UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-2
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2001
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to_________
Commission File No. 0-12374
EQUITEX, INC.
----------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 84-0905189
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
7315 East Peakview Avenue
Englewood, Colorado 80111
-------------------------------------------------
(Address of principal executive offices) (Zip code)
(303) 796-8940
-------------------------------------------------
(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Number of shares of common stock outstanding at August 15, 2001: 18,284,820
EQUITEX, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial statements:
Independent accountants' report 3
Condensed consolidated balance sheets - June
30, 2001 and December 31, 2000 4-5
Condensed consolidated statements of operations-
three and six months ended June 30, 2001 and 2000 6
Condensed consolidated statement of changes in
stockholders' equity - six months ended June 30, 2001 7-8
Condensed consolidated statements of cash
flows - six months ended June 30, 2001 and 2000 9-10
Notes to condensed consolidated financial statements 11-22
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Equitex, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Equitex, Inc. and subsidiaries as of June 30, 2001, and the related condensed
consolidated statements of operations for the three-month and six-month periods
then ended, the condensed consolidated statements of stockholders' equity for
the six months ended June 30, 2001 and cash flows for the six-month periods
ended June 30, 2001 and 2000. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements as of
June 30, 2001 and for the three and six-month periods ended June 30, 2001 and
2000 for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 2000, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
March 30, 2001, except for Notes 16, 20, and 21, as to which the date is May 15,
2001, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2000, is fairly stated,
in all material respects, in relation to the balance sheet from which it has
been derived.
GELFOND HOCHSTADT PANGBURN, P.C.
/s/ Gelfond Hochstadt Pangburn, P.C.
Denver, Colorado
August 15, 2001
3
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
June 30, December 31,
2001 2000
---------- ----------
(Unaudited)
(Note 8)
Current assets:
Cash and cash equivalents $ 177,168 $ 337,234
Mortgage loans held for sale 241,465
Related party receivables, current portion 983,615 900,150
Other receivables, net 350,241 477,613
Inventories 43,555 70,084
Marketable securities and short term investments 124,284 238,216
---------- ----------
Total current assets 1,920,328 2,023,297
---------- ----------
Equity investments 190,400 365,000
Other investments 867,471 867,471
Related party receivables, net of current portion 83,407 83,407
Other receivables 376,275 361,007
Furniture, fixtures and equipment, net 240,817 261,071
Intangible and other assets, net 4,861,889 5,470,374
---------- ----------
6,620,259 7,408,330
---------- ----------
$8,540,587 $9,431,627
========== ==========
(Continued)
4
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
2001 2000
------------ ------------
(Unaudited)
(Note 8)
Current liabilities:
Warehouse loans $ 235,200
Notes and advances payable, related parties 2,067,334 $ 1,877,631
Accounts payable 650,763 377,763
Accrued liabilities:
Related parties 1,011,614 719,837
Others 232,504 162,259
------------ ------------
Total current liabilities 4,197,415 3,137,490
------------ ------------
Notes and advances payable, others 157,733 79,627
------------ ------------
Total liabilities 4,355,148 3,217,117
------------ ------------
Minority interest 470,020 631,070
------------ ------------
Commitments and contingencies
Series G, 6%, redeemable convertible preferred stock;
stated value $1,000 per share; 1,300 shares issued and
outstanding; liquidation preference, $1,690,000 1,536,000
------------
Stockholders' equity:
Preferred stock; 2,000,000 shares authorized;
Series D, 6%, stated value $1,000 per share; 725
and 1,200 shares issued and outstanding;
liquidation preference $1,585,000 725,000 1,200,000
Series E, stated value $1,000 per share; 250 shares
issued and outstanding in 2000 250,000
Series F, 460,000 shares issued and outstanding;
liquidation preference 3,864,000 2,990,000 2,990,000
Series G, 6%, stated value $1,000 per share; 1,300
shares issued and outstanding; liquidation
preference $1,798,000 1,770,500
Common stock, par value $.02; 50,000,000 shares
authorized; 7,687,657 and 7,140,293 shares issued;
7,618,982 and 7,071,618 shares outstanding 153,753 142,806
Common stock and warrants to be issued 1,528,000
Deferred compensation cost (708,500)
Additional paid-in capital 25,814,850 23,629,547
Accumulated deficit (27,677,002) (23,695,981)
Series E preferred stock to be issued (50 preferred
shares, issued and converted to common stock in
June 2001) 368,750
Receivable from former Series E preferred stockholder (597,145) (553,645)
Less treasury stock at cost (68,675 common shares) (284,037) (284,037)
------------ ------------
Total stockholders' equity 3,715,419 4,047,440
------------ ------------
$ 8,540,587 $ 9,431,627
============ ============
See notes to condesed consolidated financial statements.
5
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months Six months
ended June 30, ended June 30,
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues:
Product sales $ 43,672 $ 105,024 $ 112,567 $ 220,588
Loan production and processing
revenues 855,254 96,590 1,542,329 293,065
Secondary marketing revenues, net 10,559 871,134
Interest and dividend income, mortgage
banking operations 105,340 334,655
Other 38,319 3,914 52,940 59,278
----------- ----------- ----------- -----------
937,245 321,427 1,707,836 1,778,720
----------- ----------- ----------- -----------
Expenses:
Cost of product sales 29,603 63,688 73,384 136,321
Loan production and processing 146,361 739,735
Selling, general and administrative 2,732,308 1,889,242 5,533,626 4,531,120
Loss on FBMS rescission (Note 2) 3,979,000 3,979,000
----------- ----------- ----------- -----------
2,761,911 6,078,291 5,607,010 9,386,176
----------- ----------- ----------- -----------
Loss from operations (1,824,666) (5,756,864) (3,899,174) (7,607,456)
----------- ----------- ----------- -----------
Other income (expenses):
Investment gains (losses), net 24,597 (256,915) (9,975) (102,790)
Equity in losses of affiliates (86,000) (629,404) (174,600) (562,898)
Interest income:
Related parties 16,293 31,481
Other 8,182 15,756
Interest expense:
Related parties (40,391) (74,560) (79,347) (114,618)
Other (6,148) (257,101) (6,962) (569,775)
Other income (expense) (13,728) (14,481) 73,478
----------- ----------- ----------- -----------
(97,195) (1,217,980) (238,128) (1,276,603)
----------- ----------- ----------- -----------
Loss before income taxes and minority
interest (1,921,861) (6,974,844) (4,137,302) (8,884,059)
Provision for income taxes (1,174) (4,769)
----------- ----------- ----------- -----------
Loss before minority interest (1,923,035) (6,974,844) (4,142,071) (8,884,059)
Minority interest 161,050 161,050
----------- ----------- ----------- -----------
Net loss (1,761,985) (6,974,844) (3,981,021) (8,884,059)
Accretion of redemption value on
Series G preferred stock (184,000)
Deemed preferred stock dividends (30,900) (18,200) (99,200) (35,900)
----------- ----------- ----------- -----------
Net loss applicable to common
shareholders $(1,792,885) $(6,993,044) $(4,264,221) $(8,919,959)
=========== =========== =========== ===========
Basic and diluted net loss per common
share $ (.25) $ (.98) $ (.60) $ (1.25)
=========== =========== =========== ===========
Weighted average number of common
shares outstanding 7,151,951 7,140,293 7,112,226 7,140,293
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
6
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
Common
Convertible stock and
preferred stock Common stock warrants Deferred
------------------------ --------------------- Treasury to be compensation
Shares Amount Shares Amount stock issued cost
---------- ----------- --------- --------- ---------- ----------- ----------
Balances, January 1, 2001 461,450 $ 4,440,000 7,140,293 $ 142,806 $ (284,037) -- --
Repricing of stock options and warrants
Issuance of common stock for services
Common stock of subsidiary to be issued
Common stock of Company issued for
services 120,000 2,400
Accretion of Series G redeemable preferred
stock
Reclassification of Series G redeemable
preferred stock 1,300 1,770,500
Conversion of Series D and E
preferred stock to common stock (775) (725,000) 427,364 8,547
Agreement to issue common stock and
warrants for services $1,528,000 $(1,528,000)
Amortization of deferred compensation cost 819,500
Payment of FBMS obligations (Note 4)
Net loss
---------- ----------- --------- --------- ---------- ----------- -----------
Balances, June 30, 2001 461,975 $ 5,485,500 7,687,657 $ 153,753 $ (284,037) $ 1,528,000 $ (708,500)
========== =========== ========= ========= ========== =========== ===========
(Continued)
7
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001
(UNAUDITED)
Receivable
from former
Additional Series E Series E Total
paid-in Accumulated preferred stock preferred stockholders'
capital deficit to be issued stockholder equity
------------ ------------ ------------ ------------ ------------
Balances, January 1, 2001 $ 23,629,547 $(23,695,981) $ 368,750 $ (553,645) $ 4,047,440
Repricing of stock options and warrants 138,000 138,000
Issuance of warrants for services 436,000 436,000
Common stock of subsidiary to be issued 124,000 124,000
Common stock of Company issued for
services 636,600 639,000
Accretion of Series G redeemable preferred
stock (234,500) (234,500)
Reclassification of Series G redeemable
preferred stock 1,770,500
Conversion of Series D and E
preferred stock to common stock 1,085,203 (368,750) --
Agreement to issue common stock and
warrants for services --
Amortization of deferred compensation cost 819,500
Payment of FBMS obligations (Note 4) (43,500) (43,500)
Net loss (3,981,021) (3,981,021)
------------ ------------ ------------ ------------ ------------
Balances, June 30, 2001 $ 25,814,850 $(27,677,002) -- $ (597,145) $ 3,715,419
============ ============ ============ ============ ============
See notes to condensed consolidated financial statements.
8
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2001 2000
------------ ------------
Cash flows used in operating activities:
Net loss $ (3,981,021) $ (8,884,059)
------------ ------------
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 662,624 1,547,393
Repricing of stock options and warrants 138,000
Loss on FBMS rescission 3,979,000
Loss (gain) on sale of subsidiary assets 14,481 (76,620)
Common stock issued for services 639,000
Warrants issued for services 436,000
Common stock of subsidiary to be issued 124,000
Deferred compensation expense for services 819,500
Minority interest (161,050)
Increase in receivable from former Series E
preferred stockholder (Note 4) (43,500)
Provision for bad debts 22,628
Investment loss, net 24,073 102,790
Equity in losses of affiliates 174,600 562,898
Changes in assets and liabilities:
(Increase) decrease in investments in trading
securities (14,098) 347,876
Decrease (increase) in receivables 50,775 (6,820)
(Increase) decrease in mortgage loans held for sale (241,465) 13,838,929
Decrease (increase) in inventories 26,529 (4,331)
Increase in other assets (11,020) (317,971)
Increase in accounts payable and accrued liabilities 635,023 832,675
------------ ------------
Total adjustments 3,273,472 20,828,447
------------ ------------
Net cash (used in) provided by operating activities (707,549) 11,944,388
------------ ------------
Cash flows from investing activities:
Purchase of other investments (100,000) (12,471)
Sales of other investments 203,957 278,032
Purchases of furniture, fixtures and equipment (37,856) (16,243)
Repayment of loans and notes receivable 160,553 115,998
Issuance of loans and notes receivable (182,690) (2,767,017)
Proceeds from sales of furniture, fixtures and
equipment 510
------------ ------------
Net cash provided by (used in) investing activities 44,474 (2,401,701)
------------ ------------
(Continued)
9
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2001 2000
------------ ------------
Cash flows from financing activities:
Issuance of notes payable 423,035 3,358,432
Repayment of notes payable (155,226) (80,320)
Warehouse loans and other notes payable 235,200 (14,906,244)
Proceeds from subsidiary stock transactions 1,522,000
------------ ------------
Net cash provided by (used in) financing activities 503,009 (10,106,132)
------------ ------------
Decrease in cash and cash equivalents (160,066) (563,445)
Cash and cash equivalents, beginning 337,234 783,606
------------ ------------
Cash and cash equivalents, ending $ 177,168 $ 220,161
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest: $ 13,655 $ 530,424
============ ============
Supplemental disclosure of non-cash investing and financing
activities:
Conversion of preferred stock to common stock $ 1,093,750
============
Rescission and divestiture of FBMS:
Fair value of assets divested $ (4,561,000)
Liabilities divested 15,912,000
Intangible assets impaired (15,330,000)
------------
Loss on FBMS rescission $ 3,979,000
============
Sale of subsidiary assets:
Equipment $ 38,500
Intangible assets 84,880
Inventory 68,062
Note receivable issued in exchange (268,062)
------------
Gain on sale of subsidiary assets $ (76,620)
============
See notes to condensed consolidated financial statements.
10
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
1. Basis of presentation:
The condensed consolidated financial statements of Equitex, Inc. and
subsidiaries (the "Company") for the three-month and six-month periods
ended June 30, 2001 and 2000, have been prepared by the Company without
audit by the Company's independent auditors. In the opinion of the
Company's management, all adjustments necessary to present fairly the
financial position, results of operations, and cash flows of the Company
as of June 30, 2001, and for the periods then ended have been made. Those
adjustments consist only of normal and recurring adjustments, except for
those described in Note 2. The condensed consolidated balance sheet as of
December 31, 2000, has been derived from the audited consolidated balance
sheet of the Company as of that date.
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with generally
accepted accounting principals have been condensed or omitted. These
condensed consolidated financial statements should be read in conjunction
with a reading of the financial statements and notes thereto included in
the Company's Form 10-K/A annual report for 2000, filed with the
Securities and Exchange Commission on May 16, 2001. The results of
operations for the six months ended June 30, 2001 and 2000, are not
necessarily indicative of the results to be expected for the full year.
The condensed consolidated financial statements as of and for the periods
ended June 30, 2001 include the accounts of Equitex, Inc., and the
following significant subsidiaries: nMortgage, Inc. ("nMortgage"), and
through June 28, 2000, it's wholly-owned subsidiary First Bankers
Mortgage Services, Inc. ("FBMS"), First Teleservices Corporation ("FTC"),
Triumph Sports Group, Inc. ("Triumph") and Meridian Services, Inc.
("Meridian"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
Minority interest at June 30, 2001, represents issued and outstanding
preferred stock of nMortgage and Meridian. Minority interest reflected
in the Company's statement of operations for the six months ended June
30, 2001 represents net losses of nMortgage allocated to minority
preferred stockholders.
On August 6, 2001, the Company acquired Nova Financial Systems, Inc., a
Florida corporation ("Nova") and Key Financial Systems, Inc. ("Key"),
both companies that were under common control with nearly an identical
ownership structure, in exchange for (i) 9,084,773 shares of the
Company's common stock, (ii) cash consideration of $5 million, (iii)
warrants to acquire an aggregate of 990,134 shares of the Company's
common stock exercisable at $0.02 per share, and (iv) warrants to acquire
an aggregate of 3,933,350 shares of the Company's common stock
exercisable at $5.65 per share. In order to raise the cash consideration
of $5 million, the Company issued two new series of convertible preferred
stock; the Series H 8% Convertible Preferred Stock which raised an
aggregate of $2,359,000, and the Series I 6% Convertible Preferred Stock
which raised an aggregate of $4,000,000. (Notes 4 and 8)
2. Rescission of FBMS Agreement and Plan of Reorganization and divestiture of
FBMS:
Effective June 28, 2000, the Company entered into a rescission agreement
with the previous owner of FBMS, in which the Company and the previous
owner agreed to rescind the terms of the August 23, 1999 FBMS Agreement
and Plan of Reorganization (the "August 23, 1999 Agreement"). Under the
terms of the rescission agreement, all assets and liabilities of FBMS as
of June 28, 2000 were returned to the previous owner of FBMS.
Pursuant to the terms of the settlement relating to the rescission
agreement, the parties agreed that nMortgage was to retain certain
technological rights which were developed subsequent to August 23, 1999.
In addition, as part of the settlement, the Company agreed to issue up to
50 additional shares of Series E convertible preferred stock relating to
certain performance conditions pursuant to the FBMS acquisition that were
satisfied prior to the rescission (Note 4).
11
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
2. Rescission of FBMS Agreement and Plan of Reorganization and divestiture of
FBMS (continued):
As a result of the rescission agreement, the Company divested itself of the
assets, liabilities, and operations of FBMS as of June 28, 2000, and as a
result, recorded a loss of $3,979,000, represents the write off of the
Company's investment in FBMS, including remaining goodwill as of the date
of the rescission. The operating results of FBMS have been included in
the consolidated statements of operations from the date of acquisition
through the date of rescission.
The following pro forma information has been prepared assuming the
rescission of FBMS had taken place on January 1, 2000. The pro forma
information includes adjustments to remove the operating results of FBMS,
related amortization of goodwill arising from the acquisition of FMBS,
the loss on the FBMS rescission, and to include amortization expense
related to the technological rights retained in the rescission
transaction.
The pro forma financial information is not necessarily indicative of the
results of operations as they would have been had the transaction been
effected on the assumed date.
Six months ended
June 30, 2000
-----------------
Revenues $ 345,000
Net loss $ (1,735,000)
Net loss applicable to common shareholders $ (1,771,000)
Basic and diluted loss per common share $ (.24)
Shares used in per share calculation 7,140,293
3. Commitments and contingencies:
Litigation:
On August 18, 2000, William G. Hays, Jr., liquidating agent for RDM Sports
Group, Inc. and related debtors, filed an adversary proceeding against
the Company, Smith Gambrell and Russell, LLP, David J. Harris, P.C. and
David J. Harris, in the United States Bankruptcy Court for the Northern
District of Georgia, Newnan Division, Adversary Proceeding No. 00-1065.
The liquidating agent alleges that the Company breached its October 29,
1987 consulting agreement with RDM, breached fiduciary duties allegedly
owed to RDM, and that the Company is liable for civil conspiracy and
acting in concert with directors of RDM. The liquidating agent is seeking
unspecified compensatory and punitive damages, along with attorney's
fees, costs and interest. On April 2, 2001, the court granted the
Company's motion to enforce the arbitration clause contained in the
consulting agreement. The Company intends to vigorously defend this
matter. Because this matter is in the preliminary stages and no
arbitration date has been set, it is too early to predict the outcome of
this matter.
12
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
3. Commitments and contingencies (continued):
Litigation (continued):
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
impact either individually or in the aggregate on consolidated results of
operations, financial position or cash flows of the Company.
Consulting and employment agreements:
In connection with the acquisition of Meridian in September 2000, the
Company entered into certain consulting and employment agreements which
require nMortgage to issue to the consultant/employee common shares of
nMortgage equal to 2% of the issued and outstanding common shares of
nMortgage on a fully diluted basis. The Company has recognized $124,000
of expense during the six months ended June 30, 2001, in accordance with
these agreements. The employment agreement also required nMortgage to
grant to the employee options to purchase up to 150,000 shares of
nMortgage common stock at $1.00 per share, the estimated fair value of
the nMortgage common stock at the date of grant.
In September 2000, the Company entered into a consulting agreement for
services to be performed subsequent to December 31, 2000, in which, upon
the satisfaction of various performance criteria, the Company is to issue
75,000 shares of common stock and warrants to purchase and additional
75,000 shares of common stock at an exercise price equal to 80% of the
average closing bid price of the Company's common stock ten days prior to
issuance. At the date of commitment, the total compensation cost was
calculated to be approximately $750,000, which is to be recognized
subsequent to December 31, 2000 as the performance criteria are
satisfied. The Company has recognized $625,000 of expense during the six
months ended June 30, 2001, in accordance with the terms of this
agreement.
In April 2001, the Company entered into a consulting agreement for investor
relations and development services, in which, upon the satisfaction of
various performance criteria, the Company is to issue 150,000 shares of
common stock. At the date of the commitment, the total compensation cost
was calculated to be approximately $778,000, which is to be recognized as
the performance criteria are satisfied. The Company has recognized
$194,500 of expense during the six months ended June 30, 2001, in
accordance with the terms of this agreement.
4. Stockholders' equity:
Series D convertible preferred stock:
The holder of each share of Series D convertible preferred stock (the
"Series D Preferred Stock") is entitled to a 6% cumulative annual
dividend, payable quarterly. The dividend is payable either in cash or in
shares of the Company's common stock, at the discretion of the Company.
The Series D Preferred Stock contains a liquidation preference equal to
the sum of the stated value of each share plus an amount equal to 100% of
the stated value plus the aggregate of all accrued and unpaid dividends
on each share of Series D Preferred Stock until the most recent dividend
payment date or date of liquidation, dissolution or winding up of the
Company.
13
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
4. 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.
In May and June 2001, 475 shares of the Series D Preferred Stock plus
accrued dividends of $65,401 on those shares, were converted into 127,364
shares of common stock, at an average conversion price of $4.24 per
share.
Series E convertible preferred stock and receivable from former Series E
preferred stockholder:
In connection with the August 23, 1999 acquisition of FBMS, the Company
issued 250 shares of Series E convertible preferred stock (the "Series E
Preferred Stock") valued at approximately $2,531,000, and contingent
consideration consisting of up to 750 shares of Series E Preferred Stock,
as specified in the acquisition agreement. In conjunction with the June
28, 2000 FBMS rescission agreement, the Company agreed to issue an
additional 50 shares of Series E Preferred Stock to the owner relating to
certain performance conditions pursuant to the FBMS acquisition that were
satisfied prior to rescission. The 50 additional shares of Series E
preferred stock are convertible into 50,000 shares of common stock and
are valued at $368,750, which was based on the quoted market price of the
underlying shares of common stock at the date of rescission, and which
was recorded as expense by the Company in 2000.
In June 2001, all 300 shares of the Series E Preferred Stock were converted
into 300,000 shares of common stock, at a conversion price of $1,000 per
share.
Certain FBMS obligations totaling $597,145 and $553,645 at June 30, 2001
and December 31, 2000, respectively, most of which were guaranteed by the
Company, were paid on behalf of the Company by the Company's president or
by the Company's subsidiary, nMortgage. The Company recorded a payable to
the president as well as a receivable from the previous owner of FBMS,
who is also the former Series E preferred stockholder. Due to the
uncertainty regarding the ultimate realization of the receivable, the
balance is classified as a reduction to stockholders' equity at June 30,
2001 and December 31, 2000.
14
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
4. Stockholders' equity (continued):
Series F convertible preferred stock:
In connection with the Company's acquisition of Meridian in September 2000,
the Company issued a total of 460,000 shares of Series F convertible
preferred stock (the "Series F Preferred Stock"), valued at $6.50 per
share, which was the quoted market price of the Company's common stock on
September 7, 2000 (the date the agreement was signed). The Series F
Preferred Stock includes a stated value of $8.00 per share and contains a
liquidation preference in the amount of 105% of the stated value. Series
F preferred stockholders are entitled to dividends in the amount declared
with respect to the Company's common stock.
In July 2001, all 460,000 shares of Series F Preferred Stock were converted
into 525,716 shares of common stock, at a conversion price of $7.00 per
share.
Series G redeemable convertible preferred stock:
In September 2000, the Company issued 1,300 shares of 6%, Series G
convertible preferred stock (the "Series G Preferred Stock") along with
warrants to purchase 130,000 shares of common stock for $1,000 per share,
which is the stated value per share (total proceeds of $1,300,000 less
issue costs of $60,000). The Series G Preferred Stock is convertible,
together with any accrued but unpaid dividends, at any time into shares
of the Company's common stock at a conversion price per share equal to
the lesser of $6.50 or 65% of the average closing bid price of the
Company's common stock as specified in the agreement. The warrants were
valued at $242,000 utilizing the Black-Scholes option pricing model, and
therefore $242,000 of the total proceeds was allocated to the warrants,
resulting in an imputed interest rate of 7.4%.
Because the Series G Preferred Stock contained an immediate beneficial
conversion feature, both additional paid-in capital and the accumulated
deficit were increased by $700,000 during the third quarter of 2000, the
amount of the discount resulting from the beneficial conversion feature.
The holder of the Series G Preferred Stock is entitled to cumulative
dividends at 6% per annum plus a 4% dividend default rate, payable
quarterly commencing September 30, 2000. Dividends are payable in cash
or, at the Company's option, in shares of the Company's common stock. All
outstanding shares of Series G Preferred Stock automatically convert into
common stock on August 31, 2003. The Series G Preferred Stock is
redeemable at the Company's option at any time through August 31, 2003 at
a redemption price equal to $1,350 per share plus any accrued but unpaid
dividends. Through June 30, 2001, the Company recorded a $650,500
accretion to the Series G Preferred Stock balance so that the carrying
value of the Series G Preferred Stock will equal the redemption amount at
the redemption date.
In May 2001, the Company satisfied criteria which removed the manadatory
redemption requirements from the Series G Preferred Stock terms; and
therefore the Series G Preferred Stock has been reclassified to
stockholders' equity at June 30, 2001.
15
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
4. Stockholders' equity (continued):
Series H Convertible Preferred Stock:
In July 2001, the Company issued 2,359 shares of 8%, Series H Convertible
Preferred Stock (the "Series H Preferred Stock") for $1,000 per share,
which is the stated value per share (total proceeds of $2,359,000 less
issue costs of approximately $300,000). Each share of Series H Preferred
Stock automatically converted into 200 shares of the Company's common
stock and 200 warrants to purchase common stock on July 19, 2001. Each
warrant is exercisable until July 19, 2004 at an exercise price equal to
the average of the last trade of the Company's common stock twenty days
prior to July 19, 2001.
Series I Convertible Preferred Stock:
In August 2001, the Company issued 4,000 shares of 6%, Series I Convertible
Preferred Stock (the "Series I Preferred Stock") along with warrants to
purchase 400,000 shares of common stock for $1,000 per share, which is
the stated value per share (total proceeds of $4,000,000 less issue costs
of approximately $500,000). The Series I Preferred Stock is convertible,
together with any accrued but unpaid dividends, at any time into shares
of the Company's common stock at a conversion price per share equal to
the lesser of $5.98 or 65% of the average closing price of the Company's
common stock as specified in the agreement.
Options and warrants:
In June 2001, 21,000 options issued under the 1999 stock option plan were
forfeited and reissued to both an employee and a director of the Company.
The options were granted with an exercise price above market value at the
date of issuance and are exercisable through June 2006.
In August 2001, the Company issued 78,645 shares of common stock at a price
equal to the closing stock price at the date of issuance along with
warrants to purchase 78,645 shares of common stock in exchange for
$495,510 in related party receivables due by the Company's subsidiary
Triumph. The warrants were granted with an exercise price above market
value at the date of issuance and are exercisable through August 2006.
In August 2001, the Company issued 78,339 shares of common stock along with
warrants to purchase 78,339 shares of common stock to Equitex 2000, Inc.
("Equitex 2000"), a wholly owned subsidiary of the Company. The warrants
were granted with an exercise price above market at the date of issuance
and are exercisable through August 2006. The stock and warrants were
valued at approximately $410,000.
Debt conversions:
In August 2001, the Company converted $859,062 in notes and other payables
due to related parties of the Company into 163,466 shares of the
Company's common stock at a price equal to the closing stock price at the
date of issuance along with warrants to purchase 163,466 shares of common
stock. The warrants were granted with an exercise price above market
value at the date of issuance and are exercisable through August 2006.
16
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
5. Subsidiary transactions:
Effective January 1, 2000, Triumph sold the assets of one of its five
retail stores in exchange for a $268,000 note receivable. In connection
with this transaction, Triumph recorded a gain on the sale of
approximately $76,600, which is included in other income in the
accompanying statement of operations for the six-months ended June 30,
2000. In November 2000 and March 2001, the Company terminated operations
at two other retail stores. In connection with these store closings, the
Company recorded an $88,900 impairment loss in 2000. During the fourth
quarter of 2000, in connection with the store closings and an evaluation
of future undiscounted cash flows, the Company concluded that an
impairment charge of $365,350 was necessary to write off the carrying
amount of goodwill related to the Triumph operations.
During the six-months ended June 30, 2000, an officer/shareholder of the
Company sold marketable securities to Triumph for $10,000. The difference
between the cost and market value of these securities at the date of the
sale totaled $382,807 and was recorded as an increase to additional
paid-in capital.
6. Proposed business transactions:
Proposed transactions with Chex Services, Inc.:
On August 13, 2001, the Company announced the signing of a letter of intent
with Chex Services, Inc. ("Chex"). Chex is a financial services company
that provides check cashing, automated teller machines and credit card
advances to customers primarily at gaming establishments. The Company's
are currently in the process of negotiating a definitive agreement and
the terms of the transaction.
7. Operating segments:
As of and during the three and six month periods ended June 30, 2001 and
2000, the segment results were as follows:
Three months ended June 30,:
---------------------------
2001:
Sporting goods/ Corporate activities
Financial product -------------------------------
services related Investments Other Total
-------------- ------------- ------------- ------------- -----------
Revenues $ 892,290 $ 43,672 $ 1,283 $ 937,245
Segment gain (loss) (76,537) (177,414) $ 23,421 (1,531,455) (1,761,985)
2000:
Sporting goods/ Corporate activities
Financial product -------------------------------
services related Investments Other Total
-------------- ------------- ------------- ------------- -----------
Revenues $ 186,330 $ 122,502 $ 12,481 $ 114 $ 321,427
Segment (loss) (1,337,033) (774,553) (161,901) (4,701,357) (6,974,844)
17
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
7. Operating segments (continued):
Six months ended June 30,:
-------------------------
2001:
Sporting goods/ Corporate activities
Financial product -------------------------------
services related Investments Other Total
-------------- ------------- ------------- ------------- -----------
Revenues $ 1,592,105 $ 112,567 $ 3,164 $ 1,707,836
Segment (loss) (430,722) (346,233) $ (10,574) (3,193,492) (3,981,021)
Total assets 2,995,536 868,870 755,551 3,920,630 8,540,587
2000:
Sporting goods/ Corporate activities
Financial product -------------------------------
services related Investments Other Total
-------------- ------------- ------------- ------------- -----------
Revenues $ 1,492,275 $ 238,066 $ 47,901 $ 478 $ 1,778,720
Segment (loss) (3,100,383) (724,136) (7,776) (5,051,764) (8,884,059)
Total assets 3,462,312 1,530,515 1,960,218 1,328,095 8,281,140
8. Unaudited pro forma financial information:
On June 22, 2001, at a Special Meeting of the Stockholders, the
stockholders of the Company approved three proposals outlined in the
Definitive Special Meeting Proxy Statement dated May 16, 2001. These
proposals included the following:
A. A proposal to increase the number of authorized shares of the Company's
common stock from 7,500,000 shares to 50,000,000 shares.
B. A proposal to provide for the distribution by the Company of all of its
assets (which primarily consist of its investments in subsidiaries) to
Equitex 2000; the assumption of all the Company's liabilities by
Equitex 2000; and the subsequent distribution of Equitex 2000 common
shares to the stockholders of the Company in a spin off transaction.
C. A proposal to acquire all of the outstanding capital stock of Nova and
Key, companies under common control with nearly an identical ownership
structure, in exchange for 50% of the outstanding common stock of the
Company on a post acquisition basis, cash consideration of $5 million
and a warrant. Effective August 6, 2001 the Company completed these
acquisitions.
The following unaudited pro forma condensed statements of operations for
the Company for the six months ended June 30, 2001, and for the year
ended December 31, 2000, give effect to the transactions described above
as if they had occurred effective January 1, 2001 and January 1, 2000
respectively. The following unaudited pro forma condensed balance sheet
as of June 30, 2001, gives effect to the transactions as if they had
occurred on June 30, 2001.
The summary historical data has been derived from and should be read in
conjunction with the audited consolidated financial statements of the
Company, included in its Annual Report on Form 10-K/A for the year ended
December 31, 2000, and its unaudited interim financial statements
included in its Quarterly Report on Form 10-Q for the period ended March
31, 2001.
18
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
8. Unaudited pro forma financial information (continued):
These unaudited pro forma condensed financial statements do not purport to
present results which would actually have been obtained if the
transactions had been in effect during the periods covered or any future
results which may in fact be realized. These unaudited pro forma
condensed financial statements should be read in conjunction with the
accompanying notes and the separate historical financial statements of
the Company referred to above.
Description of Equitex pro forma adjustments:
A. To reflect the distribution by the Company of all of its assets to
Equitex 2000, and the assumption by Equitex 2000 of the Company's
liabilities.
B.1 To reflect the issuance of 2,359 shares of Series H Preferred Stock in
exchange for net proceeds of $2,059,000 (net of $300,000 issue costs),
which is to be used along with the proceeds from the Series I Preferred
Stock (see B.2) in connection with the Company's acquisition of Key and
Nova. All shares of Series H Preferred Stock converted into 471,800
shares of the Company's common stock on July 19, 2001. Because the
Series H Preferred Stock contained an immediate beneficial conversion
feature, net loss applicable to common stockholders was increased by
$212,310, the amount of the discount resulting from the beneficial
conversion feature.
B.2 To reflect the issuance of 4,000 shares of Series I Preferred Stock in
exchange for net proceeds of $3,500,000 (net of $500,000 issue costs),
which is to be used along with the proceeds from the Series H Preferred
Stock in connection with the Company's acquisitions of Key and Nova.
Because the Series I Preferred Stock contained an immediate beneficial
conversion feature, net loss applicable to common stockholders was
increased by $2,153,846, the amount of the discount resulting from the
beneficial conversion feature.
B.3 To reflect the conversion of all 460,000 shares of Series F Preferred
Stock into 525,716 shares of the Company's common stock on July 19,
2001.
B.4 To reflect the issuance of 112,500 shares of the Company's common stock
to consultants upon the exercise of warrants and the issuance of
320,450 shares to related parties for debt conversions and the purchase
of receivables prior to the completion of the acquisitions.
C. To reflect the acquisition of all of the outstanding common shares of
Key and Nova, companies under common control with nearly an identical
ownership structure, and consolidation of Key and Nova. All
intercompany accounts have been eliminated. The purchase price consists
of 9,084,773 shares of the Company's common stock (which represents 50%
of the outstanding common shares of the Company, after giving effect to
the consummation of the merger), and warrants for the purchase of
common stock of the Company equal to 100% of any warrants, options,
preferred stock or other securities outstanding at the closing date and
exchangeable for or convertible into the Company's common shares.
The transaction is recorded as a reverse acquisition. The purchase
price applied to the reverse acquisition has been based on the net
book value of the underlying assets of the Company prior to the
transaction plus $5,000,000.
D. To reflect estimated federal and state income tax effects of the
transactions described above, taking into consideration available net
operating losses.
19
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
8. Unaudited pro forma financial information (continued)
UNAUDITED PRO FORMA C0NDENSED BALANCE SHEET
JUNE 30, 2001
Distribution
of assets/ Acquisition
assumption of of
Equitex, Inc. liabilities Key/Nova
and to/by (combined
subsidiaries Stock Equitex 2000, balance Pro forma
ASSETS Historical transactions Inc. sheets) combined
------------ ----------- ----------- ------------ -----------
(SEE A) (SEE C)
Cash and cash equivalents $ 177,168 $ 2,059,000 (B1) $ (736,168) $ 482,292 $ 482,292
3,500,000 (B2) (5,000,000)
Receivables 2,035,003 (2,035,003) 6,583,086 6,583,086
Investments 1,182,155 (1,182,155)
Intangible and other assets 5,146,261 (5,146,261) 308,257 308,257
------------ ----------- ----------- ------------ -----------
Total assets $ 8,540,587 $ 5,559,000 $(9,099,587) $ 2,373,635 $ 7,373,635
============ =========== =========== ============ ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Accounts payable $ 650,763 $ (650,763) $ 1,236,390 $ 1,236,390
Accrued expenses and other
liabilities 1,244,118 (1,244,118) 244,252 244,252
Notes payable 2,460,267 (2,460,267)
Due to cardholders 4,700,149 4,700,149
------------ ----------- ----------- ------------ -----------
Total liabilities 4,355,148 (4,355,148) 6,180,791 6,180,791
------------ ----------- ----------- ------------ -----------
Minority interest 470,020 (470,020)
------------ ----------- ----------- ------------ -----------
Preferred stock 5,485,500 $ 4,000,000 (B2)
(2,990,000)(B3) 6,495,500
Common stock 153,753 9,436 (B1)
10,514 (B3)
8,659 (B4) 181,695 364,057
Accumulated deficit (27,677,002) 27,471,011 (205,991)
Other stockholders' equity
(deficiency) 25,753,168 4,520,391 (4,274,419) (31,459,862) (5,460,722)
------------ ----------- ----------- ------------ -----------
Total stockholders' equity 3,715,419 5,559,000 (4,274,419) (3,807,156) 1,192,844
------------ ----------- ----------- ------------ -----------
Total liabilities and
stockholders' equity $ 8,540,587 $ 5,559,000 $(9,099,587) $ 2,373,635 $ 7,373,635
============ =========== =========== ============ ===========
20
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
8. Unaudited pro forma financial information (continued)
UNAUDITED PRO FORMA C0NDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001
Adjustments
to
reflect Adjustments
distribution to
Equitex, Inc. of assets/ reflect the
and liabilities acquisitions
subsidiaries to Equitex of Pro forma
Historical 2000, Inc. Key and Nova combined
----------- ----------- ----------- -----------
(SEE A) (SEE C)
Product sales $ 112,567 $ (112,567)
Credit card income $ 4,878,997 $ 4,878,997
Loan production and processing 1,542,329 (1,542,329)
Application fees, net of direct
marketing costs 2,230,938 2,230,938
Other 52,940 (52,940) 180,811 180,811
----------- ----------- ----------- -----------
Total income 1,707,836 (1,707,836) 7,290,746 7,290,746
Cost of sales 73,384 (73,384)
----------- ----------- ----------- -----------
Gross profit 1,634,452 (1,634,452) 7,290,746 7,290,746
----------- ----------- ----------- -----------
Selling, general and administrative 5,533,626 (5,533,626) 3,207,354 3,207,354
Application processing fees and
third party servicing fees 2,700,868 2,700,868
Provision for credit card losses 205,345 205,345
Other 238,128 (238,128)
----------- ----------- ----------- -----------
Total operating expenses 5,771,754 (5,771,754) 6,113,567 6,113,567
----------- ----------- ----------- -----------
Income (loss) before income taxes
and minority interest (4,137,302) 4,137,302 1,177,179 1,177,179
Provision for income taxes 4,769 (4,769) (D)
----------- ----------- ----------- -----------
Income (loss) before minority
interest (4,142,071) 4,142,071 1,177,179 1,177,179
Minority interest 161,050 (161,050)
----------- ----------- ----------- -----------
Net income (loss) $(3,981,021) $ 3,981,021 $ 1,177,179 $ 1,177,179
Accretion of redemption value on
Series G preferred stock (184,000) (184,000)
Deemed preferred stock dividends (99,200) (99,200)
Beneficial conversion features (212,310) (B1)
(2,153,846) (B2) (2,366,156)
----------- ----------- ----------- -----------
Net loss applicable to common
stockholders $(4,264,221) $ 3,981,021 $(1,188,977) $(1,472,177)
=========== =========== =========== ===========
Basic and diluted net loss
per common share $ (0.60) $ (0.08)
=========== ===========
Weighted average number of
common shares outstanding 7,112,226 18,169,546
=========== ===========
21
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
8. Unaudited pro forma financial information (continued)
UNAUDITED PRO FORMA C0NDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
Adjustments
to
reflect Adjustments
distribution to
Equitex, Inc. of assets/ reflect the
and liabilities acquisitions
subsidiaries to Equitex of Pro forma
Historical 2000, Inc. Key and Nova combined
------------ ------------ ------------ ------------
(SEE A) (SEE C)
Product sales $ 376,394 $ (376,394)
Credit card income $ 11,594,818 $ 11,594,818
Loan production and processing 1,173,148 (1,173,148)
Secondary market, net 871,134 (871,134)
Application fees, net of direct
marketing costs 2,735,438 2,735,438
Other 448,615 (448,615) 182,618 182,618
------------ ------------ ------------ ------------
Total income 2,869,291 (2,869,291) 14,512,874 14,512,874
Cost of sales 233,228 (233,228)
------------ ------------ ------------ ------------
Gross profit 2,636,063 (2,636,063) 14,512,874 14,512,874
------------ ------------ ------------ ------------
Selling, general and administrative 8,594,478 (8,594,478) 5,221,993 5,221,993
Loan production and processing 739,735 (739,735)
Application processing fees and
third party servicing fees 5,677,641 5,677,641
Provision for credit card losses 56,520 56,520
Impairment loss 807,250 (807,250)
Net investment loss 451,502 (451,502)
Interest expense 736,749 (736,749)
Loss on FBMS recission 3,979,000 (3,979,000)
Other (186,707) 186,707
------------ ------------ ------------ ------------
Total operating expenses 15,122,007 (15,122,007) 10,956,154 10,956,154
------------ ------------ ------------ ------------
Income (loss) before income taxes (12,485,944) 12,485,944 3,556,720 3,556,720
Provision for income taxes 13,457 (13,457) 668,000 (D) 668,000
------------ ------------ ------------ ------------
Net income (loss) $(12,499,401) $ 12,499,401 $ 2,888,720 $ 2,888,720
Accretion of redemption value on
Series G preferred stock (453,000) (453,000)
Deemed preferred stock dividends (97,000) (97,000)
Beneficial conversion features (700,000) (212,310) (B1)
(2,153,846) (B2) (3,066,156)
------------ ------------ ------------ ------------
Net loss applicable to common
stockholders $(13,749,401) $ 12,499,401 $ 522,564 $ (727,436)
============ ============ ============ ============
Basic and diluted net loss
per common share $ (1.93) $ (0.05)
============ ============
Weighted average number of
common shares outstanding 7,106,749 14,247,042
============ ============
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Equitex, Inc.
(Registrant)
Date: October 22, 2001 By: /s/ Henry Fong
---------------------------------------
Henry Fong
President, Treasurer and
Chief Financial Officer
23