SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
Current Report Pursuant to Section 13 or
15(d) of The Securities Act of 1934
Date of Report (Date of earliest event reported): October 22, 2001
(August 6, 2001)
EQUITEX, INC.
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 000-12374 84-0905189
--------------------------------------------------------------------------------
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
7315 EAST PEAKVIEW AVENUE, ENGLEWOOD, COLORADO 80111
---------------- -----------------------------------------------------
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code: (303) 796-8940
------------------------------------------------------
(Former name or former address, if changed since last report.)
Item 2. Acquisition or Disposition of Assets
DISTRIBUTION OF EQUITEX, INC. ASSETS TO EQUITEX 2000, INC.
As described in the Registrant's Current Report on Form 8-K filed with
the Securities and Exchange Commission on August 21, 2001 (the "Initial 8-K"),
on August 6, 2001, Equitex, Inc. ("Equitex") completed the distribution of all
of its assets and liabilities to Equitex 2000, Inc.
ACQUISITIONS OF NOVA FINANCIAL SYSTEMS, INC. AND KEY FINANCIAL SYSTEMS, INC.
Also as described in the Initial 8-K, effective August 6, 2001, the
Registrant acquired Nova Financial Systems, Inc., a Florida corporation and Key
Financial Systems, Inc., a Florida corporation.
Item 7. Financial Statements and Exhibits
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED.
Pursuant to paragraph (a)(4) of Item 7 of Form 8-K, the attached
financial statements were omitted from the disclosure contained in the
Initial 8-K. Attached hereto are the audited financial statements of
Nova Financial Systems, Inc. for the years ended December 31, 2000,
1999 and the period from inception October 10, 1998 through December
31, 1998 along with the unaudited six month period ended June 30, 2001.
Also attached hereto are the audited financial statements of Key
Financial Systems, Inc. for the years ended December 31, 2000, 1999 and
1998 along with the unaudited six month period ended June 30, 2001.
(b) PRO-FORMA FINANCIAL INFORMATION.
Pro-Forma financial information reflecting the effect of the asset
distribution and addition of the businesses acquired as described in
Item 2 above are incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q/A filed on October 22, 2001.
(c) EXHIBITS
None.
-2-
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 hereunto duly authorized.
EQUITEX, INC.
Date: October 22, 2001
By:/s/Thomas B. Olson
-----------------------------
Secretary
-3-
NOVA FINANCIAL SYSTEMS, INC.
FINANCIAL REPORT
CONTENTS
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INDEPENDENT AUDITOR'S REPORT 1
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 2
Statements of income 3
Statements of stockholders' equity 4
Statements of cash flows 5
Notes to financial statements 6 - 10
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Nova Financial Systems, Inc.
Clearwater, Florida
We have audited the accompanying balance sheets of Nova Financial Systems, Inc.
as of December 31, 2000 and 1999, and the related statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 2000 and
1999 and for the period from inception, October 10, 1998, through December 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nova Financial Systems, Inc. as
of December 31, 2000 and 1999, and the results of its operations and its cash
flows for the years ended December 31, 2000 and 1999, and for the period from
inception, October 10, 1998, through December 31, 1998, in conformity with
accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Fort Lauderdale, Florida
March 30, 2001
NOVA FINANCIAL SYSTEMS, INC.
BALANCE SHEETS
--------------------------------------------------------------------------------
December 31,
June 30, -----------------------
2001 2000 1999
---------- ---------- ----------
(Unaudited)
ASSETS
Cash $ 143,403 $ 1,738 $ 26,756
Credit card receivables, net (Note 2) 223,715 283,353 619,149
Due from Merrick Bank 1,214,954 1,490,231 2,580,665
Due from shareholders -- 606,500 --
Deferred tax asset -- -- 606,500
---------- ---------- ----------
$1,582,072 $2,381,822 $3,833,070
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 53,925 $ 85,085 $ 265,197
Due to cardholders 1,118,898 1,286,517 1,921,769
Due to affiliate (Note 3) 25,140 81,138 685,464
Accrued expenses and other liabilities -- 792,769 734,264
---------- ---------- ----------
1,197,963 2,245,509 3,606,694
---------- ---------- ----------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, par value $1 per share,
authorized 7,500 shares; issued June 30, 2001,
1,020 shares; December 31, 2000 and 1999, 1000
shares 1,020 1,000 1,000
Additional paid-in capital 123,980 24,000 24,000
Retained earnings 259,109 111,313 201,376
---------- ---------- ----------
384,109 136,313 226,376
---------- ---------- ----------
$1,582,072 $2,381,822 $3,833,070
========== ========== ==========
See Notes to Financial Statements.
2
NOVA FINANCIAL SYSTEMS, INC.
STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
Period from
inception
Six months ended October 10,
June 30, Year ended December 31, 1998 through
-------------------------- -------------------------- December 31,
2001 2000 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Credit card income:
Servicing fees $ 1,067,699 $ 2,859,448 $ 4,322,258 $ 7,278,767 $ 1,102
Other 39,965 109,550 148,746 127,115 8
----------- ----------- ----------- ----------- -----------
1,107,663 2,968,998 4,471,004 7,405,882 1,110
Provision for (recovery of) losses
(Note 2) (31,746) (221,622) (83,262) 676,343 192
----------- ----------- ----------- ----------- -----------
NET CREDIT CARD INCOME AFTER
PROVISION FOR LOSSES 1,139,409 3,190,620 4,554,266 6,729,539 918
----------- ----------- ----------- ----------- -----------
Other income:
Application fees, net of direct
marketing costs; six months ended
June 30, 2001 and 2000, none and
$(9,945) (unaudited); periods ended
December 31, 2000, 1999, 1998,
none, $11,307,984 and $32,653
(Note 3) -- (2,403) -- 1,942,520 2,751
----------- ----------- ----------- ----------- -----------
Operating expenses:
Application processing fees (Note 3) -- -- -- 2,112,092 --
Third party servicing fees (Note 3) 661,828 2,267,157 3,342,984 5,934,125 580
Other operating expenses (Note 6) 97,285 290,869 635,345 303,258 6,797
----------- ----------- ----------- ----------- -----------
759,113 2,558,026 3,978,329 8,349,475 7,377
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE
INCOME TAXES 380,296 630,191 575,937 322,584 (3,708)
Provision (credit) for income taxes
(Note 5) (117,500) -- -- 117,500 --
----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) $ 497,796 $ 630,191 $ 575,937 $ 205,084 $ (3,708)
=========== =========== =========== =========== ===========
See Notes to Financial Statements.
3
NOVA FINANCIAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED), YEARS ENDED
DECEMBER 31, 2000 AND 1999, AND PERIOD FROM INCEPTION OCTOBER 10, 1998
THROUGH DECEMBER 31, 1998
--------------------------------------------------------------------------------
Additional Retained
Common Paid In Earnings
Stock Capital (Deficit) Total
-------------------------------------------------------------------------------------
Issuance of shares at inception,
October 10, 1998 $ 1,000 $ 24,000 $ -- $ 25,000
Net loss -- -- (3,708) (3,708)
--------- --------- --------- ---------
Balance, December 31, 1998 1,000 24,000 (3,708) 21,292
Net Income -- -- 205,084 205,084
--------- --------- --------- ---------
Balance, December 31, 1999 1,000 24,000 201,084 226,376
Net income -- -- 575,937 575,937
Dividends (666,000) (666,000)
--------- --------- --------- ---------
Balance, December 31, 2000 1,000 24,000 111,313 136,313
Net income (unaudited) -- -- 497,796 497,796
Dividends (unaudited) -- -- (350,000) (350,000)
Issuance of 20 shares of common
stock 20 99,980 -- 100,000
--------- --------- --------- ---------
Balance, June 30, 2001 (unaudited) $ 1,020 $ 123,980 $ 259,109 $ 384,109
========= ========= ========= =========
See Notes to Financial Statements.
4
NOVA FINANCIAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Period from
inception
Six months ended October 10,
June 30, Year ended December 31, 1998 through
-------------------------- -------------------------- December 31,
2001 2000 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
Cash Flows From Operating Activities
Net income (loss) $ 497,796 630,191 $ 575,937 $ 205,084 $ (3,708)
Adjustments to reconcile net income
(loss) to net cash provided by (used
in) operating activities:
Provision for (recovery of) losses (31,746) (221,622) (83,262) 676,343 192
Deferred income taxes -- 606,500 606,500 (606,500) --
Decrease (increase) in other
receivables 275,278 65,801 1,090,434 (2,580,646) (19)
Decrease (increase) in due from
shareholders 606,500 (606,500) (606,500) -- --
(Decrease) increase in accounts
payable and accrued expenses (823,930) (374,705) (121,606) 977,074 22,387
(Decrease) increase in due to
cardholders (167,619) (134,965) (635,252) 1,921,769 --
(Decrease) increase in due to (from)
affiliates (55,998) (632,985) (604,327) 708,225 (22,761)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 300,281 (81,125) 221,924 1,301,349 (3,909)
----------- ----------- ----------- ----------- -----------
Cash Flows Provided By (Used In) Investing
Activities
Net (increase) decrease in credit card
receivables 91,384 361,184 419,058 1,294,593 (1,091)
----------- ----------- ----------- ----------- -----------
Cash Flows From Financing Activities
Dividends paid (350,000) (466,000) (666,000) -- --
Capital contributed and common stock
issued 100,000 -- -- -- 25,000
----------- ----------- ----------- ----------- -----------
NET CASH (USED IN) PROVIDED
BY FINANCING ACTIVITIES (250,000) (466,000) (666,000) -- 25,000
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH 141,665 (23,691) (25,018) 6,756 20,000
Cash:
Beginning 1,738 26,756 26,756 20,000 --
----------- ----------- ----------- ----------- -----------
Ending $ 143,403 $ 3,065 $ 1,738 $ 26,756 $ 20,000
=========== =========== =========== =========== ===========
See Notes to Financial Statements.
5
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2001 and June 30, 2000 is
unaudited)
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Nova Financial Systems, Inc. (the "Company") designs and
markets credit card products aimed at the sub-prime market. The credit card
products are marketed for an unaffiliated bank under an agreement that provides
the Company with a 100% participation interest in the credit cards issued and
requires the payment of monthly servicing fees to the bank.
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES: The
accounting and reporting policies of the Company conform to generally accepted
accounting principles and general practices within the financial services
industry. In preparing the accompanying financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and the reported amounts of revenue and expenses
for the period. Actual results could differ from those estimates.
UNAUDITED FINANCIAL STATEMENTS: The balance sheet as of June 30, 2001, the
statements of operations and cash flows for the six months ended June 30, 2001
and 2000, and the statement of stockholders' equity for the six months ended
June 30, 2001, have been prepared by the Company without audit. In the opinion
of management, all adjustments (which include normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for all such periods have been made. The results of operations for
the six months ended June 30, 2001, are not necessarily indicative of the
operating results for the full year.
PRESENTATION OF CASH FLOWS: Cash flows from credit card receivables are reported
net.
CREDIT CARD RECEIVABLES: Credit card receivables are stated at cost plus
refundable and earned fees (the balance reported to customers), reduced by
allowances for refundable fees and losses.
Fees are accrued monthly on active credit card accounts and included in credit
card receivables, net of estimated uncollectible amounts. Accrual of income is
discontinued on credit card accounts that have been closed or charged off.
Accrued fees on credit card loans are charged off with the card balance,
generally when the account becomes 90 days past due.
The allowance for losses is established through a provision for losses charged
to expense. Credit card receivables are charged against the allowance for losses
when management believes that collectibility of the principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
estimated losses on existing receivables, based on evaluation of the
collectibility of the accounts and prior loss experience. This evaluation also
takes into consideration such factors as changes in the volume of the loan
portfolio, overall portfolio quality and current economic conditions that may
affect the borrowers' ability to pay. While management uses the best information
available to make its evaluation, this estimate is susceptible to significant
change in the near term.
DUE TO AFFILIATES: The amount due to affiliate in the accompanying balance
sheets represents amounts paid on behalf of the company by Key Financial
Systems, Inc. ("Key"), a company affiliated through common ownership, and the
balance of unpaid servicing fees payable in connection with Nova's card
activity. Effective July 1, 2000, the company no longer receives such services
from Key.
6
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2001 and June 30, 2000 is
unaudited)
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DUE FROM MERRICK BANK AND DUE TO CARDHOLDERS: The Company charges a fully
refundable reservation fee equal to each cardholder's borrowing limit upon
issuance of a credit card. The amount due to cardholders represents the balance
of reservation fees that would have to be refunded to cardholders should they
close their accounts at the balance sheet date. Funds held in trust to secure
payment of this liability are reflected in due from Merrick Bank in the
accompanying balance sheets.
INCOME TAXES: The Company, with the consent of its stockholders, elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code
effective January 1, 2000, which provides that in lieu of corporate tax the
stockholders separately account for their pro rata shares of the Company's items
of income, deductions, losses and credits. As of December 31, 2000 and June 30,
2001, the Company's reported net assets exceed their tax bases by approximately
$155,000 and $200,000 (unaudited), respectively. Accordingly, if the election
was terminated on that date, a deferred tax liability of approximately $58,000
and $75,000 (unaudited), respectively, would be recognized by a charge to income
tax expense.
NOTE 2. CREDIT CARD RECEIVABLES
The composition of credit card receivables at June 30, 2001, and at December 31,
2000 and 1999 is as follows:
2001 2000 1999
------------ ------------ ------------
(Unaudited)
Credit card receivables $ 4,588,619 $ 7,001,194 $ 29,407,412
Refundable reservation fees (4,339,602) (6,593,483) (28,319,231)
------------ ------------ ------------
249,017 407,111 1,088,181
Less allowance for losses 25,302 124,358 469,032
------------ ------------ ------------
$ 223,715 $ 283,353 $ 619,149
============ ============ ============
Changes in the allowance for losses for the six-month periods ended June 30,
2001 and 2000, the years ended December 31, 2000 and 1999, and the period from
inception, October 10, 1998, through December 31, 1998, are as follows:
June 30, December 31,
---------------------- -----------------------------------
2001 2000 2000 1999 1998
--------- --------- --------- --------- ---------
(Unaudited) (Unaudited)
Balance, beginning $ 124,358 $ 469,032 $ 469,032 $ 192 $ --
Provision for (recovery
of) losses (31,746) (221,622) (83,262) 676,343 192
Recoveries of amounts
charged-off -- -- -- -- --
Amounts charged-off (67,310) (169,915) (261,412) (207,503) --
--------- --------- --------- --------- ---------
Balance, ending $ 25,302 $ 77,495 $ 124,358 $ 469,032 $ 192
========= ========= ========= ========= =========
7
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2001 and June 30, 2000 is
unaudited)
--------------------------------------------------------------------------------
NOTE 3. TRANSACTIONS WITH RELATED PARTIES
The Company had entered into an informal agreement with Key under which Key
provided marketing and preprocessing of credit card applications, customer
service and collection services for Nova. Expenses were charged to the Company
for application processing and customer service based on set fee per application
processed and for collections based on a set fee per delinquent account on file.
The Company believes the method and per unit price charged are consistent with
the methods and rates of similar third party credit card processors. As of July
1, 2000, the company is no longer receiving services from Key. The Company
recognized processing fee and servicing expenses of $672,420 and $3,832,736
associated with Key's activities during 2000 and 1999, respectively. No
significant services were received from Key in 1998 or 2001. During the six
months ended June 30, 2000, processing fees and servicing expenses of $672,400
(unaudited) were recognized. As of June 30, 2001, and December 31, 2000 and
1999, the Company owed Key $25,140 (unaudited), $81,138, and $685,464,
respectively, in connection with services performed and amounts paid for Nova by
Key.
The Company has entered into an agreement with Paragon Water Services, Inc.
(Paragon), a company affiliated through common ownership, whereby Paragon
provides credit card marketing services for the Company. Paragon earns
commissions for card applications that are not subsequently refunded. The
Company paid Paragon approximately $6,631,608 in commissions during the year
ended December 31, 1999, and none in 2000 or 1998. The company paid no
commissions during the six-month periods ended June 30, 2001 and 2000
(unaudited).
NOTE 4. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
A credit limit has been established for each cardholder account acquired by the
Company. By agreement, the credit limit can be terminated at any time for any
reason. Because the initial reservation fee charged to all account holders is
fully refundable, the total of accounts with credit limits in excess of
cardholder balances is reflected as a liability in the amount of $1,118,898
(unaudited), $1,286,517, and $1,921,769 as of June 30, 2001, and December 31,
2000 and 1999, respectively, in the accompanying balance sheets.
CONTINGENCIES: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
financial statements.
Credit card loans are issued throughout the United States to customers that are
considered high credit risks. The Company evaluates each customer's credit
worthiness on a case-by-case basis. Because of the reservation fee charged upon
issuance of credit cards, charges for purchases or cash advances are generally
limited to the amount of payments collected from each customer less fees
charged.
The Company issues its credit cards under membership terms with VISA.
Modification of these terms by VISA could adversely affect operating results.
8
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2001 and June 30, 2000 is
unaudited)
--------------------------------------------------------------------------------
NOTE 5. INCOME TAXES
All active card accounts are charged monthly membership fees, late charges,
overlimit fees and other charges according to the card agreements. The Company
has not recognized certain of these monthly charges as income for financial
reporting purposes because the charges are not believed to be collectible. A
deferred tax asset in the amount of $606,500 was recognized as of December 31,
1999, related to the excess of the estimated tax basis of credit card
receivables over the reported receivables.
The Company elected S Corporation status effective January 1, 2000. Upon
converting to S Corporation status, the Company eliminated deferred tax assets
in the amount of $606,500 as a charge against income form operations. This
charge against income was offset by the recognition of a receivable from
stockholders in the amount of $606,500 due to a commitment from the stockholders
to reimburse the Company for income taxes paid by the Company related to losses
recognized by the Company for financial reporting purposes in 1999, but passed
through to the stockholders in the years subsequent to 1999 for income tax
purposes.
The provision for income taxes charged to operations for the six-month periods
ended June 30, 2001 and 2000, the years ended December 31, 2000 and 1999, and
the period from inception, October 10, 1998, through December 31, 1998, consist
of the following:
June 30, December 31,
---------------------- ---------------------------------
2001 2000 2000 1999 1998
--------- --------- --------- --------- -------
(Unaudited) (Unaudited)
Currently payable or paid:
Federal $(100,500) $ -- $ -- $ 618,000 $ --
State (17,000) -- -- 106,000 --
Deferred income taxes -- 606,500 606,500 (606,500) --
Reimbursement -- (606,500) (606,500) -- --
--------- --------- --------- --------- -------
$(117,500) $ -- $ -- $ 117,500 $ --
========= ========= ========= ========= =======
The income tax provision differs from the amount of income tax determined by
applying the U. S. federal income tax rate to pretax income for the following
periods due to the following:
Period from
inception
October 10,
Six months ended 1998 through
June 30, Year ended December 31, December 31,
-------------------- --------------------- ---------
2001 2000 2000 1999 1998
--------- ------- --------- --------- ---------
(Unaudited) (Unaudited)
Computed "expected" tax
expense (benefit) $ -- $ -- $ -- $ 109,679 $ (1,261)
Increase resulting from
state income taxes, net
of federal tax benefit -- -- -- 11,710 --
IRS audit adjustment (117,500)
Effect of lower tax
brackets and other -- -- -- (3,889) 1,261
--------- ------- --------- --------- ---------
$(117,500) $ -- $ -- $ 117,500 $ --
========= ======= ========= ========= =========
9
NOVA FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2001 and June 30, 2000 is
unaudited)
--------------------------------------------------------------------------------
NOTE 5. INCOME TAXES (CONTINUED)
Pursuant to an audit of tax returns for 1998 and 1999 by the IRS in 2001,
accrued income taxes payable of $117,500 were eliminated in 2001.
NOTE 6. OTHER OPERATING EXPENSES
Period from
inception
Six months ended October 10,
June 30, Year ended December 31, 1998 through
----------------------- ----------------------- December 31,
2001 2000 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Cardholder expense-other $ 16,722 $ 72,258 $ 146,438 $ 96,206 $ --
Professional fees 46,631 198,657 391,391 20,128 1,121
Printing and supplies -- -- -- 21,742 676
Other 33,932 19,954 97,516 165,182 5,000
---------- ---------- ---------- ---------- ----------
$ 97,285 $ 290,869 $ 635,345 $ 303,258 $ 6,797
========== ========== ========== ========== ==========
NOTE 7. PLAN OF REORGANIZATION AND SUBSEQUENT EVENT
The Company has entered into an Agreement and Plan of Reorganization with
Equitex, Inc. under which the Company's stockholders would exchange all of the
issued and outstanding shares of the Company for a) 25% of the outstanding
common shares of Equitex, after giving effect to the consummation of this merger
and a similar planned merger of Key, b) warrants for the purchase of common
stock of Equitex equal to 50% of any warrants, options, preferred stock or other
securities outstanding at the closing date and exchangeable for or convertible
into Equitex common shares, and c) $2,500,000.
This transaction was completed on August 6, 2001 with the Company's shareholders
receiving 4,542,287 shares of Equitex common stock, 2,461,742 warrants to
purchase additional common stock, and $2,500,000 in cash.
NOTE 8. SUBSEQUENT EVENT
On March 5, 2001, the Company agreed to issue 20.41 shares of common stock,
representing 2% of the outstanding stock of the Company on a fully-diluted
basis, to three individual investors for $100,000. Mr. Henry Fong, President and
Chairman of Equitex, Inc. purchased 10.20 of the shares and owns 1% of the
Company.
KEY FINANCIAL SYSTEMS, INC.
FINANCIAL REPORT
CONTENTS
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT 1
--------------------------------------------------------------------------------
FINANCIAL STATEMENTS
Balance sheets 2
Statements of income 3
Statements of stockholders' equity 4
Statements of cash flows 5
Notes to financial statements 6 - 10
--------------------------------------------------------------------------------
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Key Financial Systems, Inc.
Clearwater, Florida
We have audited the accompanying balance sheets of Key Financial Systems, Inc.
as of December 31, 2000 and 1999, and the related statements of income,
stockholders' equity, and cash flows for the years ended December 31, 2000,
1999, and 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Key Financial Systems, Inc. as
of December 31, 2000 and 1999, and the results of its operations and its cash
flows for the years ended December 31, 2000, 1999, and 1998 in conformity with
accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Fort Lauderdale, Florida
March 30, 2001
KEY FINANCIAL SYSTEMS, INC.
BALANCE SHEETS
--------------------------------------------------------------------------------
December 31,
June 30, -------------------------
2001 2000 1999
----------- ----------- -----------
(Unaudited)
ASSETS
Cash $ 338,889 $ 71,873 $ 30,908
Credit card receivables, net (Note 2) 828,394 622,943 519,929
Other receivables (Note 3) 4,316,023 3,787,854 2,874,293
Due from affiliates (Note 5) 25,140 81,138 685,464
Leaseholds and equipment, net (Note 4) 287,139 266,643 303,976
Other assets 21,118 32,329 17,917
----------- ----------- -----------
$ 5,816,703 $ 4,862,780 $ 4,432,487
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Due to cardholders (Note 6) $ 3,581,251 $ 3,102,926 $ 2,402,377
Accounts payable (Note 5) 1,182,465 595,550 311,029
Accrued expenses and other liabilities 244,252 402,452 379,012
----------- ----------- -----------
5,007,968 4,100,928 3,092,418
----------- ----------- -----------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common stock, par value $1 per share, authorized
7,500 shares; issued June 30, 2001, 2,041 shares;
December 31, 2000 and 1999, 2000 shares 2,041 2,000 2,000
Additional paid-in capital 1,271,794 371,835 371,835
Retained earnings (deficit) (465,100) 388,017 966,234
----------- ----------- -----------
808,735 761,852 1,340,069
----------- ----------- -----------
$ 5,816,703 $ 4,862,780 $ 4,432,487
=========== =========== ===========
See Notes to Financial Statements.
2
KEY FINANCIAL SYSTEMS, INC.
STATEMENTS OF INCOME
--------------------------------------------------------------------------------
Six months ended
June 30, Years ended December 31,
------------------------- ---------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(Unaudited) (Unaudited)
Credit card income:
Card servicing fees $ 3,613,037 $ 3,478,308 $ 6,892,015 $11,628,340 $ 3,529,187
Other 158,296 86,365 231,799 246,767 51,283
----------- ----------- ----------- ----------- -----------
3,771,333 3,564,673 7,123,814 11,875,107 3,580,470
Provision for (recovery of) losses (Note 2) 237,091 (14,955) 139,782 511,645 260,332
----------- ----------- ----------- ----------- -----------
NET CREDIT CARD INCOME AFTER
PROVISION FOR LOSSES 3,534,242 3,579,628 6,984,032 11,363,462 3,320,138
----------- ----------- ----------- ----------- -----------
Other income:
Application fees, net of direct marketing
costs; six months ended June 30,
2001 and 2000, $8,839,063 and
$3,424,947 (unaudited); years ended
December 31, 2000, 1999 and 1998,
$10,366,826, $7,153,144 and
$9,721,837 (Note 5) 2,230,938 654,547 2,735,438 935,015 1,621,815
Servicing fee income (Note 5) -- 672,420 672,420 3,832,736 --
Other 180,811 48,892 182,618 59,807 --
----------- ----------- ----------- ----------- -----------
2,411,749 1,375,859 3,590,476 4,827,558 1,621,815
----------- ----------- ----------- ----------- -----------
Operating expenses:
Salaries and wages 1,990,764 1,237,197 2,686,033 3,997,724 1,015,019
Employee benefits 217,421 176,930 333,843 466,540 1,335
Third party servicing fees (Note 8) 2,039,040 1,281,604 3,007,077 4,978,279 3,035,568
Occupancy and equipment (Note 6) 235,251 206,120 426,930 351,647 61,133
Other operating expenses (Note 7) 666,633 396,547 1,139,842 1,011,976 373,564
----------- ----------- ----------- ----------- -----------
5,149,109 3,298,398 7,593,725 10,806,166 4,486,619
----------- ----------- ----------- ----------- -----------
NET INCOME $ 796,882 $ 1,657,089 $ 2,980,783 $ 5,384,854 $ 455,334
=========== =========== =========== =========== ===========
See Notes to Financial Statements.
3
KEY FINANCIAL SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED) AND YEARS ENDED
DECEMBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
Additional Retained
Common Paid In Earnings
Stock Capital (Deficit) Total
-------------------------------------------------------------------------------------------
Balance, January 1, 1998 $ 1,000 $ 22,835 $ (11,954) $ 11,881
Net income -- -- 455,334 455,334
Issuance of 1,000 Shares 1,000 249,000 -- 250,000
Dividends Paid -- -- (798,112) (798,112)
----------- ----------- ----------- -----------
Balance, December 31, 1998 2,000 271,835 (354,732) (80,897)
Net income -- -- 5,384,854 5,384,854
Capital contributed -- 100,000 -- 100,000
Dividends paid -- -- (4,063,888) (4,063,888)
----------- ----------- ----------- -----------
Balance, December 31, 1999 2,000 371,835 966,234 1,340,069
Net income -- -- 2,980,783 2,980,783
Dividends paid -- -- (3,559,000) (3,559,000)
----------- ----------- ----------- -----------
Balance, December 31, 2000 2,000 371,835 388,017 761,852
Net income (unaudited) -- -- 796,882 796,882
Dividends paid (unaudited) -- -- (1,650,000) (1,650,000)
Issuance of 41 shares of common
stock (unaudited) 41 899,959 -- 900,000
----------- ----------- ----------- -----------
Balance, June 30, 2001 (unaudited) $ 2,041 $ 1,271,794 $ (465,100) $ 808,735
=========== =========== =========== ===========
See Notes to Financial Statements.
4
KEY FINANCIAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Six months ended
June 30, Years ended December 31,
-------------------------- -----------------------------------------
2001 2000 2000 1999 1998
----------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
Cash Flows From Operating Activities
Net income $ 796,882 $ 1,657,089 $ 2,980,783 $ 5,384,854 $ 455,334
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for (recovery of) losses 237,091 (14,955) 139,782 511,645 260,332
Depreciation and amortization 53,903 44,422 93,167 117,349 23,597
Increase in other receivables (528,169) (906,281) (913,561) (2,501,580) (372,713)
Decrease (increase) in due from
affiliates 55,998 632,985 604,326 (685,464) --
(Increase) decrease in other assets 11,211 600 (14,412) 21,960 (34,573)
Increase in due to cardholders 478,325 502,644 700,549 993,684 1,408,693
Increase (decrease) in accounts
payable, accrued expenses and other
liabilities 428,715 344,305 307,961 (334,823) 1,022,864
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 1,533,956 2,260,809 3,898,595 3,507,625 2,763,534
----------- ----------- ----------- ----------- -----------
Cash Flows From Investing Activities
Net increase (decrease) in credit card
receivables (442,542) 100,037 (242,796) 89,823 (1,381,729)
Advances to stockholders -- -- -- -- (288,888)
Collection of advances to stockholders -- -- -- 288,888 --
Purchase of property and equipment (74,398) (20,654) (55,834) (208,370) (228,308)
----------- ----------- ----------- ----------- -----------
NET CASH PROVIDED BY (USED
IN) INVESTING ACTIVITIES (516,940) 79,383 (298,630) 170,341 (1,898,925)
----------- ----------- ----------- ----------- -----------
Cash Flows From Financing Activities
Capital contributions and common
stock issued 900,000 -- -- 100,000 250,000
Dividends paid (1,650,000) (2,209,000) (3,559,000) (4,063,888) (798,112)
----------- ----------- ----------- ----------- -----------
NET CASH USED IN FINANCING
ACTIVITIES (750,000) (2,209,000) (3,559,000) (3,963,888) (548,112)
----------- ----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN
CASH 267,016 131,192 40,965 (285,922) 316,497
Cash:
Beginning 71,873 30,908 30,908 316,830 333
----------- ----------- ----------- ----------- -----------
Ending $ 338,889 $ 162,100 $ 71,873 $ 30,908 $ 316,830
=========== =========== =========== =========== ===========
See Notes to Financial Statements.
5
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2001 and June 30, 2000 is
unaudited)
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS: Key Financial Systems, Inc. (the "Company") designs and
markets credit card products aimed at the sub-prime market. The credit card
products are marketed for an unaffiliated bank under an agreement that provides
the Company with a 100% participation interest in the receivables and related
rights associated with credit cards issued and requires the payment of monthly
servicing fees to the bank. The Company provides collection and customer service
related to the credit cards issued.
BASIS OF FINANCIAL STATEMENT PRESENTATION AND ACCOUNTING ESTIMATES: The
accounting and reporting policies of the Company conform to generally accepted
accounting principles and general practices within the financial services
industry. In preparing the accompanying financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of
the date of the balance sheet and the reported amounts of revenue and expenses
for the period. Actual results could differ from those estimates.
UNAUDITED FINANCIAL STATEMENTS: The balance sheet as of June 30, 2001, the
statements of operations and cash flows for the six months ended June 30, 2001
and 2000, and the statement of stockholders' equity for the six months ended
June 30, 2001, have been prepared by the Company without audit. In the opinion
of management, all adjustments (which include normal recurring adjustments)
necessary to present fairly the financial position, results of operations and
cash flows for all such periods have been made. The results of operations for
the six months ended June 30, 2001, are not necessarily indicative of the
operating results for the full year.
PRESENTATION OF CASH FLOWS: Cash flows from credit card receivables are reported
net.
CREDIT CARD RECEIVABLES: Credit card receivables are stated at cost plus
refundable and earned fees (the balance reported to customers), reduced by
allowances for refundable fees and losses.
Fees are accrued monthly on active credit card accounts and included in credit
card receivables, net of estimated uncollectable amounts. Accrual of income is
discontinued on credit card accounts that have been closed or charged off.
Accrued fees on credit card loans are charged off with the card balance,
generally when the account becomes 90 days past due.
The allowance for losses is established through a provision for losses charged
to expense. Receivables are charged against the allowance for losses when
management believes that collectibility of principal is unlikely. The allowance
is an amount that management believes will be adequate to absorb estimated
losses on existing accounts, based on evaluation of the collectibility of the
accounts and prior loss experience. This evaluation also takes into
consideration such factors as changes in the volume of the credit card
receivable portfolio, overall portfolio quality, and current economic conditions
that may affect the borrowers' ability to pay. While management uses the best
information available to make its evaluation, this estimate is susceptible to
significant change in the near term.
DUE FROM AFFILIATES: The amount due from affiliate in the accompanying balance
sheets represents amounts paid by the Company for Nova Financial Systems, Inc.
("Nova"), a company affiliated through common ownership, and the balance of
unpaid servicing fees receivable in connection with Nova's card activity. The
Company provided credit card marketing, customer service and collection services
for Nova, in exchange for a fee. Effective July 1, 2000, the Company no longer
provides such services for Nova.
6
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2001 and June 30, 2000 is
unaudited)
--------------------------------------------------------------------------------
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER RECEIVABLES AND DUE TO CARDHOLDERS: The Company charges a fully refundable
reservation fee equal to each cardholder's borrowing limit upon issuance of a
credit card. The amount due to cardholders represents the balance of reservation
fees that would have to be refunded to cardholders should they close their
accounts at the balance sheet date. Funds held in trust at Key Bank & Trust to
secure payment of this liability are reflected in other receivables in the
accompanying balance sheets.
LEASEHOLDS AND EQUIPMENT: Leaseholds and equipment are stated at cost less
accumulated depreciation. Depreciation is computed principally by the double
declining-balance method over the assets' estimated useful lives.
INCOME TAXES: The Company, with the consent of its stockholders, elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code
effective January 1, 1998, which provides that in lieu of corporate income tax
the stockholders separately account for their pro rata shares of the Company's
items of income, deductions, losses and credits. As a result of this election,
no income taxes have been recognized in the accompanying financial statements.
As of December 31, 2000 and June 30, 2001, the Company's reported net assets
exceed their tax bases by approximately $330,000 and $750,000 (unaudited),
respectively. Accordingly, if the election was terminated on that date, a
deferred tax liability of approximately $122,000 and $280,000 (unaudited),
respectively, would be recognized by a charge to income tax expense. Funds
received in excess of projected cash requirements for the next month are
generally distributed to the stockholders.
NOTE 2. CREDIT CARD RECEIVABLES
The composition of credit card receivables at June 30, 2001, and at December 31,
2000 and 1999 is as follows:
2001 2000 1999
------------ ------------ ------------
(Unaudited)
Credit card receivables $ 40,456,077 $ 24,993,671 $ 22,274,017
Refundable reservation fees (39,435,064) (24,241,000) (21,693,622)
------------ ------------ ------------
1,021,013 752,671 580,395
Less allowance for losses 192,619 129,728 60,466
------------ ------------ ------------
$ 828,394 $ 622,943 $ 519,929
============ ============ ============
Changes in the allowance for losses for the six-month periods ended June 30,
2001 and 2000, and for the years ended December 31, 2000, 1999 and 1998 are as
follows:
Six months ended
June 30, Years ended December 31,
--------------------- -----------------------------------
2001 2000 2000 1999 1998
--------- --------- --------- --------- ---------
(Unaudited) (Unaudited)
Balance, beginning $ 129,728 $ 60,466 $ 60,466 $ 217,872 $ --
Provision for recovery
of losses 237,091 (14,955) 139,782 511,645 260,332
Recoveries of amounts
charged-off -- -- -- 4,231 67,274
Amounts charged-off (174,200) (6,666) (70,520) (673,282) (109,734)
--------- --------- --------- --------- ---------
Balance, ending $ 192,619 $ 38,845 $ 129,728 $ 60,466 $ 217,872
========= ========= ========= ========= =========
7
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2001 and June 30, 2000 is
unaudited)
--------------------------------------------------------------------------------
NOTE 3 OTHER RECEIVABLES
The composition of other receivables at June 30, 2001, and at December 31, 2000
and 1999 is as follows:
2001 2000 1999
---------- ---------- ----------
(Unaudited)
Due from Key Bank & Trust $ 667,886 $1,532,254 $2,785,624
Due from Net 1st National Bank 3,259,627 2,150,410 --
Other 388,511 105,190 88,669
---------- ---------- ----------
$4,316,023 $3,787,854 $2,874,293
========== ========== ==========
The amounts due from Key Bank and Trust and Net 1st National Bank are held in
trust accounts by the respective bank.
NOTE 4. LEASEHOLDS AND EQUIPMENT
The major classes of property and equipment and total accumulated depreciation
at June 30, 2001, and at December 31, 2000 and 1999, are as follows:
2001 2000 1999
---------- ---------- ----------
(Unaudited)
Leasehold improvements $ 122,354 $ 116,202 $ 104,304
Furniture and equipment 427,769 360,011 332,019
Software 16,433 15,944 --
---------- ---------- ----------
566,556 492,157 436,323
Less accumulated depreciation 279,417 225,514 132,347
---------- ---------- ----------
$ 287,139 $ 266,643 $ 303,976
========== ========== ==========
NOTE 5. TRANSACTIONS WITH RELATED PARTIES
The Company had an informal agreement with Nova under which the Company provided
marketing and preprocessing of credit card applications, customer service and
collection services for Nova. Expenses were charged to Nova for application
processing and customer service based on a set fee per application processed and
for collections based on a set fee per delinquent account on file. The Company
believes the method and per unit price charged were consistent with the methods
and rates of similar third party credit card processors. As of July 1, the
Company is no longer providing these services to Nova. The Company recognized
processing fee and servicing income of $672,420 and $3,832,736 associated with
Nova's activities during the years ended December 31, 2000 and 1999,
respectively. During the six months ended June 30, 2000, processing fee and
servicing income of $672,400 (unaudited) was recognized. These amounts are
included in other operating income. No significant services were performed for
Nova in 1998 or 2001. As of June 30, 2001, December 31, 2000 and 1999, Nova owed
the Company $25,140 (unaudited), $81,138 and $685,464, respectively, in
connection with services performed and amounts paid for Nova by the Company.
Accrued expenses and other liabilities include $325,000 and $200,000 at December
31, 2000 and 1999, respectively, of short-term borrowings from shareholders.
Such amounts were borrowed in December of each year to provide working capital
and repaid in January of the following year in each instance.
8
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2001 and June 30, 2000 is
unaudited)
--------------------------------------------------------------------------------
NOTE 5. TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
The Company has entered into an agreement with Paragon Water Member Services
("Paragon"), a company affiliated through common ownership, whereby Paragon
provides credit card marketing services for the Company. Paragon earns
commissions for card applications that are not subsequently refunded. The
Company paid Paragon $897,521 and $5,622,028 in commissions during the years
ended December 31, 2000 and 1999, respectively, and $1,993,836 and none during
the six months ended June 30, 2001 and 2000, respectively (unaudited). The
Company owed Paragon $228,226 as of June 30, 2001 (unaudited) and no amount was
due to Paragon at December 31, 2000 and 1999.
Effective March 19, 2001, The Company entered into an agreement with Paragon to
assume the management of Paragon's telemarketing operations. Under the agreement
the Company assumed certain operating expenses and will be paid a management fee
representing 75% of the net operating profits of the telemarketing operations.
The Company will be responsible for any operating losses, with the right of
offset against future operating profits. A net loss of $196,000 (unaudited) has
been included in other income for the six months ended June 30, 2001.
NOTE 6. COMMITMENTS, CONTINGENCIES AND CREDIT RISK
A credit limit has been established for each cardholder account acquired by the
Company. By agreement, the credit limit can be terminated at any time for any
reason. Because the initial reservation fee charged to all account holders is
fully refundable, the total of accounts with credit limits in excess of
cardholder balances is reflected as a liability in the amount of $3,581,250
(unaudited), $3,102,926 and $2,402,377 as of June 30, 2001, December 31, 2000
and 1999, respectively, in the accompanying balance sheets.
LEASE COMMITMENTS: The Company rents office space under an operating lease with
initial terms through September 30, 2004. The office lease has a five year
renewal option. The future minimum rental payments due under the lease as of
December 31, 2000, is as follows:
Year Ending
December 31, Amount
-------------------------------------------------------------------------------
2001 $ 292,130
2002 306,700
2003 322,100
2004 250,500
-------------------
$ 1,449,600
===================
Total rent expense under operating leases was approximately $299,000 and
$229,000 for the years ended December 31, 2000 and 1999, respectively. During
the six months ended June 30, 2001 and 2000, rent expense amounted to $155,000
(unaudited) and $147,000 (unaudited), respectively.
CONTINGENCIES: In the normal course of business, the Company is involved in
various legal proceedings. In the opinion of management, any liability resulting
from such proceedings would not have a material adverse effect on the Company's
financial statements.
Credit cards are issued throughout the United States to customers that are
considered high credit risks. The Company evaluates each customer's credit
worthiness on a case-by-case basis. Because of the reservation fee charged upon
issuance of credit cards, changes for purchases or cash advances are generally
limited to the amount of payments collected from each customer less fees
charged.
9
KEY FINANCIAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(Information related to the periods ended June 30, 2001 and June 30, 2000 is
unaudited)
--------------------------------------------------------------------------------
NOTE 6. COMMITMENTS, CONTINGENCIES AND CREDIT RISK (CONTINUED)
The Company's credit card receivables were initiated under membership terms with
VISA and MasterCard. Modification of these terms by VISA and Master Card could
adversely affect operating results.
NOTE 7. OTHER OPERATING EXPENSES
Six months ended
June 30, Years ended December 31,
----------------------- ------------------------------------
2001 2000 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Telecommunications $ 242,462 $ 168,175 $ 402,038 $ 648,111 $ 259,105
Professional fees 217,851 105,806 341,444 166,005 2,869
Printing and supplies 12,169 7,880 15,007 41,461 63,049
Bank charges 105,999 -- 101,183 3,461 --
Other 88,152 114,686 280,170 152,935 48,541
---------- ---------- ---------- ---------- ----------
$ 666,633 $ 396,547 $1,139,842 $1,011,976 $ 373,564
========== ========== ========== ========== ==========
NOTE 8. SETTLEMENT WITH BANK
In April 1999, the Company reached a settlement with Key Bank & Trust that
resulted in a) a significant increase in the amount of collected funds held in
trust by the Bank pending payment to the Company, b) the cessation of marketing
credit cards for the Bank, c) a reduction in the monthly fees charged by the
Bank to the Company, and d) mutual releases from any and all claims against each
other through the date of the release. In connection with the settlement, the
Bank paid the Company $1,016,928, which has been recognized as a reduction in
third party servicing fees for the year ended December 31, 1999 in the
accompanying statements of operations.
NOTE 9. PLAN OF REORGANIZATION
The Company has entered into an Agreement and Plan of Reorganization with
Equitex, Inc. under which the Company's stockholders would exchange all of the
issued and outstanding shares of the Company for a) 25% of the outstanding
common shares of Equitex, after giving effect to the consummation of this merger
and a similar planned merger of Nova, b) warrants for the purchase of common
stock of Equitex equal to 50% of any warrants, options, preferred stock or other
securities outstanding at the closing date and exchangeable for or convertible
into Equitex common shares, and c) $2,500,000.
This transaction was completed on August 6, 2001 with the Company's shareholders
receiving 4,542,286 shares of Equitex common stock, 2,461,742 warrants to
purchase additional common stock, and $2,500,000 in cash.
NOTE 10. SUBSEQUENT EVENT
On March 5, 2001, the Company agreed to issue 40.82 shares of common stock,
representing 2% of the outstanding stock of the Company on a fully-diluted
basis, to three individual investors for $900,000. Mr. Henry Fong, President and
Chairman of Equitex, Inc. purchased 20.41 of the shares and owns 1% of the
Company.
10