UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 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 November 14, 2001: 18,494,502
EQUITEX, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial statements:
Independent accountants' report 3
Condensed consolidated/combined balance sheets -
September 30, 2001 and December 31, 2000 (unaudited) 4
Condensed consolidated/combined statements of
operations- three and nine months ended
September, 2001 and 2000 (unaudited) 5
Condensed consolidated/combined statement of
changes in stockholders' equity - nine months ended
September 30, 2001(unaudited) 6-7
Condensed consolidated/combined statements of cash
flows - nine months ended September 30, 2001
and 2000 (unaudited) 8-9
Notes to condensed consolidated/combined
financial statements 10-22
Item 2. Management's discussion and analysis of financial
condition and results of operations 23
Item 3. Quantitative and qualitative disclosures of market risk 28
PART II OTHER INFORMATION
Item 1. Legal proceedings 29
Item 2. Changes in securities and use of proceeds 29
Item 3. Defaults upon senior securities 30
Item 4. Submission of matters to a vote of security holders 30
Item 5. Other information 30
Item 6. Exhibits and reports on Form 8-K 30
2
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Equitex, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Equitex, Inc. and subsidiaries as of September 30, 2001 and the related
condensed consolidated/combined statements of operations for the three-month and
nine-month periods then ended, the condensed consolidated/combined statements of
stockholders' equity for the nine months ended September 30, 2001 and cash flows
for the nine-month periods ended September 30, 2001 and 2000. These financial
statements are the responsibility of the Company's management.
We conducted our review 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/combined financial statements
as of September 30, 2001 and for the three-month and nine-month periods ended
September 30, 2001 and 2000 for them to be in conformity with generally accepted
accounting principles.
/S/ GELFOND HOCHSTADT PANGBURN, P.C.
GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
November 16, 2001
3
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED/COMBINED BALANCE SHEETS
(UNAUDITED)
(Note 1)
ASSETS
September 30, December 31,
2001 2000
----------- -----------
Cash and cash equivalents $ 315,689 $ 73,611
Credit card receivables, net 1,692,109 906,296
Other receivables 6,106,604 5,278,085
Leaseholds and equipment, net 296,985 266,643
Prepaid expenses and other 207,967 638,829
Deferred income tax benefit 1,380,000 --
----------- -----------
$ 9,999,354 $ 7,163,464
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Due to cardholders $ 4,999,740 $ 4,389,443
Notes and advances payable, related parties 249,700 325,000
Accounts payable 1,280,681 680,635
Accrued liabilities:
Related parties 250,092 --
Others 100,557 870,221
----------- -----------
Total liabilities 6,880,770 6,265,299
----------- -----------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred stock; 2,000,000 shares authorized:
Series D, 6%, stated value
$1,000 per share;
725 shares issued and outstanding;
liquidation preference $1,034,000 725,000 --
Series G, 6%, stated value $1,000 per share; 1,300
shares issued and outstanding; liquidation
preference $1,834,000 1,770,500 --
Series I, 6%, stated value $1,000 per share; 3,600
shares issued and outstanding; liquidation
preference $4,535,000 3,600,000 --
Common stock, $0.02 par value; 50,000,000 shares
authorized; 18,384,835 and 8,903,730 shares issued;
18,351,485 and 8,903,730 shares outstanding at
September 30, 2001 and December 31, 2000,
respectively 367,697 178,075
Common stock and warrants to be issued 2,640,009 --
Deferred compensation cost (1,733,000) --
Additional paid-in capital (4,102,500) 220,760
Retained earnings (deficit) (35,085) 499,330
Less treasury stock at cost (33,350 common shares) (114,037) --
----------- -----------
Total stockholders' equity 3,118,584 898,165
----------- -----------
$ 9,999,354 $ 7,163,464
=========== ===========
See notes to condensed consolidated/combined financial statements.
4
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Note 1)
Three months Nine months
ended September 30, ended September 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Credit card income:
Card servicing fees $ 2,946,653 $ 2,477,045 $ 7,627,389 $ 8,814,801
Other 109,174 105,539 307,434 301,454
------------ ------------ ------------ ------------
3,055,827 2,582,584 7,934,823 9,116,255
Provision for (recovery of) losses 40,256 146,310 245,601 (90,267)
------------ ------------ ------------ ------------
Net credit card income after
provision for losses 3,015,571 2,436,274 7,689,222 9,206,522
------------ ------------ ------------ ------------
Other income:
Application fees,
net of direct marketing costs 941,624 1,539,763 3,172,562 2,191,907
Other 154,998 58,785 335,809 107,677
------------ ------------ ------------ ------------
1,096,622 1,598,548 3,508,371 2,299,584
------------ ------------ ------------ ------------
Total income 4,112,193 4,034,822 11,197,593 11,506,106
------------ ------------ ------------ ------------
Operating expenses:
Salaries and wages 1,188,857 686,661 3,179,621 1,923,858
Employee benefits 113,461 82,497 330,882 259,427
Third party servicing fees 1,639,082 1,469,888 4,339,950 4,346,229
Occupancy and equipment 155,156 129,950 390,407 336,070
Interest expense, related parties 672 -- 672 --
Other operating expenses 784,058 530,563 1,547,976 1,217,979
------------ ------------ ------------ ------------
3,881,286 2,899,559 9,789,508 8,083,563
------------ ------------ ------------ ------------
Income before taxes 230,907 1,135,263 1,408,085 3,422,543
Income tax (expense) benefit (60,000) -- 57,500 --
------------ ------------ ------------ ------------
Net income 170,907 1,135,263 1,465,585 3,422,543
Beneficial conversion features (Note 8) (2,366,156) -- (2,366,156) --
Deemed preferred stock dividends (Note 8) (60,600) -- (60,600) --
------------ ------------ ------------ ------------
Net income (loss) applicable to common
shareholders $ (2,255,849) $ 1,135,263 $ (961,171) $ 3,422,543
============ ============ ============ ============
Basic and diluted net income (loss) per
common share $ (0.15) $ 0.13 $ (0.09) $ 0.38
============ ============ ============ ============
Weighted average number of common
shares outstanding 14,585,390 8,903,730 10,896,018 8,903,730
============ ============ ============ ============
See notes to condensed consolidated financial statements.
5
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED/COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
(Note 1)
Convertible preferred stock Common stock Common stock
-------------------------- -------------------------- Treasury and warrants
Shares Amount Shares Amount stock to be issued
----------- ----------- ----------- ----------- ----------- -----------
Balances, January 1, 2001 (Note 1) -- -- 7,506,614 $ 150,132 -- --
Common stock of Key and Nova
issued for cash 181,043 3,621
Dividends paid to Key and Nova
shareholders by Key and Nova
Common stock of Equitex issued from July
1, 2001 through August 5, 2001 - Includes
525,716 common shares issued upon
conversion of Series F Preferred Stock,
471,800 common shares issued upon
conversion of Series H Preferred Stock,
239,484 common shares issued upon the
exercise of options and warrants, and
163,466 common shares issued uon the
conversion of debt (Note 8) 1,430,466 28,610
----------- -----------
Balances as of August 6, 2001, prior to
acquisition of Key and Nova (represents
issued shares, including 33,350 shares
of treasury stock) 9,118,123 182,362
Issuance of common stock in connection
with the acquisition of Key and Nova -
preferred stock of Equitex outstanding
includes 725 shares of Series D, 1,300
shares of Series G, and 4,000 shares of
Series I Preferred Stock 6,025 $ 6,495,500 9,084,773 181,696 $ (114,037) $ 1,528,000
Conversion of Series I Preferred Stock
to common stock (400) (400,000) 115,274 2,305
Common stock issued for services 66,665 1,333 (345,991)
Cancellation of agreement to issue
common stock for services (415,000)
Agreements to issue common stock
and warrants for services 1,873,000
Amortization of deferred compensation cost
Net income
----------- ----------- ----------- ----------- ----------- -----------
Balances, September 30, 2001 5,625 $ 6,095,500 18,384,835 $ 367,697 $ (114,037) $ 2,640,009
=========== =========== =========== =========== =========== ===========
(Continued)
6
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED/COMBINED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2001
(UNAUDITED)
(Note 1)
Deferred Additional Retained Total
compensation paid-in earnings stockholders'
cost capital (deficit) equity
----------- ----------- ----------- -----------
Balances, January 1, 2001 (Note 1) -- $ 248,703 $ 499,330 $ 898,165
Common stock of Key and Nova
issued for cash 996,379 1,000,000
Dividends paid to Key and Nova
Shareholders (2,000,000) (2,000,000)
Common stock of Equitex issued from July
1, 2001 through August 5, 2001 - Includes
525,716 common shares issued upon
conversion of Series F Preferred Stock,
471,800 common shares issued upon
conversion of Series H Preferred Stock,
239,484 common shares issued upon the
exercise of options and warrants, and
163,466 common shares issued uon the
conversion of debt (Note 8) (28,610) --
-----------
Balances as of August 6, 2001, prior to
acquisition of Key and Nova (represents
issued shares, including 33,350 shares
of treasury stock) 1,216,472
Issuance of common stock in connection
with the acquisition of Key and Nova -
preferred stock of Equitex outstanding
includes 725 shares of Series D, 1,300
shares of Series G, and 4,000 shares of
Series I Preferred Stock $ (589,834) (6,061,325) 1,440,000
Conversion of Series I preferred stock
to common stock 397,695 --
Common stock issued for services 344,658 --
Cancellation of agreement to issue
common stock for services 415,000 --
Agreements to issue common stock
and warrants for services (1,733,000) 140,000
Amortization of deferred compensation cost 174,834 174,834
Net income 1,465,585 1,465,585
----------- ----------- ----------- -----------
Balances, September 30, 2001 $(1,733,000) $(4,102,500) $ (35,085) $ 3,118,584
=========== =========== =========== ===========
See notes to condensed consolidated/combined financial statements.
7
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2001 2000
----------- -----------
Cash flows provided by operating activities:
Net income $ 1,465,585 $ 3,422,543
----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for (recovery of) losses 245,601 (90,267)
Depreciation and amortization 84,310 91,507
Deferred compensation expense for services 174,834 --
Changes in assets and liabilities:
Increase in other receivables (828,915) (180,127)
Increase in due from shareholders -- (606,500)
Decrease in deferred income taxes 60,000 606,500
Decrease in other assets 430,862 900
Increase in due to card holders 610,297 373,023
Increase in accounts payable and accrued liabilities 70,270 571,146
----------- -----------
Total adjustments 847,259 766,182
----------- -----------
Net cash provided by operating activities 2,312,844 4,188,725
----------- -----------
Cash flows from investing activities:
Net (increase) decrease in credit card receivables (1,031,414) 282,954
Purchases of furniture, fixtures and equipment (114,652) (49,325)
----------- -----------
Net cash (used in) provided by investing activities (1,146,066) 233,629
----------- -----------
Cash flows from financing activities:
Common stock of Key and Nova issued for cash 1,000,000 --
Dividends paid to Key and Nova shareholders (2,000,000) (3,925,000)
Issuance of notes payable, related parties (249,700) --
Repayment of notes payable, related parties 325,000 --
----------- -----------
Net cash used in financing activities (924,700) (3,925,000)
----------- -----------
Increase in cash and cash equivalents 242,078 497,354
Cash and cash equivalents, beginning 73,611 57,664
----------- -----------
Cash and cash equivalents, ending $ 315,689 $ 555,018
=========== ===========
(Contineud)
8
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2001 2000
----------- -----------
Supplemental disclosure of non-cash investing and
financing activities:
Issuance of common stock by Equitex to acquire
Key and Nova resulting recognition of a deferred tax
asset $ 1,440,000
===========
Conversion of preferred stock to common stock $ 400,000
===========
Common stock issued under deferred compensation
agreements $ 345,991
===========
Cancellation of agreement to issue common stock
for services $ 415,000
===========
Amortization of discount on preferred stock $ 2,366,156
===========
See notes to condensed consolidated/combined financial statements.
9
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION AND INTERIM FINANCIAL STATEMENTS:
ORGANIZATION AND BASIS OF PRESENTATION:
On August 6, 2001, Equitex, Inc. ("Equitex") distributed all of its assets
(which primarily consisted of its investments in subsidiaries) to Equitex
2000, Inc. ("Equitex 2000"), a newly-formed subsidiary of Equitex.
Equitex 2000 also assumed all liabilities of Equitex. The outstanding
common shares of Equitex 2000 are to be distributed to the stockholders
of Equitex based on proportional ownership of the shares held by the
Equitex stockholders in a spin-off transaction. The shares of Equitex
2000 are being held in escrow pending effectiveness of Equitex 2000's
Form 10 Registration Statement. Subsequent to the distribution, Equitex
had no remaining operations.
Also on August 6, 2001, immediately following the transaction described
above, Equitex acquired Key Financial Systems, Inc. ("Key") and Nova
Financial Systems, Inc. ("Nova"), both Florida companies that were under
common control with nearly an identical ownership structure. The Company
acquired Key and Nova in exchange for (i) 9,084,773 shares of the
Company's common stock, (ii) cash of $5 million, (iii) warrants to
acquire an aggregate of 990,134 shares of 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: 2,359 shares of Series H,
8% convertible preferred stock in exchange for $2,359,000, and 4,000
shares of Series I, 6% convertible preferred stock in exchange for
$4,000,000 (Note 8).
The transaction has been 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. The historical stockholders' equity of Key and Nova
prior to the merger has been retroactively restated (a recapitalization)
for the equivalent number of shares received in the merger after giving
effect to any differences in the par value of the Equitex, Key, and Nova
common stock, with an offset to additional paid-in capital. The restated
retained earnings of the acquirer is carried forward after the
acquisition.
Key and Nova design and market 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.
The accompanying unaudited financial statements present the condensed
consolidated financial position of the Company, Key and Nova as of
September 30, 2001, and the results of their operations and cash flows
for the three month and nine month periods ended September 30, 2001 and
2000. The financial statements presented for periods prior to August 6,
2001 consist of a combined balance sheet of Key and Nova as of December
31, 2000, and combined statements of operations and cash flows of Key and
Nova through August 5, 2001. Subsequent to August 5, 2001, the
accompanying unaudited financial statements present the financial
position, results of operations and cash flows of the Company on a
consolidated basis. The condensed combined balance sheet as of December
31, 2000 has been derived from the separate audited balance sheets of Key
and Nova as of that date. All significant intercompany accounts and
transactions have been eliminated in consolidation.
10
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
1. ORGANIZATION, AND BASIS OF PRESENTATION AND INTERIM FINANCIAL STATEMENTS
(CONTINUED):
INTERIM FINANCIAL STATEMENTS:
The condensed consolidated interim financial statements of Equitex, Inc.
and subsidiaries (the "Company") for the three-month and nine-month
periods ended September 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 September 30, 2001 and December 31, 2000, and for the
periods ended September 30, 2001 and 2000 have been made. Except as
described above, those adjustments consist only of normal and recurring
adjustments.
Certain information and note disclosures normally included in the
Company's annual financial statements prepared in accordance with
accounting principals generally accepted in the United States of America
have been condensed or omitted. These condensed consolidated/combined
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 and the Company's definitive proxy
statement, both filed with the Securities and Exchange Commission ("SEC")
on May 16, 2001, as well as a Form 8-K/A filed with the SEC on October
22, 2001. The results of operations for the nine months ended September
30, 2001 are not necessarily indicative of the results to be expected for
the full year.
2. SIGNIFICANT ACCOUNTING POLICIES:
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
borrower's 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.
11
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2. 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:
Through August 5, 2001, both Key and Nova maintained S Corporation status
for federal income tax purposes. As an S corporation, the shareholders
reported their respective share of net income on their income tax
returns. Effective August 6, 2001, in connection with the Company's
acquisition of Key and Nova, Key and Nova terminated their S corporation
status and became C corporations. As a C corporation, income taxes are
provided for the tax effects of transactions reported in the financial
statements and a deferred income tax liability or asset is recognized for
temporary differences between the Company's financial statements and tax
returns. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years which those
temporary differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the
statement of operations in the period that includes the enactment date.
ESTIMATES:
Preparation of the financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the balance sheet and the reported amounts of
revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
SEGMENT INFORMATION:
Statement of Financial Accounting Standards ("SFAS") No. 131, DISCLOSURES
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, establishes
standards for the reporting and disclosure of information about operating
segments in annual and interim financial statements. Operating segments
are defined as components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief
operating decision maker(s) in deciding how to allocate resources and in
assessing performance. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers.
12
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
SEGMENT INFORMATION (CONTINUED):
Management has determined that the Company operates in one dominant,
operating segment that involves designing and marketing credit card
products aimed at the sub-prime market. Substantially all of the
Company's assets and employees are located in Florida, and all revenues
are generated within the United States.
NET INCOME (LOSS) PER SHARE:
SFAS No. 128, EARNINGS PER SHARE, requires dual presentation of basic and
diluted earnings or loss per share ("EPS") with a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. Basic EPS excludes
dilution. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity.
Earnings and loss per share of common stock is computed based on the
average number of common shares outstanding during the period. The
historical earnings per share of Key and Nova prior to the merger has
been retroactively restated to reflect the new capital structure. Stock
options, warrants, common stock to be issued, and convertible preferred
stock are not considered in the calculations for the three month and nine
month periods ended September 30, 2001, as the impact of the potential
common shares would be to decrease loss per share. Therefore, diluted
loss per share is equivalent to basic loss per share. Key and Nova did
not have any outstanding dillutive equity instruments outstanding for the
three month or nine month periods ending September 30, 2000, therefore
diluted earnings per share is equivalent to basic loss per share.
RECENTLY ISSUED ACCOUNTING STANDARDS:
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001. Use of the pooling-of-interests method is prohibited after that
date. SFAS No. 142 changes the accounting for goodwill and intangible
assets with indefinite lives from an amortization method to an
impairment-only approach and requires intangible assets with finite lives
to be amortized over their useful lives. Thus, amortization of goodwill
and intangible assets with indefinite lives will cease upon adoption of
the statement. SFAS No. 142 is required to be applied in fiscal years
beginning after December 15, 2001. The Company is currently assessing the
impact, if any, that SFAS No. 141 and SFAS No. 142 may have on its
financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, which addresses accounting and financial
reporting for the impairment or disposal of long-lived assets. This
statement is effective for fiscal years beginning after December 15,
2001. The Company is currently assessing the impact, if any, that SFAS
No. 144 may have on its financial condition and results of operations.
13
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
3. CREDIT CARD RECEIVABLES:
The composition of credit receivables at September 30, 2001, and at
December 31, 2000, is as follows:
2001 2000
------------ ------------
(Unaudited) (Unaudited)
Credit card receivables $ 49,865,331 $ 31,994,865
Refundable reservation fees (47,982,019) (30,834,483)
------------ ------------
1,883,312 1,160,382
Less allowance for losses 191,203 254,086
------------ ------------
$ 1,692,109 $ 906,296
============ ============
Changes in the allowance for losses for the nine-month and three month
periods ended September 30, 2001 and 2000, are as follows:
Nine-months ended Three-months ended
September 30, September 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Balances, beginning $ 254,086 $ 529,498 $ 217,921 $ 116,340
Provision for
(recovery of) losses 245,601 (90,267) 40,256 146,310
Amounts charged-off (308,484) (261,612) (66,974) (85,031)
--------- --------- --------- ---------
Balances, ending $ 191,203 $ 177,619 $ 191,203 $ 177,619
========= ========= ========= =========
14
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
4. OTHER RECEIVABLES:
The composition of other receivables at September 30, 2001, and at
December 31, 2000, is as follows:
2001 2000
-------------- --------------
(Unaudited) (Unaudited)
Due from Key Bank & Trust $ 479,485 $ 1,532,254
Due from Net 1st National Bank 4,018,000 2,150,410
Due from Merrick Bank 937,230 1,490,231
Other 671,889 105,190
-------------- --------------
$ 6,106,604 $ 5,278,085
============== ==============
The amounts due from Key Bank & Trust and Net 1st National Bank are held
in trust accounts by the respective bank.
5. LEASEHOLDS AND EQUIPMENT:
The major classes of property and equipment and total accumulated
depreciation at September 30, 2001, and at December 31, 2000, are as
follows:
2001 2000
-------------- --------------
(Unaudited) (Unaudited)
Leasehold improvements $ 125,854 $ 116,202
Furniture and equipment 464,522 360,011
Software 16,433 15,944
-------------- --------------
606,809 492,157
Less accumulated depreciation 309,824 225,514
-------------- --------------
$ 296,985 $ 266,643
============== ==============
6. TRANSACTIONS WITH RELATED PARTIES:
Notes payable include $249,700 and $325,000 at September 30, 2001 and
December 31, 2000, respectively, of short-term borrowings from
shareholders. Such amounts were borrowed in September 2001 and December
2000, respectively, to provide working capital. Shareholder borrowings
bear interest at 10%, are due on demand, and are repaid from cash flow
generated by ongoing operations.
15
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
6. TRANSACTIONS WITH RELATED PARTIES (CONTINUED):
Key has entered into an agreement with Paragon Water Member Services
("Paragon"), a company that was affiliated with Key through common
ownership prior to Equitex's acquisition of Key on August 6, 2001,
whereby Paragon provides credit card marketing services for the Company.
Paragon earns commissions for card applications that are not subsequently
refunded. Total expense under this agreement was $1,771,523 and $318,796
for the three months ended September 30, 2001 and 2000, respectively, and
$3,765,359 and $318,796 during the nine months ended September 30, 2001
and 2000, respectively. The Company owed Paragon $250,092 as of September
30, 2001, and no amount was owed to Paragon at December 31, 2000.
Effective March 19, 2001, Key entered into an agreement with Paragon to
assume the management of Paragon's telemarketing operations. Under the
agreement Key assumed certain operating expenses and is paid a management
fee representing 75% of the net operating profits of the telemarketing
operations. Total net losses under this agreement were $20,548 and $0 for
the three months ended September 30, 2001 and 2000, respectively, and
$216,698 and $0 during the nine months ended September 30, 2001 and 2000,
respectively. The Company is responsible for any operating losses, with
the right of offset against future operating profits.
7. COMMITMENTS, CONTINGENCIES AND CREDIT RISK:
LITIGATION:
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact
either individually or in the aggregate on the consolidated results of
operations, financial position or cash flows of the Company.
LEASE COMMITMENTS:
Key and Nova rent office space under a non-cancelable 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
non-cancelable lease as of September 30, 2001, is as follows:
Year ending
December 31, Amount
-------------------------------------------------
2001 (Remainder) $ 100,400
2002 408,300
2003 431,000
2004 450,100
------------------
$ 1,389,800
==================
During the nine months ended September 30, 2001 and 2000, rent expense
amounted to approximately $258,000 and $222,000, respectively.
In addition, the Company leases office space in Colorado on a
month-to-month basis for $2,500 per month from a corporation in which the
Company's president is the sole shareholder.
16
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
7. COMMITMENTS, CONTINGENCIES AND CREDIT RISK (CONTINUED):
CONTINGENCIES:
A credit limit has been established for each cardholder account acquired
by Key and Nova. 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 $4,999,740 and $4,389,443 as of September 30, 2001 and
December 31, 2000, respectively, in the accompanying balance sheets.
Credit cards are issued throughout the United States to customers that are
considered high credit risks. The Company evaluates each customer's
credit worthiness on a case-by-case basis. Because of the reservation fee
charged upon issuance of credit cards, charges for purchases or cash
advances are generally limited to the amount of payments collected from
each customer less fees charged.
The Company's credit card receivables were initiated under membership
terms with VISA and MasterCard. Modification of these terms by VISA and
MasterCard could adversely affect operating results.
CONSULTING AGREEMENTS:
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 was recognized subsequent
to December 31, 2000, as the performance criteria were satisfied. The
Company recognized $687,500 of expense prior to the August 6, 2001
merger, and $62,500 of expense subsequent to the August 6, 2001 merger,
which is included in the Company's operations for the three month and
nine month periods ended September 30, 2001.
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 commitment, the total
compensation cost was calculated to be approximately $778,000, which was
to be recognized as the performance criteria are satisfied. In October
2001, the Company exercised its right to cancel this contract and agreed
to issue only 70,000 shares of common stock for certain performance
criteria that were met upon cancellation of the contract. Therefore,
compensation cost was recalculated to be approximately $363,000 at the
date of the original commitment. The Company recognized $250,666 of
expense prior to the August 6, 2001 merger, and $112,334 of expense
subsequent to the August 6, 2001 merger, which is included in the
Company's operations for the three month and nine month periods ended
September 30, 2001.
17
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
7. COMMITMENTS, CONTINGENCIES AND CREDIT RISK (CONTINUED):
CONSULTING AGREEMENTS (CONTINUED):
In September 2001, the Company entered into a consulting agreement for
investor communications and public relations, in which the Company is to
issue 350,000 shares of common stock and warrants to purchase an
additional 350,000 shares of common stock in equal increments of 50,000
shares at exercise prices from $4 to $10 per share. At the date of the
commitment, the total compensation cost was calculated to be
approximately $1,733,000, which is to be recognized in subsequent periods
as the services are performed.
8. STOCKHOLDERS' EQUITY:
ISSUANCES AND ACTIVITY PRIOR TO THE AUGUST 6, 2001 MERGER:
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 30% of
the stated value plus the aggregate of all accrued and unpaid dividends
on each share of Series D Preferred Stock until the most recent dividend
payment date or date of liquidation, dissolution or winding up of the
Company.
The Series D Preferred Stock is convertible into common stock at any time,
at a conversion price per share of common stock equal to 65% of the
average closing bid price of the Company's common stock as specified in
the agreement.
SERIES G REDEEMABLE CONVERTIBLE PREFERRED STOCK:
The holder of the Series G redeemable convertible preferred stock (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. The Series G Preferred
Stock contains a liquidation preference equal to the sum of the stated
value of each share plus an amount equal to 30% of the stated par value
plus the aggregate of all accrued and unpaid dividends on each share of
Series G Preferred Stock until the most recent dividend payment date or
date of liquidation, dissolution or winding up of the Company. 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.
18
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED):
ISSUANCES AND ACTIVITY PRIOR TO THE AUGUST 6, 2001 MERGER (CONTINUED):
SERIES G REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED):
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%.
At June 30, 2001, Equitex, Inc. had 7,687,657 shares of common stock
issued and 462,025 shares of Series D, F and G convertible preferred
stock outstanding valued at $5,485,500. In July 2001, prior to the
merger, all of the Series F convertible shares (460,000 shares) valued at
$2,990,000 were converted into 525,716 shares of common stock at a
conversion price of $7.00 per share.
SERIES H CONVERTIBLE PREFERRED STOCK:
In July 2001, prior to the merger, 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 (471,800 shares) and 200 warrants to purchase
common stock on July 19, 2001. Each warrant is exercisable until July 19,
2004 at an exercise price of $5.78 per share.
Because the Series H Preferred Stock contained an immediate beneficial
conversion feature, net income applicable to common stockholders was
decreased by $212,310 during the third quarter of 2001, the amount of the
discount resulting from the beneficial conversion feature.
SERIES I REDEEMABLE 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 holder of each share of
Series I Preferred Stock is entitled to cumulative dividends at 6% per
annum plus a 4% dividend default rate if any dividend is not paid in full
on any dividend payment due date, payable quarterly commencing September
30, 2001. Dividends are payable in cash or at the Company's option, in
shares of the Company's common stock. The Series I Preferred Stock
contains a liquidation preference equal to the sum of the stated value of
each share plus an amount equal to 30% of the stated par value plus the
aggregate of all accrued and unpaid dividends on each share of Series I
Preferred Stock until the most recent dividend payment date or date of
liquidation, dissolution or winding up of the Company. All outstanding
shares of the Series I Preferred Stock automatically convert into common
stock on July 20, 2004.
19
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED):
ISSUANCES AND ACTIVITY PRIOR TO THE AUGUST 6, 2001 MERGER (CONTINUED):
SERIES I REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED):
The Series I Preferred Stock is redeemable at the Company's option at any
time through July 20, 2004 at a redemption price equal to $1,250 per
share plus any accrued but unpaid dividends. 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.
Because the Series I Preferred Stock contained an immediate beneficial
conversion feature, net income applicable to common stockholders was
decreased by $2,153,846 during the third quarter of 2001, the amount of
the discount resulting from the beneficial conversion feature.
OPTIONS AND WARRANTS:
In July 2001, prior to the merger, the Company issued 112,500 shares of
common stock to consultants upon the conversion of 112,500 warrants to
purchase common stock at an exercise price of $4.00 per share.
In August 2001, prior to the merger, 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, prior to the merger, the Company issued 78,339 shares of
common stock along with warrants to purchase 78,339 shares of common
stock to 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, prior to the merger, the Company converted $859,062 in
notes and other payables 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.
20
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED):
ISSUANCES AND ACTIVITY SUBSEQUENT TO THE AUGUST 6, 2001 MERGER:
COMMON STOCK:
In September 2001, 400 shares of Series I Preferred Stock were converted
into 115,274 shares of common stock, at an average conversion price of
$3.47 per share. In addition, the Company issued 66,665 shares of common
stock to a consultant for services under a deferred compensation
agreement entered into in April 2001.
Also in September 2001, the Company agreed to issue 35,000 shares of
common stock valued at $140,000 in exchange for acquisition costs
incurred by third parties in connection with the Company's proposed
acquisition of Chex Services, Inc. (Note 11).
SERIES G PREFERRED STOCK:
In November 2001, 200 shares of Series G Preferred Stock, plus accrued
dividends of $13,833 on those shares, were converted into 78,664 shares
of common stock at an average conversion price of $2.54 per shares.
SERIES I PREFERRED STOCK:
In October 2001, 370 shares of Series I Preferred Stock, plus accumulated
unpaid dividends of $1,652 on those shares, were converted into 64,353
shares of common stock, at an average conversion price of $2.64 per
share.
In November 2001, the Board of Directors authorized the redemption of 330
shares of Series I Preferred Stock for $330,000 plus related accumulated
and unpaid dividends of approximately $6,200. The scheduled redemption
date is November 27, 2001.
9. INCOME TAXES:
Effective August 6, 2001, in conjunction with the acquisitions of Key and
Nova by Equitex, and in conjunction with Key and Nova's termination of S
Corporation status, the Company recorded a net deferred tax asset of
approximately $1,440,000, which was recorded as an increase to deferred
tax assets and an increase in additional paid-in capital. The net
deferred tax asset primarily consists of approximately $3,700,000 of net
operating losses of Equitex accumulated through August 5, 2001, and
available to offset future taxable income. The net operating loss
carryforwards expire between 2015 and 2021, and may be subject to certain
limitations due to business acquisitions and other transactions.
21
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
10. OTHER OPERATING EXPENSES:
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Telecommunications $ 166,522 $ 227,751 $ 408,984 $ 395,926
Professional fees 456,797 171,880 721,282 476,343
Printing and supplies 4,323 4,520 16,492 12,400
Bank Charges 5,029 50,673 111,028 50,673
Other 151,387 75,739 290,190 282,637
---------- ---------- ---------- ----------
$ 784,058 $ 530,563 $1,547,976 $1,217,979
========== ========== ========== ==========
11. PROPOSED BUSINESS TRANSACTIONS:
PROPOSED TRANSACTION WITH CHEX SERVICES, INC.:
In September 2001, the Company announced the signing of a definitive
agreement for the acquisition of all the outstanding capital stock of
Chex Services, Inc. ("Chex"), the effectiveness of which is subject to
the completion and acceptance of certain due diligence-related items,
completion of final closing documents and other customary pre-closing
conditions. Chex is a financial services company that provides check
cashing, automated teller machines and credit card advances to customers
primarily at gaming establishments located in Minnesota.
PROPOSED TRANSACTIONS WITH MONEY CENTERS OF AMERICA, INC.:
In September 2001, the Company signed a non-binding letter of intent to
acquire Money Centers of America, Inc. ("MOA" ), the effectiveness of
which is subject to the completion of customary due diligence,
negotiation and execution of a definitive agreement and other customary
conditions. MOA is a financial services company that provides cash
access, technology, and marketing services to the gaming and retail
markets. MOA funds-transfer systems allow casino patrons to access cash
through check cashing, credit/debit card advances, automated teller
machines and wire transfer. MOA also owns a proprietary "Cash Access
System", which processes check, credit, and debit card transactions,
thereby reducing the need for third party vendors.
22
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THIS REPORT MAY CONTAIN CERTAIN "FORWARD-LOOKING" STATEMENTS AS SUCH TERM IS
DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 OR BY THE
SECURITIES AND EXCHANGE COMMISSION IN ITS RULES, REGULATIONS AND RELEASES, WHICH
REPRESENT THE COMPANY'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO,
STATEMENTS CONCERNING THE COMPANY'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL
CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE
OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE
NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING
STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS
"MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE",
"MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE
TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN
OF WHICH ARE BEYOND THE COMPANY'S CONTROL, AND ACTUAL RESULTS MAY DIFFER
MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY
RELATED TO THE COMPANY'S OPERATIONS, MERGERS OR ACQUISITIONS, GOVERNMENTAL
REGULATION, THE VALUE OF THE COMPANY'S ASSETS AND ANY OTHER FACTORS DISCUSSED IN
THIS AND OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
(a) Liquidity.
(b) Capital Resources.
On August 6, 2001, the Registrant completed the distribution of all of its
assets to Equitex 2000, Inc., and Equitex 2000, Inc. assumed all liabilities of
the Registrant. Immediately following this transaction, the Registrant completed
the acquisitions of Key Financial Systems, Inc. ("Key") and Nova Financial
Systems, Inc. ("Nova"), which were recorded as reverse acquisitions. The
financial statements presented for the three and nine months ended September 30,
2000, are those of Key and Nova. For the three and nine months ended September
30, 2001, the financial results of Key and Nova are presented on a consolidated
basis with those of the Registrant for the period from August 6, 2001 through
September 30, 2001.
Net income will provide the most significant portion of the Registrant's
liquidity at the operating company level for Key and Nova. This may be augmented
from time to time by the issuance of notes payable for short-term financing
needs. For the Registrant at the holding company level, a majority of liquidity
needs will be derived from financing activities including the issuance of stock
for cash through the exercise of warrants and options, as well as the issuance
of notes payable. Holding company liquidity may also be affected by
inter-company payments of cash from Key and Nova. Presently, the Registrant
believes its liquidity and capital resources are sufficient to fund its
operations through fiscal 2002.
At September 30, 2001, the Registrant had a cash position on a consolidated
basis of $315,689. Net cash provided by operating activities for the nine months
ended September 30, 2001 was $2,312,844 versus $4,188,725 during the same period
of 2000 for Key and Nova. The most significant portion of this change was the
decrease in net income for the nine month period from $3,422,543 in 2000 to
$1,465,585 in 2001. Total adjustments to reconcile net income to net cash
increased by $81,077 to $847,259 at September 30, 2001. Increases in provision
for recovery of losses and increase in other receivables were offset by a
significantly lower decrease in deferred income taxes and a decrease in other
assets.
23
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Net cash used in investing activities was $(1,146,066) in the nine months ended
September 30, 2001 as compared to net cash provided by investing activities of
$233,629 in 2000 for Key and Nova. Net increase in credit card receivables of
$(1,031,414) in 2001 from a net decrease in credit card receivables of $282,954
in 2000 accounted for nearly all of this change.
Net cash used in financing activities was $(924,700) for the nine months ended
September 30, 2001 as compared to $(3,925,000) in 2000 for Key and Nova. Common
stock of Key and Nova issued for cash of $1,000,000 in 2001, a decrease in
dividends paid to Key and Nova shareholders from $3,925,000 in 2000 to
$2,000,000 in 2001, and net changes in notes receivable of $75,300 accounted for
this significant decrease.
(c) Results of operations.
The financial statements presented for the three and nine months ended September
30, 2000, are those of Key and Nova. For the three and nine months ended
September 30, 2001, the financial results of Key and Nova are presented on a
consolidated basis with those of the Registrant for the period from August 6,
2001 through September 30, 2001.
NINE MONTHS ENDED SEPTEMBER 30, 2001 VS. SEPTEMBER 30, 2000
CREDIT CARD INCOME
Credit card servicing fees, Key and Nova's principal source of earnings, are
credit card fees accessed on credit card accounts owned by each companies'
client bank. These include monthly membership fees, late charges, overlimit
fees, and return check fees. The fees are paid to Key and Nova under a 100% loan
participation agreement with the client bank. Credit card servicing fees for the
nine months ended September 30, 2001 decreased 13% to $7,627,389 from the 2000
period as a result of a slight decrease in average active credit card accounts.
The year-to-date average number of active accounts during 2001 was 100,889
versus 104,035 in 2000, a 3% decrease. The year-to-date new account volume in
2001 was 117,212 compared to 45,627 for 2000, a 157% increase.
At the inception of the program, all applicants that paid the processing fee
were issued a credit card account. In June 2000, Key implemented a new account
activation procedure that required applicants to return a signed activation
certificate. This procedure greatly reduced the number of credit cards issued to
individuals that historically never activated their accounts.
In March of 2001, Key performed a detailed analysis comparing the number of
active accounts on file for three months and longer between the two different
card issuance methodologies. The company found a significantly smaller
percentage of active accounts on file in relationship to applications for the
new method versus the original card issuance policy. Though the average credit
card income per account was higher during 2000 when the activation certificates
were required, the number of net remaining accounts was significantly less,
which reduces the amount of residual income Key will earn over the life of
the account relationships. Therefore, effective April 2001, new applicants that
have paid the processing fee are issued credit cards without the need to return
a signed activation certificate. The majority of the accounts that represent the
increase in new accounts in 2001 versus 2000 were booked after the change in the
card issuance policy.
24
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Marketing accelerated in May 2001, increasing from 23,646 new accounts added
during January through April 2001 to 93,566 added during May through September.
This increase in marketing placed a larger expense burden on Key that will be
borne by income generated in subsequent periods. A few months lapse before new
accounts become profitable, with later period profits recovering earlier losses.
While the accelerated marketing plans continue, effects of the September 11,
2001 disaster and subsequent slowing of mail delivery due to bioterrorism
concerns may affect the timing and effectiveness of Key's direct marketing
campaigns during the fourth quarter of 2001 and into 2002.
PROVISION FOR LOSSES
The provision for losses is the charge to operating earnings that management
feels is necessary to maintain the reserve for possible losses at an adequate
level. The provision is determined based on growth of the portfolio, the net
amount of losses incurred, and management's estimation of potential future
losses based on an evaluation of the portfolio risks and economic conditions. In
the 2001 period, Key and Nova had a total provision of $245,601 compared to a
recovery of $90,267 for the same period in 2000. This resulted from a reduced
year-to-date 2000 provision, $28,329, and not from a decrease in credit quality.
The allowance for losses at September 30, 2001 was $191,203 or 10.2% of credit
card receivables, net of unearned income, compared to $177,619 or 15.8% of
credit card receivables, net of unearned income, at September 30, 2000.
Management believes that the reserve for possible losses was adequate to provide
for potential losses at September 30, 2001 and 2000.
The 2000 reduction in provision came from the maturation of Key's credit card
portfolio. Key ceased marketing of new accounts from April of 1999 to January
2000, at the request of the initial client bank. New card volume during this
time was transferred to the client bank of Key Financial Systems' affiliate
company, Nova Financial Systems. Marketing resumed in February 2000.
OTHER INCOME
Other income for the nine months ended September 30, 2001 increased 52.6% to
$3,508,371 compared to the same period in 2000. The major component of other
income is application processing fee income which increased 44.7% to $3,172,562
due to increased new application volume. New account volume was 117,212 in 2001
compared to 45,627 for the same period in 2000.
OPERATING EXPENSES
Operating expenses for the nine months ended September 30, 2001 increased
$1,705,945 to $9,789,508 from $8,083,563 for the same period in 2000. This
operating expense corresponds to increases in salaries and wages of $1,255,763
due to increases in call center staffing. The year-to-date average account base
of 100,889 was similar to the average account base of 104,035 for the
year-to-date period in 2000. However, the average life of the average account
was significantly less in the 2001 period. Additionally, in 2001, there were
117,212 average monthly new accounts compared to 45,627 average monthly new
accounts in 2000. This resulted in a higher percentage of newer accounts, the
most costly period of the account's life. Included in the nine months ended
September 30, 2001 are other operating expenses for Equitex of approximately
$326,000 for the period from August 6, 2001 through September 30, 2001.
25
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
THREE MONTHS ENDED SEPTEMBER 30, 2001 VS. SEPTEMBER 30, 2000
CREDIT CARD INCOME
Third quarter 2001 credit card servicing fees increased 19% to $2,946,653 from
the third quarter 2000 as a result of an increase in active credit card
accounts. Quarterly average number of active accounts during 2001 was 132,082
versus 109,572 in 2000, a 21% increase. The third quarter new account volume in
2001 was 49,977 compared to 15,322 for 2000, a 326% increase. Applicants
marketed during the third quarter of 2000 were required to return a signed
activation certificate prior to the establishment of an account. During 2001,
all applicants that paid the processing fee were issued a credit card account
resulting in higher new account volume.
PROVISION FOR LOSSES
The provision for losses is the charge to operating earnings that management
feels is necessary to maintain the reserve for possible losses at an adequate
level. The provision is determined based on growth of the portfolio, the net
amount of losses incurred, and management's estimation of potential future
losses based on an evaluation of the portfolio risks and economic conditions.
For the three months ended September 30, 2001, the provision for losses was
$40,256 compared to $146,310 for the three months ended September 30, 2000.
OTHER INCOME
Third quarter other income for the year 2001 decreased 31.3% to $1,096,622
compared to the third quarter 2000. The major component of other income is
application processing fee income which decreased 38.8% to $941,624 due to lower
new paid application volume, 49,037 for third quarter 2001 versus 65,076 for the
same period in 2000. The lower volume was primarily in the Internet related
marketing activities.
OPERATING EXPENSES
Operating expenses for the quarter ended September 30, 2001 increased $981,727
to $3,881,286. This 33.9% operating expense increase corresponds to the 20%
increase in average active accounts. Additionally, the average account base of
109,572 for the third quarter 2000 was comprised of more seasoned accounts,
since the marketing of new accounts ceased from April 1999 through January 2000.
The third quarter 2001 average account base of 132,082 was comprised of a higher
percentage of newer accounts, the most costly period of the account's life
The increase of $981,727 was principally comprised of increased salaries and
wages of $502,196 for the three months ended September 30, 2001 compared to the
three months ended September 30, 2000. This increase is directly associated with
the increased costs of obtaining new accounts as well as higher costs related to
the higher percentage of newer accounts. Included in the three months ended
September 30, 2001 are other operating expenses of approximately $326,000 for
the period from August 6, 2001 through September 30, 2001 for the operations of
Equitex, Inc.
26
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
PREFERRED STOCK
Non-cash amortization of beneficial conversion costs relating to the
Registrant's H and I Preferred Stock was $2,366,156 for the three and nine
months ended September 30, 2001. Deemed preferred dividends was $60,600 for the
three and nine months ended September 30, 2001. As a result of these non-cash
expenses, net loss applicable to common stockholders was $(2,274,349) for the
three months ended September 30, 2001 and $(1,078,871) for the nine months ended
September 30, 2001.
OTHER ISSUES
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement, as
amended by SFAS No. 137, is effective for fiscal years beginning after June 15,
2000. Currently, the Company does not have derivative financial instruments and
does not participate in hedging activities. Therefore, management believes that
SFAS No. 133 will not have an impact on the Company's financial position or
results of operations.
In July 2001, The Financial Accounting Standards Board ("FASB") issued SFAS No.
141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is prohibited after that date. SFAS No. 142 changes
the accounting for goodwill and intangible assets with indefinite lives from an
amortization method to an impairment-only approach and requires intangible
assets with finite lives to be amortized over their useful lives. Thus,
amortization of goodwill and intangible assets with indefinite lives will cease
upon adoption of the statement. SFAS No. 142 is required to be applied in fiscal
years beginning after December 15, 2001. The Company is currently assessing the
impact, if any, that SFAS No. 141 and SFAS No. 142 may have on its financial
condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, ACCOUNTING FOR IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, which addresses accounting and financial
reporting for the impairment or disposal of long-lived assets. This statement is
effective for fiscal years beginning after December 15, 2001. The Company is
currently assessing the impact, if any, that SFAS No. 144 may have on its
financial condition and results of operations.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial
Statements. SAB No. 101, as amended by SAB No. 101A and SAB No. 101B, effective
no later than the fourth fiscal quarter of fiscal years beginning after December
15, 1999. SAB No. 101 provides the Staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. The Company
believes that it complies with the accounting and disclosure described in SAB
No. 101; therefore, management believes that SAB No. 101 will not impact the
Company's financial statements.
ITEM THREE
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Not applicable
27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
During the quarter ended September 30, 2001, the Company issued a total
of 10,697,178 shares of its $0.02 par value common stock, 2,359 shares of its
Series H 8% Convertible Preferred Stock ("Series H Preferred") and 4,000 shares
of its Series I 6% Convertible Preferred Stock ("Series I Preferred") in various
transactions as described below. For each of the following transactions, the
Company relied upon the exemptions from registration provided by Sections 4(6)
or 4(2) of the Securities Act and Rule 506 promulgated thereunder based upon (i)
representations from each investor that it is an accredited or sophisticated
investor with experience in investing in securities such that it could evaluate
the merits and risks related to the Company's securities; (ii) that no general
solicitation of the securities was made by the Company; (iii) each investor
represented to the Company that it was acquiring the securities for its own
account and not with a view towards further distribution; (iv) the securities
issued were "restricted securities" as that term is defined under Rule 144
promulgated under the Securities Act; (v) the Company placed appropriate
restrictive legends on the certificates representing the securities regarding
the restricted nature of these securities; and (vi) prior to completion of the
transaction, each investor was informed in writing of the restricted nature of
the securities, provided with all information regarding the Company as required
under Rule 502 of Regulation D and were given the opportunity to ask questions
of and receive additional information from the Company regarding its financial
condition and operations. The shares were issued as follows:
On July 9, 2001, the Company issued 12,500 shares of its $0.02 par
value common stock to an accredited investor upon conversion of 12,500 warrants
to purchase common stock at an exercise price of $4.00 per share for total
proceeds to the Company of $50,000.
On July 19, 2001, the Company issued 525,716 shares of its $0.02 par
value common stock to Meridian Residential Group and two accredited investors,
upon conversion of 460,000 shares of the Company's Series F Convertible
Preferred Stock valued at $2,990,000. This represents a conversion price of
$7.00 per share. Under the terms of the Series F Shares, conversion does not
require the payment of any consideration. The Company relied upon the exemption
provided under Section 3(a)(9) of the Securities Act for the issuance of the
common stock upon conversion, based upon the following factors: (i) the Company
was the issuer of the Series F Shares and the common stock issued upon
conversion; (ii) the conversion right is only available to holders of the Series
F Shares; (iii) no additional consideration was paid to the Company by the
holders of the Series F Shares to complete the conversion, nor were the terms of
the Series F Shares modified to provide for the conversion; and (iv) no
commission or other remuneration was paid in connection with the conversion.
On July 19, 2001, the Company issued 100,000 shares of its $0.02 par
value common stock to an accredited investor upon conversion of 100,000 warrants
to purchase common stock at an exercise price of $4.00 per share for total
proceeds to the Company of $400,000.
On July 19, 2001, the Company issued 2,359 shares of its Series H
Preferred to twenty-three accredited investors at a purchase price of $1,000 per
share for total proceeds to the Company of $2,359,000. Each share of Series H
Preferred automatically converted on July 19, 2001 into 200 shares of the
Company's $0.02 par value common stock and 200 warrants, each warrant to
purchase one share of the Company's common stock at $5.78 per share exercisable
until July 19, 2004. Accordingly, on July 19, 2001, the Company issued 471,800
shares of its $0.02 par value common stock to twenty-three accredited investors
upon conversion of 2,359 shares of Series H Preferred stock valued at
$2,359,000. A commission and non-refundable expense allowance of $306,670 was
paid to Miller Johnson Steichen Kinnard with respect to this transaction.
On August 2, 2001, the Company issued 191,425 shares of its $0.02 par
value common stock to Gulfstream 1998 Irrevocable Trust upon conversion of
$786,201 in debt owed the President of the Company as well as the purchase of
$216,868 in notes and accrued interest issued by the Company's subsidiary,
Triumph Sports, Inc. This represents a conversion price of $5.24 per share.
28
On August 2, 2001, the Company issued 12,156 shares of its $0.02 par
value common stock to TR Capital Corp upon conversion of $63,695 in debt owed to
TR Capital by the Company. This represents a conversion price of $5.24 per
share.
On August 2, 2001, the Company issued 37,258 shares of its $0.02 par
value common stock to USA Skate Corp for the purchase of $195,235 in notes and
accrued interest issued by the Company's subsidiary, Triumph Sports, Inc. This
represents a conversion price of $5.24 per share.
On August 2, 2001, the Company issued 78,339 shares of its $0.02 par
value common stock to Equitex 2000, Inc. as compensation for $410,496 costs and
expenses incurred by the Company in connection with the acquisitions of Key
Financial Systems, Inc. and Nova Financial Systems, Inc. that were transferred
to Equitex 2000 as a result of the distribution of the Company' assets and
liabilities to Equitex 2000 effective August 6, 2001. This represents a
conversion price of $5.24 per share.
On August 2, 2001, the Company issued, 795 shares of its $0.02 par
value common stock to Russell Casement, a director of the Company, upon
conversion of $4,167 in debt owed Mr. Casement by the Company. This represents a
conversion price of $5.24 per share.
On August 2, 2001, the Company issued, 477 shares of its $0.02 par
value common stock to Joseph W. Hovorka, a director of the Company, upon
conversion of $2,500 in debt owed Mr. Hovorka by the Company. This represents a
conversion price of $5.24 per share.
On August 3, 2001 through August 6, 2001, the Company issued 4,000
shares of its Series I Preferred to five accredited investors at a purchase
price of $1,000 per share for total proceeds to the Company of $4,000,000. The
Series I Preferred is convertible into the Company's common stock at the lesser
of $5.98 per share or 65% of the average closing bid price of the Registrant's
common stock as reported by the Nasdaq Stock Market for the five days
immediately preceding conversion, including accured dividends. Finders fees
totaling $400,000 were paid to World Capital Funding and Blake Street Capital
in connection with this transaction.
On August 6, 2001, the Company issued 9,084,773 shares of its $0.02 par
value common stock to the stockholders of Key Financial Systems, Inc. ("Key")
and Nova Financial Systems, Inc. ("Nova") in consideration for the acquisition
of all of the outstanding securities of Key and Nova. The value of these
securities was $48,966,926 or $5.39 per share, which represents the closing
price of the Company's common stock as reported by the Nasdaq Stock Market on
that date.
On August 9, 2001, the Company issued 115,274 shares of its $0.02 par
value common stock to an accredited investor upon conversion of 400 shares of
Series I Preferred valued at $400,000. This represents a conversion price of
$3.47 per share.
On September 24, 2001, the Company issued 66,665 shares of its $0.02
par value common stock to a consultant for services valued at $345,325 or $5.19
per share.
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
29
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
On August 21, 2001, the Company filed a Current Report on Form 8-K
under Items 2 and 7 reporting the distribution of the assets and liabilities of
the Company to Equitex 2000, Inc. as well as the subsequent acquisitions of Key
Financial Systems, Inc. and Nova Financial Systems, Inc.
30
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: November 19, 2001 By: /s/ Henry Fong
-------------------------------------
Henry Fong
President, Treasurer and
Chief Financial Officer
31