officer, 10,000 shares of common stock
at $1.16 per share. Another 139,200 shares were sold to outside directors
at $1.16 per share. Common stock sales to unrelated individuals during
1998 were as follows:
Share price Number sold
----------- -----------
$ .75 330,000
$1.16 350,000
$3.25 306,000
In March 1998, the Company's Board of Directors authorized a private
placement offering of up to 500,000 shares of the Company's common stock
at $1.16 per share. As of the close of the private placement on May 21,
1998, 499,200 shares were sold.
On June 29, 1998, the Company's Board of Directors authorized an additional
private placement of up to 750,000 shares of the Company's common stock
at $3.25 per share. As of December 31, 1998, 306,000 shares were sold
under this placement.
During December of 1997, the Company's president purchased 270,000 shares
of common stock at $.75 each.
Stock options and warrants:
In 1993, the Company adopted two stock option plans: the 1993 Stock option
Plan (the "Option Plan") and the 1993 Stock Option Plan for Non-Employee
Directors (the "Directors' Plan"). In January 1999, the Company's Board
of Directors adopted an incentive stock option plan covering up to
1,000,000 shares of the Company's common stock. During the year ended
December 31, 1999, the Company granted incentive stock options for 29,000
shares and 8,000 shares to the Company's officers and employees,
respectively. In addition, non-statutory stock options for 472,000 and
491,000 shares were granted to officers and directors, respectively. All
options were granted at a price of $6.75 per share which represents fair
market value at the grant date.
F-42
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
18. Stockholders' equity (continued):
Stock options and warrants:
In 1999 and 1998, the Board of Directors granted the following stock
options to officers and employees of the Company:
Number Option
Option type Grantee of shares price
----------- -------- --------- ------
1999: Inventive Officers 477,700 $ 6.75
Non-qualified Officers 522,300 $ 6.75
---------
1,000,000
=========
1998: Incentive Officer 62,000 $ 3.19
Non-qualified Officers 447,655 $ 3.19
Non-qualified Employees 28,800 $ 3.19
----------
538,455
==========
A summary of the status of the Company's stock options and weighted average
exercise prices is as follows:
1993 Plans 1999 Plan Total
-------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
-------------------------------------------------------------------------
January 1, 1997 311,545 $3.00 311,545 $3.00
Granted
Exercised
Canceled/expired
-------- ----- --------- ----- --------- -----
December 31, 1997 311,545 3.00 311,545 3.00
Granted 538,455 3.19 538,455 3.19
Exercised (98,000) 3.05 (98,000) 3.05
Canceled/expired
-------- ----- --------- ----- --------- -----
December 31, 1998 752,000 3.13 752,000 3.13
Granted 1,000,000 $6.75 1,000,000 6.75
Exercised (665,600) 3.19 (665,600) 3.19
Canceled/expired
-------- ----- --------- ----- --------- -----
December 31, 1999 86,400 $3.19 1,000,000 $6.75 1,086,400 $6.46
======== ===== ========= ===== ========= =====
Options outstanding and exercisable at:
December 31, 1998 749,000 $3.13
December 31, 1999 1,086,400 $6.46
F-43
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
18. Stockholders' equity (continued):
Stock options and warrants (continued):
Options exercisable at December 31, 1999 expire from 2004 through 2005. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates consistent with the
provisions of SFAS No. 123, the Company's net loss and net loss per
common share would have increased to the pro forma amounts indicated
below:
1999 1998
------------ ------------
Net loss applicable to common stockholders/
decrease in net assets, as reported $(10,985,572) $(1,981,299)
Net loss applicable to common stockholders/
decrease in net assets, pro forma $(14,416,572) $(2,724,153)
Net loss/decrease in net assets per
share, as reported $ (1.64) $ (.45)
Net loss/decrease in net assets per
share, pro forma $ (2.15) $ (.62)
The fair value of each option granted during 1999 was estimated on the date
of grant using the Black-Scholes option-pricing model. The following
assumptions were utilized:
1999 1998
----------- -----------
Expected dividend yield 0 0
Expected stock price volatility 71% 83%
Risk-free interest rate 6% 6.5%
Expected life of options 3 years 5 years
In connection with the Company's private placements of common and preferred
stock in 1999, the Company issued warrants to purchase 397,500 shares of
common stock at a weighted average exercise price of $7.99 per share.
During 1999, 337,500 of these warrants were exercised, and 60,000
warrants remain outstanding and exercisable at a weighted average
exercise price of $9.82 at December 31, 1999. These warrants expire in
February 2002.
In 1999, a warrant to purchase 50,000 shares of the Company's common stock
at $3.75 per share was granted to an unrelated entity for services valued
at $150,000.
F-44
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
19. Operating segments:
In 1999, the Company adopted SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which establishes reporting and
disclosure standards for an enterprise's operating segments. Operating
segments are defined as components of an enterprise for which separate
financial information is available and regularly reviewed by the
Company's senior management.
Beginning in 1999, in connection with the Company's acquisitions, the
Company has three reportable segments: The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The Company evaluates performance based on operating
earnings of the respective business units. As of and during the year
ended December 31, 1999, the segment results were as follows:
Sporting
goods/ Corporate activities
Financial product ------------------------
services related Investments Other Total
----------- ---------- ---------- ----------- -----------
Revenues $ 1,547,754 $ 738,456 $ 133,054 $ 2,419,264
Segment loss (4,153,125) (800,997) $ (571,257) (2,191,180) (7,716,559)
Total assets 35,851,114 1,211,539 2,915,435 1,619,349 41,744,937
Capital
expenditures 135,329 122,335 20,361 278,025
Depreciation and
amortization 737,629 87,954 12,776 838,359
20. Fourth-quarter adjustments:
During the fourth quarter of 1999, in connection with the Company's
evaluation of its investments in available-for-sale securities,
management determined that a decline in the value of its investment in
RDM Sports Group, Inc. was other than temporary. As a result of this
determination, the Company recorded an adjustment to decrease the
unrealized loss of $1,201,355 on this investment, previously recorded as
a component of stockholders' equity, and recorded a realized loss of
$1,201,355 in the 1999 statement of operations. The Company also recorded
a $70,000 impairment charge related to cost basis investments in the
fourth quarter
In addition, management became aware of certain loan losses that had not
been adequately provided for by FBMS at the date of acquisition the
allocation of the FBMS purchase price during the fourth quarter of 1999,
and determined that an adjustment was necessary to more reasonably
allocate the excess of consideration over the net tangible assets
acquired. The Company recorded an adjustment to increase goodwill by
approximately $9,700,000 and decrease the amount of net tangible assets
acquired.
F-45
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999, 1998 AND 1997
21. Proposed business transactions:
Proposed sale of nMortgage, Inc.:
On September 22, 1999, the Company entered into a letter of intent, whereby
all of the outstanding common stock of nMortgage is to be acquired by
Innovative Gaming Corporation of America ("IGCA"), an SEC reporting
company whose common stock trades on the Nasdaq SmallCap Market. Under
the terms of this proposed transaction, in exchange for all outstanding
shares of nMortgage, Inc., the Company and the other nMortgage
shareholders are to receive approximately 46,000,000 shares of IGCA
common stock, assuming that there will be approximately 16,000,000 shares
of IGCA common stock outstanding on a fully-diluted basis, before the
transaction.
IGCA was formed in 1991 to develop, manufacture, market and distribute
specialty video gaming machines. As a condition of the proposed
transaction, IGCA is to dispose of its gaming assets, resulting in
nMortgage as the sole business operation of IGCA.
There are a number of material conditions that must be satisfied prior to
the completion of this transaction, including any required approval by
the Company's shareholders, the disposal of IGCA's gaming assets, the
negotiation and execution of a definitive agreement between the Company
and IGCA, and approval from all governmental bodies or agencies and
regulatory authorities. There is no assurance that the conditions
summarized above will be satisfied, or that the transaction will occur
consistent with the terms outlined above.
Proposed transactions with First TeleBanc Corp.:
On May 4, 1999, the Company entered into a definitive agreement whereby
First TeleBanc Corp. ("First TeleBanc"), a single bank holding company
based in Boca Raton, Florida, is to merge with and into the Company, with
the Company being the surviving corporation (the "TeleBanc Merger").
First TeleBanc owns all of the issued and outstanding stock of 1st
National Bank, a national banking association. Consummation of the
TeleBanc Merger is subject to a number of conditions, including approval
by the Federal Reserve Bank of Atlanta, Georgia, the distribution of
certain of the Company's assets to a new wholly-owned subsidiary and the
"spin-off" of that subsidiary, and the approval of the TeleBanc Merger by
the Company's shareholders.
F-46
EQUITEX, INC.
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II
Column A Column B Column C Column D Column E
Charged
Balance Charged to other Balance
beginning to costs/ accounts- at end
of period expenses describe Deductions of period
--------- -------- -------- ---------- ---------
FOR THE YEAR ENDED
DECEMBER 31, 1999:
Allowance for
uncollectible
accounts:
Mortgage loans held
for sale $1,386,000 - - - $1,386,000
Mortgage loans
receivable 57,500 - - - 57,500
Notes receivable 100 45,601 10,874(*) - 56,575
Interest receivable 1,830 - - (1,765) 65
Accounts receivable 57,705 - - (9,109) 48,596
FOR THE YEAR ENDED
DECEMBER 31, 1998:
Allowance for
uncollectible
accounts:
Notes receivable $ 40,293 $ - $ - $ (40,193) $ 100
Interest receivable 35 1,795 - - 1,830
Accounts receivable 53,742 3,936 - - 57,705
FOR THE YEAR ENDED
DECEMBER 31, 1997:
Allowance for
uncollectible
accounts:
Notes receivable $ 100 $ 40,193 $ - $ - $ 40,293
Interest receivable 35 - - - 35
Accounts receivable 2,943 50,799 - - 53,742
(*) Amount was reclassified between the allowance for uncollectible interest and
accounts receivable.
S-1
EQUITEX, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet and statements of
operations present the pro forma consolidated financial position and operations
of Equitex, Inc. at December 31,1998 and for the year then ended. Because the
Company withdrew its election to be a BDC on January 4, 1999, this unaudited pro
forma information reflects the December 31, 1998 financial information as if the
Company were an operating company rather thana BDC for all of 1998. As a result
of being an operating company, the 1998 pro forma unaudited financial
information is presented on a consolidated basis and includes the accounts of
Equitex, Inc., its wholly-owned subsidiary First Teleservices Corporation, which
was acquired in August 1998 and two majority-owned subsidiaries, VP Sports, Inc.
and Triumph Sports, Inc., which were formed in December 1997 and January 1998,
respectively. Pro forma adjustments were made for revaluing certain investments
from fair market value to cost, consolidating three entities versus carrying
them as investments at fair value, eliminating all intercompany receivables,
payables, income and expense, and recording gains and losses on trading
securities.
EQUITEX, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998 (UNAUDITED)
(As if operating company)
ASSETS
Current assets:
Receivables ............................................. $ 71,090
Inventories ............................................. 119,698
Other current assets .................................... 5,530
Notes receivable ........................................ 101,948
Investments ............................................. 1,467,689
-----------
1,765,955
Net fixed assets ............................................. 153,876
Other assets:
Investment in First TeleBanc ............................ 725,000
Other investments ....................................... 195,000
Intangible assets ....................................... 975,746
Deposits and other ...................................... 196,619
-----------
$ 4,012,196
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable ........................................... $ 411,575
Accounts payable and other accrued liabilities .......... 996,552
Accrued bonus to officer ................................ 676,168
-----------
2,084,295
Minority interest ............................................ 215,429
STOCKHOLDERS' EQUITY
Common stock ............................................ 108,353
Additional paid-in capital .............................. 7,368,624
Accumulated comprehensive other income .................. 2,732
Accumulated deficit ..................................... (5,653,200)
Less: treasury stock at cost ............................ (114,037)
-----------
$ 4,012,196
===========
EQUITEX, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 (UNAUDITED)
(As if operating company)
REVENUES
Sales, consulting and other fees ........................ $ 574,425
Interest and dividend income ............................ 7,052
Gain (loss) on trading securities ....................... 105,367
-----------
686,844
EXPENSES
Cost of goods sold ...................................... 201,898
Advertising and promotion ............................... 54,088
Interest ................................................ 112,040
Bad debt expense ........................................ (34,435)
Depreciation and amortization ........................... 37,512
General and administrative .............................. 3,178,710
-----------
3,549,813
-----------
Income (loss) before minority interest
and taxes ............................................. (2,862,969)
Minority interest in income (loss) ...................... 34,571
-----------
Income (loss) before income taxes ....................... (2,828,398)
Provision for income taxes - deferred ................... (63,180)
-----------
Net income (loss) ....................................... (2,891,578)
Other comprehensive income, net of tax
Unrealized holding gains (losses) on
securities arising during period ..................... 2,732
-----------
Comprehensive income (loss) ............................. $(2,888,846)
===========
Basic and diluted net income (loss) per
common share .......................................... $ (.65)
===========
Weighted average number of common shares ................ 4,416,988
===========