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, 2002
( ) 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
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(Address of principal executive offices) (Zip code)
(303) 796-8940
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(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, 2002: 24,638,611
EQUITEX, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial statements:
Independent accountants' report 3
Condensed consolidated balance sheets - September 30, 2002 (unaudited)
and December 31, 2001 4 - 5
Condensed consolidated/combined statements of operations-
three and nine months ended September 30, 2002 and 2001 (unaudited) 6
Condensed consolidated statement of changes in stockholders'
equity - nine months ended September 30, 2002 (unaudited) 7 - 8
Condensed consolidated/combined statements of cash
flows - nine months ended September 30, 2002 and 2001 (unaudited) 9 - 11
Notes to condensed consolidated/combined financial statements 12 - 24
Item 2. Management's discussion and analysis of financial
condition and results of operations 25 - 31
Item 3. Quantitative and qualitative disclosures of market risk 31
Item 4. Disclosure controls and procedures 31
PART II OTHER INFORMATION
Item 1. Legal proceedings 31
Item 2. Changes in securities and use of proceeds 31-32
Item 3. Defaults upon senior securities 32
Item 4. Submission of matters to a vote of security holders 32
Item 5. Other information 32
Item 6. Exhibits and reports on Form 8-K 32
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors
Equitex, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Equitex, Inc. and its subsidiaries as of September 30, 2002, and the related
condensed consolidated/combined statements of operations and cash flows for the
three-month and nine-month periods ended September 30, 2002 and 2001, and the
related condensed consolidated statement of stockholders' equity for the nine
months ended September 30, 2002. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, 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, 2002, and for the three-month and nine-month periods ended
September 30, 2002 and 2001, for them to be in conformity with accounting
principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet as of
December 31, 2001, and the related consolidated/combined statements of
operations, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated April 10, 2002, except for note 9, as
to which the date is April 12, 2002, we expressed an unqualified opinion on
those consolidated/combined financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2001, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
/s/ GELFOND HOCHSTADT PANGBURN, P.C.
Denver, Colorado
November 18, 2002
3
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
September 30, December 31,
2002 2001
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 7,802,248 $ 7,830,426
Accounts receivable, net 4,608,948 4,181,392
Credit card receivables, net (Note 3) 174,006 1,493,481
Other receivables (Note 4) 519,416 6,435,060
Current portion of notes receivable, related parties 746,550 563,460
Prepaid expenses and other 344,119 577,288
----------- -----------
Total current assets 14,195,287 21,081,107
----------- -----------
Notes receivable, related parties, net 1,267,526 1,146,375
Note receivable, other 500,000
Property, equipment and leaseholds 1,292,715 1,180,258
Deferred tax asset 1,380,000 1,380,000
Intangible assets 4,263,145 4,925,415
Goodwill 5,636,000 5,636,000
----------- -----------
14,339,386 14,268,048
----------- -----------
$28,534,673 $35,349,155
=========== ===========
(Continued)
4
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2002 2001
------------ ------------
(Unaudited)
Current liabilities:
Accounts payable $ 1,067,263 $ 1,819,555
Accrued expenses and other liabilities, including
related party accruals of $173,000 and $83,000 1,646,813 827,065
Accrued liability on casino contracts 613,874 517,805
Notes payable, related parties 5,628,133 5,225,241
Line of credit, notes and loans payable 7,893,160 8,574,310
Current portion of long-term debt 476,535 527,754
Due to credit card holders (Note 4) 501,099 5,056,668
------------ ------------
Total current liabilities 17,826,877 22,548,398
------------ ------------
Long-term debt, related parties, net of current portion 232,200
------------ ------------
Total liabilities 17,826,877 22,780,598
------------ ------------
Commitments and contingencies
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 $993,000 725,000 725,000
Series G, 6%; stated value $1,000 per share; 370 and 900 shares
issued and outstanding at September 30, 2002 and December 31,
2001, respectively; liquidation preference $524,000 370,000 900,000
Series I, 6%; stated value $1,000 per share; 2,100 and 2,660 shares
issued and outstanding at September 30, 2002 and December 31,
2001, respectively; liquidation preference $2,858,000 2,100,000 2,660,000
Common stock, $0.02 par value; 50,000,000 shares authorized;
25,169,560 and 21,244,797 shares issued; 24,753,703 and 21,211,447
shares outstanding at September 30, 2002 and December 31, 2001,
respectively 503,391 424,896
Common stock and warrants to be issued 750,485
Deferred compensation cost (22,000)
Additional paid-in capital 12,981,309 9,754,252
Accumulated deficit (5,693,053) (2,532,039)
Less treasury stock at cost (415,857 and 33,350 common shares at
September 30, 2002 and December 31, 2001, respectively) (256,851) (114,037)
------------ ------------
Total stockholders' equity 10,707,796 12,568,557
------------ ------------
$ 28,534,673 $ 35,349,155
============ ============
See notes to condensed consolidated/combined financial statements.
5
EQUITEX AND SUBSIDIAIRES
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 3001
(UNAUDITED)
Three months ended September 30, Nine months ended September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Credit card income, net of provision for losses $ 297,184 $ 3,015,571 $ 2,857,587 $ 7,689,222
Application fees, net of direct marketing costs, including
related party costs of $1,565,000 and $4,005,000 for the three
months and nine months ended September 30, 2001,
respectively 1,259 941,624 354,048 3,172,562
Fee revenue 5,039,922 15,012,805
Other 539,286 154,998 1,190,445 335,809
------------ ------------ ------------ ------------
Total revenues 5,877,651 4,112,193 19,414,885 11,197,593
------------ ------------ ------------ ------------
Third party servicing fees 108,487 1,639,082 1,570,358 4,339,950
Fees paid to casinos 1,636,759 4,783,961
Salaries, wages and employee benefits 2,079,926 1,302,318 6,514,382 3,510,503
Stock-based compensation (26,500) 487,500
Other operating expenses 1,944,734 939,214 5,632,796 1,938,383
Interest expense:
Related parties 181,368 672 516,847 672
Other 211,138 701,563
Preferred stock penalties 263,600
Interest income:
Related parties (48,756) (91,931)
Other (4,384) (4,384)
Impairment of FDIC receivable 2,151,207 2,151,207
------------ ------------ ------------ ------------
8,233,979 3,881,286 22,525,899 9,789,508
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,356,328) 230,907 (3,111,014) 1,408,085
Income tax (expense) benefit (14,000) (60,000) (50,000) 57,500
------------ ------------ ------------ ------------
Net income (loss) (2,370,328) 170,907 (3,161,014) 1,465,585
Additional warrants issued to preferred stockholders (53,000)
Beneficial conversion feature (2,366,156) (2,366,156)
Redemption of convertible preferred stock in excess
of beneficial conversion features 86,000
Deemed preferred stock dividends (82,000) (60,600) (253,000) (60,600)
------------ ------------ ------------ ------------
Net loss applicable to common stockholders $ (2,452,328) $ (2,255,849) $ (3,381,014) $ (961,171)
============ ============ ============ ============
Basic and diluted net loss per common share $ (0.10) $ (0.15) $ (0.15) $ (0.09)
============ ============ ============ ============
Weighted average number of common shares outstanding 23,568,522 14,585,390 22,303,992 10,896,018
============ ============ ============ ============
See notes to condensed consolidated/combined financial statements.
6
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Convertible preferred stock Common stock
--------------------------- -------------------------- Treasury
Shares Amount Shares Amount stock
----------- ----------- ----------- ----------- -----------
Balances, January 1, 2002 4,285 $ 4,285,000 21,244,797 $ 424,896 $ (114,037)
Exercises of warrants for common stock 602,430 12,049
Warrants issued to an employee for services
Issuance of common stock under private
placement agreements (net of offering costs) 1,212,386 24,247
Purchase of shares of common stock by subsidiary (80,000)
Conversion of promissory note and accrued
interest to common stock by subsidiary 130,862 2,617 (62,814)
Conversion of promissory notes and accounts
payable to common stock 123,829 2,475
Redemption of Series I preferred stock for cash (300) (300,000)
Conversion of Series G preferred stock to
common stock (530) (530,000) 1,224,221 24,486
Conversion of Series I preferred stock to
common stock (260) (260,000) 616,035 12,321
Agreements to issue common stock and warrants
for services
Issuance of common stock and warrants under
deferred compensation agreement 15,000 300
Amortization of deferred compensation cost
Termination of agreement to issue common
stock and warrants for services
Issuance of additional warrants to preferred
stockholders (53,000)
Amortization of additional warrants issued to
preferred stockholders 53,000
Beneficial conversion feature and warrants
attached to convertible promissory notes
Net loss
----------- ----------- ----------- ----------- -----------
Balances, September 30, 2002 3,195 $ 3,195,000 25,169,560 $ 503,391 $ (256,851)
=========== =========== =========== =========== ===========
(Continued)
7
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002
(UNAUDITED)
Common stock Deferred Additional Total
and warrants compensation paid-in Accumulated stockholders'
to be issued cost capital deficit equity
------------ ------------ ------------ ------------ ------------
Balances, January 1, 2002 $ 750,485 $ -- $ 9,754,252 $ (2,532,039) $ 12,568,557
Exercises of warrants for common stock (485) 394,949 406,513
Warrants issued to an employee for services 438,000 438,000
Issuance of common stock under private
placement agreements (net of offering costs) 681,949 706,196
Purchase of shares of common stock by subsidiary (80,000)
Conversion of promissory note and accrued
interest to common stock by subsidiary 60,197
Conversion of promissory notes and accounts
payable to common stock 105,436 107,911
Redemption of Series I preferred stock for cash (82,867) (382,867)
Conversion of Series G preferred stock to
common stock 505,514
Conversion of Series I preferred stock to
common stock 247,679
Agreements to issue common stock and warrants
for services 134,000 (134,000)
Issuance of common stock and warrants under
deferred compensation agreement (134,000) 133,700
Amortization of deferred compensation cost 112,000 112,000
Termination of agreement to issue common
stock and warrants for services (750,000) 687,500 (62,500)
Issuance of additional warrants to preferred
stockholders 53,000
Amortization of additional warrants issued to
preferred stockholders (53,000)
Beneficial conversion feature and warrants
attached to convertible promissory notes 55,000 55,000
Net loss (3,161,014) (3,161,014)
------------ ------------ ------------ ------------ ------------
Balances, September 30, 2002 $ -- $ (22,000) $ 12,981,309 $ (5,693,053) $ 10,707,796
============ ============ ============ ============ ============
See notes to condensed consolidated/combined financial statements.
8
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
----------- -----------
Cash flows provided by operating activities:
Net income (loss) $(3,161,014) $ 1,465,585
----------- -----------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Provision for losses 117,821 245,601
Impairment of FDIC receivable 2,151,207
Gain on sale of equipment (1,268)
Depreciation and amortization 961,893 84,310
Deferred compensation expense for services 174,834
Beneficial conversion features on convertible promissory notes 40,000
Amortization of discount on convertible promissory notes 58,300
Stock-based compensation expense 487,500
Changes in assets and liabilities:
Increase in accounts receivable (427,556)
Increase in other receivables (345,927) (828,915)
Decrease in deferred income taxes 60,000
Decrease in other assets 233,169 430,862
Increase in due to credit card holders 679,990 610,297
Increase in accounts payable and accrued liabilities 736,986 70,270
----------- -----------
Total adjustments 4,692,115 847,259
----------- -----------
Net cash provided by operating activities 1,531,101 2,312,844
----------- -----------
Cash flows from investing activities:
Net increase in credit card receivables (486,277) (1,031,414)
Purchases of furniture, fixtures and equipment (383,612) (114,652)
Sale of equipment 2,000
Issuance of related party notes receivable (628,499)
Issuance of notes receivable, other (500,000)
Repayment of related party notes receivable 124,258
----------- -----------
Net cash used in investing activities (1,872,130) (1,146,066)
----------- -----------
Cash flows from financing activities:
Capital contributions to Key and Nova 1,000,000
Dividends paid to Key and Nova shareholders (2,000,000)
Redemption of Series I preferred stock for cash (382,867)
Proceeds from the exercise of warrants 406,513
Proceeds from common stock private placements (net of offering costs) 706,196
Purchase of Equitex shares for treasury by subsidiary (80,000)
Increase in deferred costs (29,200)
Issuance of notes payable, related parties and other 1,980,806 (249,700)
Repayment of notes payable, related parties and other (2,286,597) 325,000
Net payments on line of credit (2,000)
----------- -----------
Net cash provided by (used in) financing activities 312,851 (924,700)
----------- -----------
(Continued)
9
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
----------- -----------
(Decrease) increase in cash and cash equivalents (28,178) 242,078
Cash and cash equivalents, beginning 7,830,426 73,611
----------- -----------
Cash and cash equivalents, ending $ 7,802,248 $ 315,689
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,063,983
===========
Cash paid for taxes $ 5,500
===========
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock by Equitex to acquire Key and Nova resulting in
recognition of a deferred tax asset $ 1,440,000
===========
Conversion of preferred stock to common stock $ 790,000 $ 400,000
=========== ===========
Common stock issued under deferred compensation agreements $ 345,991
===========
Cancellation of agreement to issue common stock for services $ 415,000
===========
Warrants attached to convertible promissory notes $ 15,000
===========
Amortization of additional warrants issued to preferred
stockholders $ 53,000
===========
Amortization of discount on preferred stock $ 2,366,156
===========
Termination of agreement to issue common stock and warrants for services $ 750,000
===========
Related party note receivable exchanged for related party note payable $ 200,000
===========
Conversion of promissory notes, accrued interest and accounts payable
to common stock $ 107,911
===========
Conversion of promissory note and accrued interest to common stock
by subsidiary $ 62,814
===========
(Continued)
10
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2002 2001
----------- -----------
Supplemental disclosure of non-cash investing and financing activities (continued):
Reclassification of receivables due from Net First and liabilities due
to Net First card holders:
Credit card receivables, net $ 1,687,931
Other receivables 6,261,571
Accounts payable (562,736)
Due to credit card holders (5,235,559)
-----------
Impairment of FDIC receivable $ 2,151,207
===========
See notes to condensed consolidated/combined financial statements.
11
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, BASIS OF PRESENTATION, RECENT EVENTS AND
MANAGEMENT'S PLANS:
INTERIM FINANCIAL STATEMENTS:
The condensed consolidated/combined interim financial statements of Equitex,
Inc. and its subsidiaries (the "Company") for the three-month and
nine-month periods ended September 30, 2002 and 2001, 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, 2002, and for the periods ended September 30,
2002 and 2001 have been made. Except as described below, 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
principles 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 annual
report filed with the Securities and Exchange Commission ("SEC") on April
15, 2002. The results of operations for the three-month and nine-month
periods ended September 30, 2002, are not necessarily indicative of the
results to be expected for the full year.
Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING
COMPREHENSIVE INCOME establishes requirements for the disclosure of
comprehensive income. During the periods ended September 30, 2002 and 2001,
the Company did not have any components of comprehensive income to report.
BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements as of and for
the periods ending September 30, 2002 include the accounts of Equitex, Inc.
and the following significant subsidiaries: wholly-owned Chex Services,
Inc. ("Chex"), wholly-owned Key Financial Systems, Inc. ("Key"),
wholly-owned Nova Financial Systems, Inc. ("Nova"), and beginning August
21, 2002, majority-owned Denaris Corporation. The consolidated balance
sheet as of December 31, 2001, includes the accounts of Equitex, Inc. and
its wholly-owned subsidiaries, Chex, Key and Nova. The condensed
consolidated/combined financial statements for the periods ending September
30, 2001 include the combined accounts of Key and Nova through August 5,
2001 (the date of the Company's acquisition of Key and Nova) and the
consolidated accounts of Equitex, Inc. and its wholly-owned subsidiaries,
Key and Nova from August 6, 2001 through September 30, 2001. All
significant intercompany accounts and transactions have been eliminated in
consolidation/combination.
Key maintained S Corporation status for federal income tax purposes through
August 5, 2001, and Nova did so from January 1, 2000 through August 5,
2001. As an S corporation, the shareholders reported their respective share
of net income on their income tax returns, and no income taxes are
reflected in the financial statements for those periods. Effective August
6, 2001, in connection with the Company's acquisition of Key and Nova, both
Key and Nova terminated their S Corporation status and became C
corporations. Additionally, prior to and subsequent to the Key and Nova
transaction, Equitex had certain preferred stock instruments outstanding
that impact the earnings available to common stockholders.
12
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, BASIS OF PRESENTATION, RECENT EVENTS AND
MANAGEMENT'S PLANS (CONTINUed):
BASIS OF PRESENTATION (CONTINUED):
The following unaudited pro forma information reflects the historical Key
and Nova net income and per share amounts adjusted for the impact of the
current C corporation status and equity structure of the Company for the
three-month and nine-month periods ended September 30, 2001:
Three months ended Nine months ended
September 30, 2001 September 30, 2001
------------------ ------------------
Net income, as reported $ 171,000 $ 1,466,000
Net income, pro forma $ 103,000 $ 887,000
Net loss applicable to common
stockholders, as reported $ (2,256,000) $ (961,000)
Net loss applicable to common
stockholders, pro forma $ (2,276,000) $ (1,265,000)
Basic and diluted net loss per
common share, as reported $ (0.15) $ (0.09)
Basic and diluted net loss per
common share, pro forma $ (0.12) $ (0.08)
RECENT EVENTS AND MANAGEMENT'S PLANS:
NET FIRST NATIONAL BANK CLOSURE:
Through March 1, 2002, Key's credit card products were marketed for Net
First National Bank ("Net First") under an agreement (the "Credit Card
Program Agreement") that provided the Company with a 100% participation
interest in the receivables and related rights associated with credit cards
issued, and required the payment of monthly servicing fees to Net First.
The Company provided collection and customer services related to the credit
cards issued. On March 1, 2002, federal banking regulators closed Net
First, which was the sole issuing bank for Key's PAY AS YOU GO credit card
program.
On March 4, 2002, the Federal Deposit Insurance Corporation ("FDIC")
notified the Company that it had been appointed receiver of all funds due
from Net First to Key. As Receiver, on March 4, 2002, the FDIC elected to
disaffirm, to the full extent, all contracts Key was a party to with Net
First. On March 10, 2002, the Company was made aware that the FDIC was
notifying Net First credit card holders that their accounts were to be
closed, and accordingly, Key would not be able to transfer the existing Pay
As You Go credit card portfolio to a successor financial institution. At
this time, the Company began actively pursuing collection of the credit
card and other receivables from the FDIC.
In May 2002, Key filed a claim with the FDIC for all funds due from Net
First to Key under the Credit Card Program Agreement through the date
federal banking regulators closed Net First. The total amount of the claim
was $4,311,027.
In October 2002, the FDIC notified Key that it had determined to disallow
all but $111,734 of the total claim. The notification states that as the
FDIC liquidates the assets of the receivership, Key may periodically
receive payments on the allowed portion of this claim through dividends.
The Company and its legal counsel do not agree with this disallowance. The
Company has the right to file a lawsuit on its claim within 60 days from
the date of notice of the disallowance. Therefore, on November 18, 2002,
the Company filed a lawsuit in the United States District Court for the
Southern District of Florida seeking to recover $4,311,027, the full
amount of its claim.
13
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, BASIS OF PRESENTATION, RECENT EVENTS AND
MANAGEMENT'S PLANS (CONTINUED):
RECENT EVENTS AND MANAGEMENT'S PLANS (CONTINUED):
NET FIRST NATIONAL BANK CLOSURE (CONTINUED):
While the Company believes that it will ultimately be successful in
collecting on its claim, there is no assurance that collection will
eventually occur. Accordingly, the Company has reserved 100% of the net
remaining balance due of $2,151,207 from the FDIC, as receiver for Net
First, in addition to amounts previously reserved.
BANK HOLDING COMPANY PLANS:
In April 2002, the Company's Board of Directors approved plans to prepare
and file an application to become a bank holding company. In addition, the
Company entered into an agreement with an individual to assist the Company
in obtaining a state or national bank charter (Note 5). Through September
30, 2002, the Company has continued its efforts to apply for a bank charter
and determined that a Florida state banking charter would be the most
advantageous for the Company's intended lines of business. The Company has
selected a prospective location and a bank name and is in the process of
preparing internal policies and procedures and pro forma financial
information and capital statements for submission to Florida banking
regulators. The Company has also begun to interview prospective senior
executive officers and directors. The Company plans on working closely with
each of the appropriate regulatory agencies in the application process.
AGREEMENT WITH PAYMASTER JAMAICA:
In August 2002, the Company entered into a binding agreement with Paymaster
(Jamaica) Limited ("Paymaster Jamaica") to form a jointly-owned and
operated company to replicate Paymaster Jamaica's financial services
business model throughout the Caribbean, North America and ultimately,
worldwide. Under the terms of the agreement, the Company provided a
$500,000 non-interest bearing capital advance to Paymaster Jamaica that may
be converted into stock of a newly formed subsidiary, Paymaster Worldwide,
Inc. ("PWI"). PWI is to be equally and jointly owned by the Company and
Paymaster Jamaica.
Paymaster Jamaica, headquartered in Kingston, Jamaica, commenced operations
in 1997. Its business offers revenue collection and customer care to
businesses, institutions and consumers on the island of Jamaica. It offers
its customers an alternative to retaining their own commercial offices. In
addition, through its bill payment services, Paymaster Jamaica is
developing cash remittance services affording its customers the convenience
to send and receive all types of remittances nationally or internationally
via cash or debit cards.
14
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, BASIS OF PRESENTATION, RECENT EVENTS AND
MANAGEMENT'S PLANS (CONTINUED):
RECENT EVENTS AND MANAGEMENT'S PLANS (CONTINUED):
AGREEMENT WITH PAYMASTER JAMAICA (CONTINUED):
On August 21, 2002, Equitex assigned all of its rights and obligations under
its agreement with Paymaster Jamaica, including the $500,000 capital
advance, to Denaris Corporation ("Denaris") in consideration for a
majority-interest in Denaris and a $250,000 non-interest bearing promissory
note. Denaris was formed on August 16, 2002 to develop and market a prepaid
reloadable stored value card program. Stored value cards offer a convenient
alternative to customers, particularly immigrants, who choose not to
utilize traditional bank accounts due to language barriers and
apprehension. Initially, Denaris intends to focus on the development of
marketing programs targeting various immigrant populations that utilize
international fund remittance services to transfer funds. Additionally,
Equitex, through Denaris, intends to market a proprietary stored value card
program, with its initial focus on the international funds remittance
business between the United States and Jamaica.
In August 2002, the Company announced that Chex executed an agreement with a
banking institution to issue stored value cards. Chex is to primarily
function as an independent marketing agent. The agreement will allow the
Company to provide stored value cards to support the agreements with
Paymaster Jamaica, described above. In addition, Chex clients can utilize
the card for check cashing and other cash access services at its casino and
other gaming locations. Also, Chex intends to market the cards to its
gaming establishment customers as an alternative for employee payroll and
other cash disbursement needs. The stored-value card program is now in its
development stage. Marketing materials have been developed and the
sponsoring bank has submitted all appropriate paperwork to the licensing
entities for approval. Chex has begun to work with other marketing
companies to establish market awareness and to introduce additional
processing options for various stored value card platforms.
NASDAQ STOCK MARKET LISTING:
In July 2002, the Company received a notice from the NASDAQ Stock Market
("NASDAQ") notifying the Company that for the last 30 consecutive trading
days the price of the Company's common stock closed below $1.00, the
minimum per share requirement for continued inclusion under NASDAQ
Marketplace Rule 4330(c) (the "Rule"). Under the Rule, the Company is
provided 180 calendar days, or until January 14, 2003, to regain
compliance. If anytime before January 14, 2003, the bid price of the
Company's common stock closes at $1.00 per share or more for a minimum of
10 consecutive trading days, the Company is to receive written notification
that the Company is in compliance.
If the Company does not meet the required criteria by January 14, 2003, a
determination will be made whether the Company meets listing criteria. If
the Company does, it will be granted an additional 180 calendar days to
demonstrate compliance of the $1.00 minimum closing bid price for 10
consecutive trading days. Initial inclusion criteria requires the issuer to
have (i) stockholders' equity of $5 million, (ii) market value of listed
securities of $50 million, or (iii) net income from continuing operations
of $750,000 in the most recently completed fiscal year or in two of the
last three completed fiscal years. As of September 30, 2002, the Company's
balance sheet reflects stockholders' equity of $10,707,796.
15
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, BASIS OF PRESENTATION, RECENT EVENTS AND
MANAGEMENT'S PLANS (CONTINUED):
RECENT EVENTS AND MANAGEMENT'S PLANS (CONTINUED):
NASDAQ STOCK MARKET LISTING (CONTINUED):
In November 2002, the Company received a notice from Nasdaq notifying the
Company that the issuance of 300,000 warrants to purchase common stock at
$.50 per share to James P. Welbourn, a director of the Company in March
2002, violated Nasdaq Marketplace Rule 4310(i)(1)(A) (the "Rule"). Mr.
Welbourn exercised the warrants in March and April 2002 for $150,000. The
Company has provided Nasdaq with all requested material regarding the
warrants and the circumstances upon which they were issued. NASDAQ has
requested, and the Company intends to provide, a plan to achieve and
sustain compliance. The plan is to include the rescission of the warrants
issued in addition to the Company's acquisition of the common stock that
was issued in connection with the exercise of the warrants which will
become treasury stock. Accordingly, Mr. Welbourn would return 300,000
shares of common stock to the Company and the Company would reimburse Mr.
Welbourn $150,000 for the exercise price he paid to the Company upon
exercise of the warrants. Additionally, the Company has proposed to
implement policies and procedures that will require future issuances of any
equity-based compensation, including options and warrants, to any executive
officer, director, consultant or other person as compensation for services
rendered to the Company, be reviewed by outside counsel for compliance with
marketplace rules. If Nasdaq determines that the Company has not presented
a definitive plan to achieve and sustain compliance, the Company can be
delisted from the Nasdaq Stock Market.
2. ACQUISITION OF CHEX:
Effective December 1, 2001, the Company acquired all the outstanding common
stock of Chex in a transaction accounted for as a purchase. A preliminary
allocation of the purchase price was made to major categories of assets and
liabilities in the accompanying consolidated financial statements. The
actual allocation of the purchase price and the resulting effect on income
(loss) from operations may differ from the amounts included in the
accompanying consolidated financial statements.
All of the Company's goodwill and identifiable intangible assets were
acquired in the Chex acquisition. The Company adopted the provisions of
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS No. 142") in its
entirety January 1, 2002. In accordance with SFAS 142, the Company
completed the initial transitional goodwill impairment test during the six
months ended June 30, 2002, and determined that no impairment to goodwill
existed at June 30, 2002. The Company also adopted the provisions of SFAS
No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
effective January 1, 2002. The Company does not believe any impairment has
occurred to its long-lived assets at September 30, 2002.
The following unaudited pro forma financial information for the three-month
and nine-month periods ended September 30, 2001, gives effect to the above
acquisition as if it had occurred at the beginning of the period. The
unaudited pro forma results of operations for 2001 include amortization of
identifiable intangible assets, but do not include any amortization of
goodwill, pursuant to recently issued accounting standards.
16
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
2. ACQUISITION OF CHEX (CONTINUED):
Three months ended Nine months ended
September 30, 2001 September 30, 2001
------------------ ------------------
Revenue $ 8,020,000 $ 22,424,000
Net income (loss) $ (33,000) $ 839,000
Net income loss applicable to common shareholders $ (2,460,000) $ (1,588,000)
Basic and diluted net loss per common share $ (.15) $ (.12)
Shares used in basic and diluted per share calculation 16,577,391 12,888,019
3. CREDIT CARD RECEIVABLES:
The composition of credit card receivables at September 30, 2002 and
December 31, 2001 is as follows:
September 30, December 31,
2002 2001
------------- -------------
Credit card receivables $ 1,510,943 $ 57,289,378
Refundable reservation fees (1,333,877) (55,587,827)
------------- -------------
177,066 1,701,551
Less allowance for losses 3,060 208,070
------------- -------------
$ 174,006 $ 1,493,481
============= =============
Changes in the allowance for losses for the three-month and nine-month
periods ended September 30, 2002 and 2001, and for the year ended December
31, 2001 are as follows:
Three months ended Nine months ended
September 30, September 30, December 31,
2002 2001 2002 2001 2001
--------- --------- --------- --------- ---------
Balances, beginning of period $ 4,761 $ 217,921 $ 208,070 $ 254,086 $ 254,086
Provision for losses 1,756 40,256 117,821 245,601 416,080
Amounts charged-off (3,457) (66,974) (164,487) (308,484) (462,096)
Allowance netted with receivable
from FDIC (158,344)
--------- --------- --------- --------- ---------
Balances, end of period $ 3,060 $ 191,203 $ 3,060 $ 191,203 $ 208,070
========= ========= ========= ========= =========
17
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
4. OTHER RECEIVABLES:
The composition of other receivables at September 30, 2002 and December 31,
2001 is as follows:
September 30, December 31,
2002 2001
----------- -----------
Due from Net First $ 5,490,915
Due from Key Bank & Trust $ 33,395 233,907
Due from Merrick Bank 456,964 689,946
Other 29,057 20,292
----------- -----------
$ 519,416 $ 6,435,060
=========== ===========
In connection with the closure of Net First on March 4, 2002, receivables
previously due from Net First have been reduced in connection with the
related reduction in the payable to credit card holders.
5. COMMITMENTS AND CONTINGENCIES:
LITIGATION:
In August 2000, William G. Hays, Jr., liquidating agent for RDM Sports
Group, Inc. and related debtors, filed an adversary proceeding against
Equitex, Smith Gambrell and Russell, LLP, David J. Harris, P.C. and David
J. Harris, in the United States Bankruptcy Court for the Northern District
of Georgia, Newnan Division, and Adversary Proceeding No. 00-1065. The
liquidating agent alleges that the Company breached its October 29, 1987,
consulting agreement with RDM, breached fiduciary duties allegedly owed to
RDM, and that Equitex is liable for civil conspiracy and acting in concert
with directors of RDM. The liquidating agent is seeking unspecified
compensatory and punitive damages, along with attorney's fees, costs and
interest.
On April 2, 2001, the court granted Equitex's motion to enforce the
arbitration clause contained in the consulting agreement. Because this
matter is in the preliminary stages and no arbitration date has been set,
it is too early to predict the outcome of this matter. In connection with
the Company's distribution of its assets and liabilities to Equitex 2000 on
August 6, 2001, Equitex 2000 has agreed to indemnify the Company and assume
defense in this matter, as well as certain other legal actions existing at
August 6, 2001. Although the Company believes this lawsuit is without
merit, there is no assurance of a favorable outcome. The costs to defend
this matter may be material, and an unfavorable outcome may have a material
adverse effect on the Company should Equitex 2000 not be in a position to
fulfill its indemnification to the Company for any losses that may be
incurred.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse impact either
individually or in the aggregate on consolidated results of operations,
financial position or cash flows of the Company.
18
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED):
CONTINGENCIES:
In September 2002, Key received a letter from the FDIC as Receiver for Net
First. The letter states that the FDIC, on March 4, 2002, gave notice to
Key that the FDIC had determined to disaffirm the credit card marketing
agreement between Net First and Key. The letter requests that Key pay
$1,000,000 to the FDIC for refunds of credit card applicants' processing
fees. On September 19, 2002, the Company's legal counsel responded to the
FDIC letter denying any amount due. Based on consultations with legal
counsel, management believes that this claim is without merit. However,
there is no assurance of a favorable outcome. The Company has received no
further correspondence on this matter.
CONSULTING AGREEMENTS:
In January 2002, the Company entered into a consulting agreement for
financial services in exchange for 15,000 shares of common stock and
warrants to purchase an additional 15,000 shares of common stock at an
exercise price equal to 120% of the closing bid price of the Company's
common stock at the date of the agreement. At the date of commitment, total
compensation expense was estimated to be approximately $72,000. The Company
has recognized $72,000 of expense through September 30, 2002 as the
performance criteria under the agreement have been fully satisfied.
In April 2002, the Company entered into a consulting agreement with an
individual to assist the Company in obtaining a state or national bank
charter. Pursuant to the agreement, the Company issued warrants to purchase
100,000 shares of common stock to the consultant at $0.75 per share (the
market value of the Company's common stock was $0.99 per share at the date
of the agreement). The warrants were valued at approximately $62,000 based
upon the Black-Scholes option pricing model at the date of commitment. In
addition, upon the successful completion of the consultant's undertaking,
as defined, the Company is to issue additional shares of common stock based
on the gross initial capitalization of the chartered bank, as defined.
Compensation expense relating to the common stock is to be recognized as
the performance criteria are satisfied. The Company has recognized $40,000
of expense through September 30, 2002.
In September 2000 the Company entered into an athlete endorsement, license
and consulting agreement (the "Agreement") with a professional athlete (the
"Athlete"). The Athlete was unable to perform the endorsement services
pursuant to the original term of the Agreement, which expired in September
2001. The parties verbally agreed to extend the Agreement through September
2002. The Company asserts that in November 2001, the Athlete violated the
"Reputational Standards" clause of the Agreement. Accordingly, the Company
terminated the Agreement, and all compensation called for by the Agreement
is being withheld. As a result, the Company has eliminated the common stock
and warrants that were to be issued under the Agreement and has reduced
stock-based compensation by $62,500 in the quarter ended September 30,
2002.
19
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
6. STOCKHOLDERS' EQUITY:
SERIES D CONVERTIBLE PREFERRED STOCK:
The Series D Preferred Stock is convertible, together with any cumulative
unpaid dividends, at any time into shares of the Company's common stock at
a conversion price equal to 65% of the average closing bid price of the
Company's common stock as specified in the agreement.
The holder of each share of Series D convertible preferred stock is entitled
to a 6% cumulative annual dividend, payable quarterly. Dividends are
payable in cash or, at the Company's option, in shares of the Company's
common stock. 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 130% of the stated value plus the aggregate of all
cumulative 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.
SERIES G CONVERTIBLE PREFERRED STOCK:
The Series G Preferred Stock is convertible, together with any cumulative
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 holder of each share of the Series G Preferred Stock is entitled to
cumulative dividends at 6% per annum plus a 4% dividend default rate,
payable quarterly. 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 130% of the stated par value
plus the aggregate of all cumulative 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 cumulative unpaid
dividends.
During the nine months ended September 30, 2002, 530 shares of Series G
Preferred Stock, plus cumulative unpaid dividends of $54,595, were
converted into 1,224,221 shares of common stock at conversion prices of
$0.28 to $2.31 per share.
SERIES I CONVERTIBLE PREFERRED STOCK:
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.
20
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED):
SERIES I CONVERTIBLE PREFERRED STOCK (CONTINUED):
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,
payable quarterly. 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 125% of the stated value plus
the aggregate of all cumulative 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. 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 cumulative unpaid dividends.
The Series I Preferred Stock is subject to a registration rights agreement,
which provides that the Company will use its best efforts to register the
common stock underlying the Series I Preferred Stock and the common stock
underlying the warrants within a specified time period. Because a
registration statement had not been declared effective by the stipulated
date, the Company incurred approximately $263,600 in penalties through
September 30, 2002, which is reflected in a liability account on the
Company's balance sheet as of September 30, 2002. The penalties are payable
in cash. On May 3, 2002, the Company filed a Form S-3/A with the SEC to
register the shares underlying the Series I Preferred Stock. The
registration statement was declared effective by the SEC on May 30, 2002,
and accordingly, the Company has not incurred additional penalties since
that date.
In January 2002, the Company redeemed 300 shares of Series I Preferred
Stock, plus cumulative unpaid dividends of $7,867, for $382,867. The
redemption price was less than the amount originally allocated to the
beneficial conversion feature, and as a result, loss applicable to common
stockholders was reduced by $86,000 for the nine months ended September 30,
2002.
During the nine months ended September 30, 2002, 260 shares of Series I
Preferred Stock, plus cumulative unpaid dividends of $13,080, were
converted into 616,035 shares of common stock, at conversion prices of
$0.28 to $2.33 per share.
In October 2002, the Company negotiated a settlement agreement (the
"Agreement") with the holder of 500 shares of Series I Preferred Stock. The
Agreement includes a 10% premium on the face value of the shares, which is
25% below the price at which the Company was originally required to redeem
the shares. The Agreement also includes the payment of accrued and unpaid
dividends and registration penalties. The total amount due per the
agreement is $674,250. The Company paid $266,500 on October 16, 2002, and
agreed to pay the remaining amount due under the Agreement in three equal
installments of $135,917 due November 14, 2002, December 14, 2002 and
December 29, 2002.
21
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED):
SERIES J CONVERTIBLE PREFERRED STOCK:
In September 2002, the Board of Directors of the Company approved a private
placement of Series J 6% Convertible Preferred Stock ("Series J Preferred
Stock"). The Company authorized the issuance of up to 1,380 shares of
Series J Preferred Stock with a stated value of $1,000 per share. The
Series J Preferred Stock is convertible, together with any cumulative
unpaid dividends, at any time into shares of the Company's common stock at
a conversion price per share equal to 65% of the average closing bid price
of the Company's common stock as specified in the agreement, but in no
event shall the conversion price be less than $.40 per share. On October
11, 2002, the Company closed on the sale of 715 shares of Series J
Preferred Stock and warrants to purchase 71,500 shares of common stock. In
connection with this placement, the Company issued warrants to purchase
178,750 shares of common stock and $82,555 in cash to its agent of which
$71,500 is commissions and $11,055 is for reimbursable expenses.
The holder of each share of the Series J Preferred Stock is entitled to
cumulative dividends at 6% per annum plus a 4% dividend default rate,
payable quarterly. Dividends are payable in cash or, at the Company's
option, in shares of the Company's common stock. The Series J Preferred
Stock contains a liquidation preference equal to the sum of the stated
value of each share plus an amount equal to 105% of the stated par value
plus the aggregate of all cumulative unpaid dividends on each share of
Series J 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 J Preferred Stock automatically convert into
common stock on the third anniversary of the closing of the private
placement. The Series J Preferred Stock is redeemable at the Company's
option at any time through the third anniversary, at a redemption price
equal to $1,250 per share plus any cumulative unpaid dividends.
ISSUANCES OF COMMON STOCK:
During the nine months ended September 30, 2002, the Company sold 1,212,386
shares of common stock for cash under various private placement agreements
approved by the Board of Directors. Under the terms of the agreements,
78,636 shares were sold at $2.75 representing a 25% discount from the
market price at that time. The remainder of the shares were sold at then
current market prices between $0.50 and $1.20 per share.
In March 2002, the Company issued 15,000 shares of common stock to a
consultant for services rendered under a deferred compensation agreement.
These shares were valued at $57,000, the market value of the common stock
at the date of commitment.
In May 2002, convertible promissory notes and accounts payable of $100,000
and $5,000 respectively, plus accrued interest of $2,910 were converted
into 119,662 and 4,167 shares of common stock at conversion prices of $.86
and $1.20 per share respectively per share.
During the nine months ended September 30, 2002, the Company issued 602,430
shares of common stock upon the conversion of warrants at an average
conversion price of $.67 per share.
22
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
6. STOCKHOLDERS' EQUITY (CONTINUED):
ISSUANCES OF COMMON STOCK (CONTINUED):
TREASURY STOCK TRANSACTIONS:
In April 2002, Chex, a wholly-owned subsidiary of the Company, purchased
105,645 shares of the Company's common stock from a related party under a
Stock Purchase Agreement for $80,000, at $.76 per share. This stock has
been classified as treasury at cost upon consolidation.
In August 2002, a promissory note of $60,000, plus accrued interest of
$2,814 due to Chex, a wholly-owned subsidiary of the Company, were
exchanged for 130,862 shares of common stock at a conversion price of $.48
per share, the last sales price of the Company's common stock on the
conversion date. This stock has been classified as treasury at cost upon
consolidation.
PROPOSED REVERSE STOCK SPLIT:
In November 2002, the Company filed a Preliminary Proxy Statement with the
Securities and Exchange Commission, giving notice of the Company's annual
meeting of stockholders. Among the items the stockholders will take action
on is the approval of a proposal for up to a one share for six share
reverse stock split of the Company's common stock.
STOCK OPTIONS AND WARRANTS:
In January 2002, the Company issued three-year warrants to purchase an
additional 53,333 shares of the Company's common stock at prices ranging
from $3.50 to $5.00 per share (the market price of the common stock at the
date of grant was $3.55) to a holder of the Company's convertible preferred
stock. These warrants were valued at $53,000 based upon the Black-Scholes
option pricing model. In addition, the Company issued warrants to purchase
20,000 shares of common stock at prices ranging from $4 to $5 per share
(the market price at the date of grant was $3.95 per share) to unrelated
parties as additional consideration for convertible promissory notes.
In March 2002, the Company issued warrants to purchase 300,000 shares of the
Company's common stock at $0.50 per share to an employee for services
provided to the Company, exercisable for a one-month term. The market price
of the Company's common stock at the date of the grant was $1.96 per share.
Compensation cost of $438,000 was recorded based on the excess of the
quoted market price of the Company's common stock at the date of the grant
over the exercise price per share. In March and April 2002, the employee
exercised the warrants. In November 2002, the Company received a notice
from Nasdaq notifying the Company that the issuance of the warrants
violated Nasdaq Marketplace Rule 4310(i)(1)(A). Nasdaq has requested, and
the Company intends to provide, a plan to achieve and sustain compliance.
The plan is to include the rescission of the warrants issued, as well as
the Company's acquisition of the common stock issued in connection with the
exercise of the warrants, which will become treasury stock.
23
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED/COMBINED FINANCIAL STATEMENTS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(UNAUDITED)
7. OPERATING SEGMENTS:
As of and for the three-month and nine-month periods ended September 30,
2002, and 2001, the segment results were as follows:
Three Months Ended September 30, 2002:
--------------------------------------
Cash
Credit card disbursement Corporate
services services activities Total
----------- ----------- ----------- -----------
(Key and Nova) (Chex)
Revenues $ 837,728 $ 5,039,923 $ 5,877,651
Operating expenses:
General and administrative 914,668 4,267,626 $ 259,489 5,441,783
Depreciation and amortization 31,299 296,755 69 328,123
Stock-based compensation (26,500) (26,500)
Impairment of FDIC receivable 2,151,207 2,151,207
Interest, net and penalties 321,371 17,995 339,366
Total operating expenses 3,097,174 4,885,752 251,053 8,233,979
Income taxes 14,000 14,000
Net income (loss) (2,259,446) 140,171 (251,053) (2,370,328)
Nine Months Ended September 30, 2002:
-------------------------------------
Cash
Credit card disbursement Corporate
services services activities Total
----------- ----------- ----------- -----------
(Key and Nova) (Chex)
Revenues $ 4,402,079 $15,012,806 $19,414,885
Operating expenses:
General and administrative 4,461,983 12,230,489 $ 847,132 17,539,604
Depreciation and amortization 104,258 857,566 69 961,893
Stock-based compensation 438,000 49,500 487,500
Impairment of FDIC receivable 2,151,207 2,151,207
Interest, net and penalties 1,006,482 379,213 1,385,695
Total operating expenses 6,717,448 14,532,537 1,275,914 22,525,899
Income taxes 50,000 50,000
Net income (loss) (2,315,369) 430,269 (1,275,914) (3,161,014)
Total assets 1,650,422 25,951,041 933,210 28,534,673
For the three-month and nine-month periods ended September 30, 2001, the
Company operated in only the credit card services segment.
24
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, AMOUNTS RECEIVABLE
FROM NET FIRST NATIONAL BANK, 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 THE 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.
OVERVIEW
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the consolidated/combined
financial statements and notes thereto for the years ended December 31, 2001,
2000 and 1999. The financial results presented for the three and nine months
ended September 30, 2002, are those of Chex Services, Inc. ("Chex"), Key
Financial Systems, Inc. ("Key"), Nova Financial Systems, Inc. ("Nova") and
Denaris Corporation ("Denaris") on a consolidated basis with those of Equitex,
Inc. The financial results presented for the three and nine months ended
September 30, 2001, are those of Key and Nova on a combined basis through August
5, 2001 (the date of the Company's acquisition of Key and Nova), and on a
consolidated basis with those of the Registrant for the period from August 6,
2001 through September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
For the year ending December 31, 2002, we presently anticipate our liquidity and
capital resource needs will be satisfied from cash flows generated from our
operating activities. Although the closure of Net First National Bank ("Net
First") and subsequent closure of operations will eliminate cash flows at Key,
we have taken actions to reduce personnel, marketing and other operating costs.
Our other operating subsidiary, Chex, has been experiencing an increase in cash
flows in 2002 from the increase in cash access locations and from the
introduction of new products during the year. These products are complementary
to its existing products and services. Future products may include: cashless
gaming smart cards, debit cards and customized funds transfer systems for
multi-jurisdictional gaming operators. Additionally, included in notes payable
related parties are approximately $5.1 million of 12% notes payable by Chex, due
through December 2002. Chex is attempting to restructure some of these notes,
thereby reducing interest costs and further increasing cash flow in the future.
25
Cash flow activity for the nine months ended September 30, 2002, includes the
activity of Chex, Key and Nova, Equitex, and Denaris. The 2001 activity includes
the activity of Key and Nova through August 5, 2001 as well as the activity of
the Company, Key and Nova from August 6, 2001 through September 30, 2001. For
the nine months ended September 30, 2002, net cash provided by operating
activities was $1,531,101 compared to $2,312,844 for the nine months ended
September 30, 2001. The most significant portion of this change was the decrease
from a net income for the nine month period from $1,465,585 in 2001 to a net
loss of $3,161,014 in 2002. Significant non-cash adjustments to the current
year's results including depreciation and amortization of $961,893, stock based
compensation of $487,500 and the impairment of the receivable from the FDIC of
$2,151,207 also partially offset the reduced income.
Cash used in investing activities for the nine months ended September 30, 2002
was $1,872,130 compared to $1,146,066 for the nine months ended September 30,
2001. Cash provided by financing activities for the nine months ended September
30, 2002 was $312,851 compared to cash used in financing activities of $924,700
for the nine months ended September 30, 2001. This change is primarily due to
issuances of notes receivable and the purchases of furniture, fixtures and
equipment.
The significant activity for the nine months ended September 30, 2002, included
the Company receiving approximately $1,113,000 from the exercise of warrants and
the issuance of common stock. The Company also received proceeds of
approximately $1,981,000 upon the issuance of short-term notes payable to
related parties and third parties and repaid approximately $2,287,000 of related
party and third party notes. In addition, the Company issued approximately
$1,128,000 of notes receivable to related parties and third parties and received
payment of approximately $124,000 of related party notes. During the nine months
ended September 30, 2002, the Company also redeemed 300 shares of its Series I
Preferred Stock for approximately $383,000 in cash and Chex purchased 105,645
shares of the Company's common stock for $80,000.
During the nine months ended September 30, 2001, (prior to the acquisition of
Key and Nova by the Company) Key and Nova received capital contributions of
$1,000,000 and paid dividends to Key and Nova shareholders of $2,000,000.
For the nine months ended September 30, 2002, net cash decreased $28,178
compared to an increase of $242,078 for the nine months ended September 30,
2001, and ending cash at September 30, 2002, was $7,802,248 compared to $315,689
at September 30, 2001.
Other sources available to us that we may utilize include the sale of equity
securities through private placements of common and/or preferred stock as well
as the exercise of stock options and/or warrants, all of which may cause
dilution to our stockholders. We may also be able to borrow funds from related
and/or third parties.
RESULTS OF OPERATIONS
REVENUES
Consolidated revenues for the three and nine months ended September 30, 2002,
were $5,877,651 and $19,414,885, respectively, compared to consolidated/combined
revenues of $4,112,193 and $11,197,593 for the three and nine months ended
September 30, 2001, respectively due primarily to the addition of Chex.
26
REVENUE BY SEGMENT
Three months ended Nine months ended
September 30, September 30,
Segment 2002 2001 2002 2001
- -------------------------- ----------- ----------- ----------- -----------
Cash disbursement services $ 5,039,923 $15,012,806
Credit card services 837,728 $ 4,112,193 4,402,079 $11,197,593
----------- ----------- ----------- -----------
$ 5,877,651 $ 4,112,193 $19,414,885 $11,197,593
=========== =========== =========== ===========
CASH DISBURSEMENT SERVICES SEGMENT
Chex recognizes revenue at the time certain financial services are performed.
The effective date of our acquisition of Chex was December 1, 2001, and
therefore the revenues of Chex are included for the three and nine months ended
September 30, 2002, but not for the comparative periods ended September 30,
2001. Chex processed $638 million in cash transactions for the nine months ended
September 30, 2002, and revenues are derived principally from check cashing
fees, credit and debit card advance fees, automated teller machine ("ATM")
surcharge and transaction fees.
Chex cashes personal checks at its cash access locations for fees of between 5
and 6 percent based on its casino contracts. Chex also cashes "other" checks,
comprised of tax and insurance refunds, casino employee payroll checks and
casino jackpot winnings at a reduced rate. For the three and nine months ended
September 30, 2002, Chex cashed over $45 million and $128 million, respectively,
of personal checks and over $39 million and $116 million, respectively, of
"other checks" in the three and nine months ended September 30, 2002. Fees
earned on personal and "other" checks were $2,329,787 and $257,433,
respectively, for the three months ended September 30, 2002. Chex earned fees of
$6,733,527 on personal checks and $940,506 on "other" checks for the nine months
ended September 30, 2002, respectively.
For the quarter ended September 30, 2002, Chex processed approximately 118,000
credit/debit card transactions with approximately $42 million in advances and
earned fees of $1,369,859 on these transactions. For the nine months ended
September 30, 2002, Chex processed approximately 377,000 credit/debit card
transactions with approximately $138 million in advances and earned fees of
$4,281,309. Additionally, for the three months ended September 30, 2002, Chex
processed approximately 880,000 ATM transactions and earned commissions or fees
of $919,686 on approximately $87 million of transactions. For the nine months
ended September 30, 2002, Chex processed approximately 2.5 million transactions,
earning commissions or fees of $2,589,227 on approximately $255 million of
transactions. Also, Chex collected fees of $111,954 on returned checks and had
other income of $51,203 for the three months ended September 30, 2002. For the
nine months ended September 30, 2002, Chex collected fees of $336,985 on
returned checks and had other income of $131,252.
Although, the financial results of the Registrant include the results of
operations of Chex only from the date of acquisition, December 1, 2001, for the
three and nine months ended September 30, 2002, total revenues for Chex
increased $1,131,750 or 29% and $3,786,283 or 34%, respectively, from the three
and nine months ended September 30, 2001. This increase was primarily due to the
increase in the number of casino locations in which Chex operated in during 2002
as compared to 2001.
27
CREDIT CARD SERVICES SEGMENT
CREDIT CARD INCOME
On March 1, 2002, the Office of the Comptroller of the Currency closed Net First
National Bank ("Net First") and appointed the FDIC as receiver. Key immediately
ceased all marketing and processing of new credit card accounts at the close of
business on March 1, 2002. In addition, the FDIC repudiated Key's contract with
Net First effective March 4, 2002, and has closed all the credit card accounts
subject to Key's contract with Net First. The FDIC's action results in the
termination of all future credit card servicing revenues to Key from the Net
First portfolio after March 4, 2002. For the year ended December 31, 2001, the
Net First portfolio provided 71.3% of the total credit card servicing revenues
for Key. The Net First portfolio was projected to represent an even greater
percentage of 2002 revenues due to the continuing attrition of the Key Bank &
Trust and Merrick Bank portfolios that were originated in 1998 and 1999 and the
expected growth in the Net First portfolio.
Through February 28, 2002, the Net First portfolio provided $2,121,220 of credit
card servicing fees. For the year ended December 31, 2001, credit card servicing
fees resulting from the Net First portfolio was $7,982,799.
In June 2002, Key began test telemarketing a stored value card product on behalf
of an unaffiliated company. The initial results were consistent with the success
rate Key experienced with the Net First program and accordingly, Key increased
its sales staff in July and August. However, in September 2002 it became
apparent that refunds and initial cancellations significantly lagged the initial
sales. Key attempted to improve the performance, but ultimately was unable to
obtain an acceptable success rate. Due to these circumstances Key ceased selling
the program in mid-September and terminated the sales staff. There will continue
to be minimized revenues from the prior existing credit card portfolios.
Prior to March 1, 2002, credit card servicing fees were the major component of
credit card income, which was Key and Nova's principal source of earnings before
the closure of Net First. Credit card fees were assessed on credit card accounts
owned by each company's client banks. These include monthly membership fees,
late charges, over limit fees, and return check fees. The fees were paid to Key
and Nova under a 100% loan participation agreement with the client bank. Credit
card servicing fees for the three and nine months ended September 30, 2002, were
$297,184 and $2,857,587 respectively. For the three and nine months ended
September 30, 2001, credit card servicing fees were $3,015,571 and $7,689,222
respectively. During the quarter ending September 30, 2002, the average number
of active accounts was 5,290 versus 132,082 in 2001 as a result of the closing
of Net First. The new account volume in the nine months ended September 30,
2002, was 31,477 compared to 117,212 for the nine months ended September 30,
2001, as the Company has not issued any new cards since March 1, 2002, due to
the closure of Net First.
Key has made contact with other financial institutions that had shown initial
interest in a Key credit card program to provide future credit card servicing
revenues and help replace the Net First program. To date none of these contacts
have resulted in any agreements and there is no assurance that a new financial
institution will be identified or a new secured credit card program instituted.
Marketing accelerated in May 2001, increasing from 23,646 new accounts added
during January through April 2001 to 188,656 added during May 2001 through March
1, 2002. This increase in marketing placed a larger expense burden on Key that
normally would be borne by income generated in subsequent periods. Usually a few
months lapse before new accounts become profitable, with later per card profits
recovering earlier losses on such new cards.
In March of 2001, Key performed a detailed analysis comparing the number of
active accounts on file for three months and longer between two different card
28
issuance methodologies. They found a significantly smaller percentage of active
accounts on file in relationship to applications for a method implemented in
June 2000 versus the method previously used. Though the average credit card
income per account was higher using the new method, which required customers to
return a signed activation certificate, the number of net remaining accounts was
significantly less, thereby reducing the amount of residual income Key would
earn over the life of the account relationships. As a result of this analysis,
effective April 2001, Key returned to the previous card issuance method, which
does not require applicants to return a signed activation certificate.
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 losses based on an
evaluation of the portfolio risks and economic conditions. For the nine months
ended September 30, 2002, Key and Nova had a total provision of $117,821
compared to $245,601 for the same period in 2001. This decrease is attributed to
the FDIC's closure of the Net First credit card accounts. The allowance for
losses at September 30, 2002, was $3,060 or 1.8% of credit card receivables, net
of unearned income, compared to $191,203 or 12.8% of credit card receivables,
net of unearned income, at September 30, 2001. This decrease is also attributed
to the FDIC's closure of the Net First credit card accounts. Management believes
that the reserve for possible losses was adequate to provide for potential
losses at September 30, 2002 and 2001.
APPLICATION FEES, NET OF DIRECT MARKETING COSTS
Application fees have been reduced significantly in 2002 compared to 2001 due to
the closure of Net First and the termination of all marketing programs related
to the Net First credit card. Application fees were $354,048 for the nine months
ended September 30, 2002, compared to $3,172,562 for the nine months ended
September 30, 2001. The total application processing fees in 2001 of $4,213,466
were attributable to the Net First marketing efforts. New account volume for the
nine months ended September 30, 2002, was 31,477 compared to 117,212 for the
same period in 2001. Key does not anticipate any future fees until such time, if
any, a new bank is found.
During the first quarter in 2001 the Company was still using the activation
certificate described above. The lower unit income in 2002 is due to the higher
concentration of telemarketing sales in 2002 and the impact of refunds related
to December and January sales against the lower new application volume in
February and the returns posting after the shutdown by the FDIC with no new
sales volume.
OTHER INCOME, NET
Other income for Key and Nova for the nine months ended September 30, 2002, was
$1,190,445 compared to $335,809 for the nine months ended September 30, 2001.
This income is mostly comprised of other marketing and lead income of $888,840
and $514,091. Additionally, during the three months ended September 30, 2002,
Key received $240,000 in a lawsuit settlement claim.
OPERATING EXPENSES
Total operating expenses for the three and nine months ended September 30, 2002,
were $8,233,979 and $22,525,899, respectively, compared to $3,881,286 and
$9,789,508 for the three and nine months ended September 30, 2001. The 2002
periods include expenses for the Company, Chex, Key and Nova. The 2001
periods include expenses of Key and Nova combined basis through August 5, 2001
and on a consolidated basis with those of the Company for the period from
August 6, 2001 through September 30, 2001.
29
Three months ended Nine months ended
September 30, September 30,
Segment 2002 2001 2002 2001
- -------------------------- ----------- ----------- ----------- -----------
Cash disbursement services $ 4,888,150 $14,534,935
Credit card services 3,097,175 $ 3,503,775 6,717,449 $ 9,411,997
Corporate activities 248,654 377,511 1,273,515 377,511
----------- ----------- ----------- -----------
$ 8,233,979 $ 3,881,286 $22,525,899 $ 9,789,508
----------- ----------- ----------- -----------
CASH DISBURSEMENT SERVICES SEGMENT
Chex operating expenses of $4,888,150 and $14,534,935 are included for the three
and nine months ending September 30, 2002. Chex expenses were comprised as
follows:
Three months
Nine months ended ended
September 30, 2002 September 30, 2002
--------------- ---------------
Fees to casinos $ 4,783,961 $ 1,636,759
Salaries and related costs 4,487,785 1,522,462
Stock based compensation (non-cash) 438,000 -
Returned checks, net of collections 491,589 118,902
General operating expenses 2,470,908 993,255
Interest expense, net 1,006,482 321,373
Depreciation and amortization 856,210 295,399
--------------- ---------------
$ 14,534,935 $ 4,888,150
--------------- ---------------
CREDIT CARD SERVICES SEGMENT
The closing of Net First and the shut down of their portfolio has had a
significant impact in reducing 2002 operating expenses until such time, if any,
that a replacement bank is found. The majority of the operating expenses were
directly related to Key's credit card marketing efforts and portfolio servicing
responsibilities under the contract with Net First. Effective March 11, 2002,
Key has eliminated all direct costs associated with the Net First program. In
2001, outside servicing fees of $3,901,764 or 29.5% of total operating costs
were incurred on behalf of the Net First portfolio and have ceased effective
March 4, 2002. Approximately 85% of personnel and other operating expenses were
incurred for the Net First marketing and portfolio servicing functions;
therefore Key has experienced significant reduction in these costs in 2002.
Included in operating expenses for the three and nine months ended September 30,
2002, is the impairment of the FDIC receivable for $2,151,207. Based on the
Company receiving a notice from the FDIC regarding the disallowance of our
claim, the Company decided to reserve 100% of the receivable. The Company has
filed a lawsuit seeking collection. Without the impairment of the FDIC
receivable, operating expenses for Key and Nova for the three months ended
September 30, 2002, decreased $2,557,807 to $945,968 from $3,503,775 for the
same period in 2001. There was an average account base of 5,290 for the three
months ended September 30, 2002, compared to 132,082 for the same period in
2001. Additionally, for the nine months ended September 30, 2002, there were
3,421 average monthly new accounts compared to 13,023 average monthly new
accounts in 2001. Third party servicing fees, affected by the volume decreases,
decreased by $1,530,595 to $108,487 for the three months ended September 30,
2002 compared to $1,639,082 for the three months ended September 30, 2001. Other
expenses including occupancy costs decreased by $238,047 for the three months
ended September 30, 2002 compared to September 30, 2001.
30
CORPORATE ACTIVITY
Included in the three and nine months ended September 30, 2002, are operating
expenses for Equitex and Denaris totaling $248,654 and $1,273,515 respectively.
For the nine months ended September 30, 2002, these expenses are comprised of
selling, general and administrative expenses of $1,108,800, stock-based
compensation expense of $49,500, and interest expense, net of $115,215.
Stock-based compensation expense represents non-cash expenses related to
issuances of common stock and warrants to third party consultants for services.
Included in the selling, general and administrative expenses are charges related
to a late registration filing regarding the Series I convertible preferred
shares of $263,600. Other costs include professional fees of $367,145, salaries
and related costs of $285,796, and other general operating costs of $192,259
ITEM THREE
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Not applicable.
ITEM FOUR
DISCLOSURE CONTROLS AND PROCEDURES
A review and evaluation was performed by the Company's management, including the
Company's Chief Executive Officer (the "CEO")/Chief Financial Officer (the
"CFO"), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures as of a date within 90 days prior to the
filing of this quarterly report. Based on that review and evaluation, the
CEO/CFO has concluded that the Company's current disclosure controls and
procedures, as designed and implemented, were effective. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect the Company's internal controls subsequent to the
date of their evaluation. There were no significant material weaknesses
identified in the course of such review and evaluation and, therefore, no
corrective measures were taken by the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
During the quarter ended September 30, 2002, the Company issued a total
of 938,678 shares of its $0.02 par value common stock, which were not registered
under the Securities Act of 1933, 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 there under 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:
31
On July 18, 2002, the Company issued in a private placement transaction
802,600 shares of its $.02 par value common stock at a price of $0.50 per share
in cash to a group of accredited investors for proceeds of $401,300. As part of
this transaction, an additional 1,049 shares of the Company's common stock were
issued pursuant to the exercise of a warrant at $0.50 per share for proceeds of
$525. The Company issued warrants to purchase up to 992,649 shares of the
Company's common stock exercisable at $1.00 per share expiring on June 30, 2004
to the purchasers the above referenced shares which includes 189,000 warrants
issued pursuant to the exercise of certain warrants for which the underlying
common stock had already been registered. Cash commissions of $49,632 as well
as a warrants to purchase up to 99,265 shares of the Company's common stock
exercisable at $0.50 per share and up to 99,265 shares of the Company's common
stock exercisable at $1.00 per share, both of which expire on June 30, 2007,
were paid to Feltl and Company which acted as the Solicitation Agent for the
offering.
On August 13, 2002, the Company issued 130,862 shares of its $0.02 par
value common stock to its subsidiary, Chex Services, Inc. pursuant to the
conversion of a note payable plus accrued interest totaling $62,814 or $0.48
per share.
On September 30, 2002, the Company issued 4,167 shares of its $0.02 par
value common stock to an accredited investor pursuant to the conversion of an
account payable balance of $5,000 or $1.20 per share.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 99.1 - Certification of Section 906 of the Sarbanes-Oxley
Act of 2002
32
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, 2002 By: /s/ Henry Fong
----------------------------
Henry Fong
President, Treasurer and
Chief Financial Officer
33
CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES
EXCHANGE ACT OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
I, Henry Fong, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Equitex, Inc. and
subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed based on
our most recent evaluation to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 19, 2002
/s/ Henry Fong
------------------------------------
Henry Fong
President, Treasurer and
Chief Financial Officer
34