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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 March 31, 2004
( ) 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 May 14, 2004: 33,858,878
EQUITEX, INC. AND SUBSIDIARIES
PART I FINANCIAL INFORMATION Page
----
Item 1. Financial statements:
Independent accountants' report 3
Condensed consolidated balance sheets -
March 31, 2004 (unaudited)
and December 31, 2003 4 - 5
Condensed consolidated statements of operations-
three months ended March 31, 2004 and 2003 (unaudited) 6
Condensed consolidated statement of changes
in stockholders' equity - three months ended
March 31, 2004 (unaudited) 7 - 8
Condensed consolidated statements of cash
flows - three months ended March 31, 2004
and 2003 (unaudited) 9 - 10
Notes to condensed consolidated
financial statements 11 - 22
Item 2. Management's discussion and analysis of financial
condition and results of operations 23 - 28
Item 3. Quantitative and qualitative disclosures of market risk 28
Item 4. Disclosure controls and procedures 29
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 29
Item 4. Submission of matters to a vote of security holders 29
Item 5. Other information 29
Item 6. Exhibits and reports on Form 8-K 29
Signature 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 March 31, 2004, and the related condensed
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 2004 and 2003, and the related condensed consolidated statement
of stockholders' equity for the three months ended March 31, 2004. 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 financial statements referred
to above 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 of
Equitex, Inc. and subsidiaries as of December 31, 2003, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended (not presented herein); and in our report dated April 13,
2004, (which includes an explanatory paragraph relating to the adoption of
Statement of Financial Accounting Standards No. 141, BUSINESS COMBINATIONS and
Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS) we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 2003, 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
May 12, 2004
3
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
March 31, December 31,
2004 2003
----------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 7,798,612 $ 8,059,780
Receivables, net 2,846,045 3,509,120
Current portion of notes and interest receivable,
including related parties of $236,212 (2004) and
$239,206 (2003) 727,221 707,155
Prepaid expenses and other 619,868 314,372
Assets of discontinued operations 196 1,055
----------- -----------
Total current assets 11,991,942 12,591,482
----------- -----------
Notes and interest receivable, net, including related
parties of $1,599,745 (2004) and $1,462,375 (2003) 4,195,245 2,107,062
Property, equipment and leaseholds, net 1,195,890 1,184,813
Deferred tax asset 1,380,000 1,380,000
Intangible and other assets, net 3,647,322 3,358,393
Goodwill 5,636,000 5,636,000
----------- -----------
16,054,457 13,666,268
----------- -----------
$28,046,399 $26,257,750
=========== ===========
(Continued)
4
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, December 31,
2004 2003
------------ -------------
(Unaudited)
Current liabilities:
Bank overdraft $ 2,497,766
Accounts payable $ 412,169 651,106
Accrued expenses and other liabilities, including related
party accruals of $896,014 (2004) and $1,293,360 (2003) 2,556,811 2,722,986
Accrued liabilities on casino contracts 483,527 587,099
Current portion of long-term debt 1,022,805 201,727
Notes and loans payable, including related party notes of
$155,496 (2004) and $155,421 (2003) 11,462,673 11,432,598
Due to credit card holders 279,180 275,499
Liabilities of discontinued operations 591,015 621,768
------------ ------------
Total current liabilities 16,808,180 18,990,549
------------ ------------
Long-term debt, net of current portion 3,702,797 37,243
------------ ------------
Total liabilities 20,510,977 19,027,792
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock; 2,000,000 shares authorized:
Series D, 6%; stated value $1,000 per share; 315 shares (2004) and 408
shares (2003) issued and outstanding; liquidation preference
of $460,000 315,000 408,000
Series G, 6%; stated value $1,000 per share; 370 shares
issued and outstanding; liquidation preference of $580,000 370,000 370,000
Series I, 6%; stated value $1,000 per share; 1,600 shares issued
and outstanding; liquidation preference of $2,365,000 1,600,000 1,600,000
Common stock, $0.02 par value; 50,000,000 shares authorized;
34,835,946 (2004) and 34,530,040 (2003) shares issued;
33,858,878 (2004) and 33,167,972 (2003) shares outstanding 696,719 690,601
Stock subscription note receivable (800,000) (800,000)
Additional paid-in capital 17,974,848 17,115,338
Accumulated deficit (12,059,278) (11,428,264)
Less treasury stock at cost; 977,068 shares (2004) and
1,362,068 shares (2003) (561,867) (725,717)
------------ ------------
Total stockholders' equity 7,535,422 7,229,958
------------ ------------
$ 28,046,399 $ 26,257,750
============ ============
See notes to condensed consolidated financial statements.
5
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
------------ ------------
Fee revenue $ 3,463,103 $ 4,573,951
Credit card income, net of provision for losses 78,711 129,049
------------ ------------
Total revenues 3,541,814 4,703,000
------------ ------------
Fees paid to casinos 1,166,148 1,508,242
Salaries, wages and employee benefits 1,395,290 1,625,613
Third party servicing fees 42,611 74,749
Other operating expenses 1,308,870 1,417,299
------------ ------------
3,912,919 4,625,903
------------ ------------
(Loss) income from operations (371,105) 77,097
------------ ------------
Other income (expense):
Interest income, including related party interest of
$26,456 (2004) and $11,056 (2003) 84,927 14,442
Interest expense, including related party interest of
$3,753 (2004) and $3,582 (2003) (335,532) (356,716)
------------ ------------
(250,605) (342,274)
------------ ------------
Loss from continuing operations before income taxes (621,710) (265,177)
Income tax expense 6,000 12,000
------------ ------------
Loss from continuing operations (627,710) (277,177)
Loss from discontinued operations (3,304) (29,508)
------------ ------------
Net loss (631,014) (306,685)
Warrant accretion (3,290) (3,290)
Redemption of convertible preferred stock in excess
of beneficial conversion features 38,430
Deemed preferred stock dividends (54,800) (62,500)
------------ ------------
Net loss applicable to common stockholders $ (689,104) $ (334,045)
============ ============
Basic and diluted loss per common share:
Loss from continuing operations $ (0.02) $ (0.01)
Loss from discontinued operations * *
------------ ------------
Basic and diluted loss per share $ (0.02) $ (0.01)
============ ============
Weighted average number of common shares outstanding, basic
and diluted 33,604,833 28,102,847
============ ============
*Amount is less than $(0.01) per share
See notes to condensed consolidated financial statements.
6
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2004
(UNAUDITED)
Convertible preferred stock Common stock
-------------------------- Stock -------------------------
subscription
Shares Amount receivable Shares Amount
----------- ----------- ----------- ----------- -----------
Balances, January 1, 2004 2,378 $ 2,378,000 $ (800,000) 34,530,040 $ 690,601
Exercises of options and warrants for common
stock 305,906 6,118
Warrants issued for services preformed in
connection with convertible promissory notes
Warrants attached to convertible promissory notes
Purchase of 25,000 shares of common stock by subsidiary
Redemption of Series D preferred stock for cash (93) (93,000)
Conversion of accounts payable for common stock
previously issued as contingent consideration
Sale of 410,000 shares of treasury stock for cash
Net loss
----------- ----------- ----------- ----------- -----------
Balances, March 31, 2004 2,285 $ 2,285,000 $ (800,000) 34,835,946 $ 696,719
=========== =========== =========== =========== ===========
(Continued)
7
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004
(UNAUDITED)
Common Additional Total
treasury paid-in Accumulated stockholders'
stock capital deficit equity
----------- ----------- ----------- -----------
Balances, January 1, 2004 $ (725,717) $17,115,338 $(11,428,264) $ 7,229,958
Exercises of options warrants for common
stock 162,090 168,208
Warrants issued for services performed in
connection with convertible promissory notes 164,700 164,700
Warrants attached to convertible promissory notes 358,400 358,400
Purchase of 25,000 shares of common stock
by subsidiary (24,750) (24,750)
Redemption of Series D preferred stock for cash (58,000) (151,000)
Conversion of accounts payable for common stock
previously issued as contingent consideration 10,908 10,908
Sale of 410,000 shares of treasury stock
for cash 188,600 221,412 410,012
Net loss (631,014) (631,014)
----------- ----------- ------------- ----------
Balances, March 31, 2004 $ (561,867) $17,974,848 $(12,059,278) $ 7,535,422
=========== =========== ============= ==========
See notes to condensed consolidated financial statements.
8
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
Cash flows used in operating activities from continuing operations:
Net loss $ (631,014) $ (306,685)
----------- -----------
Adjustments to reconcile net loss to net cash
provided by operating activities of continuing operations:
Loss from discontinued operations 3,304 29,508
Provision for losses 690 1,382
Depreciation and amortization 276,738 267,878
Amortization of discount on convertible promissory notes 7,964
Stock-based compensation expense 85,000
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 647,005 (2,677,794)
Decrease in other receivables 8,402 46,862
Increase in other assets (376,872) (330,956)
Increase (decrease) in due to credit card holders 3,681 (14,906)
(Decrease) increase in accounts payable and accrued liabilities (497,776) 529,124
----------- -----------
Total adjustments 73,136 (2,063,902)
----------- -----------
Net cash used in operating activities from continuing
operations (557,878) (2,370,587)
----------- -----------
Cash flows from investing activities:
Net decrease in credit card receivables 6,978 19,665
Purchases of furniture, fixtures and equipment (92,044) (57,010)
Issuance of notes receivable, related parties and other (2,038,917) (323,300)
Repayment of notes receivable, related parties and other 2,044 1,025
----------- -----------
Net cash used in investing activities from continuing
operations (2,121,939) (359,620)
----------- -----------
Cash flows from financing activities:
Decrease in bank overdraft (2,497,766)
Redemption of preferred stock for cash (151,000) (100,000)
Proceeds from the exercise of options and warrants 168,208 194,676
Purchase of Equitex shares for treasury by subsidiary (24,750)
Increase in deferred costs (320,000)
Issuance of notes payable, related parties and other 5,885,000 470,000
Repayment of notes payable, related parties and other (1,017,857) (589,589)
Net payments on line of credit (450,000)
Sale of treasury stock for cash 410,012 102,200
----------- -----------
Net cash provided by (used in) financing activities from continuing
operations 2,451,847 (372,713)
----------- -----------
Net cash used in discontinued operations (33,198) (113,261)
----------- -----------
(Continued)
9
EQUITEX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2004 2003
----------- -----------
Decrease in cash and cash equivalents (261,168) (3,216,181)
Cash and cash equivalents, beginning 8,059,780 8,926,124
----------- -----------
Cash and cash equivalents, ending $ 7,798,612 $ 5,709,943
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 244,351 $ 357,953
=========== ===========
Cash paid for taxes $ 26,484
===========
Supplemental disclosure of non-cash investing and financing activities:
Warrants issued in connection with convertible secured promissory
notes $ 523,100
===========
Conversion of accounts payable for common stock previously
issued for contingent consideration $ 10,908
===========
Conversion of preferred stock to common stock $ 1,435,000
===========
Conversion of accounts payable to common stock $ 180,954
===========
Equipment exchanged for a reduction in a note payable included
in discontinued operations $ 12,640
===========
See notes to condensed consolidated financial statements.
10
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, BASIS OF PRESENTATION AND RECENT EVENTS:
INTERIM FINANCIAL STATEMENTS:
The condensed consolidated interim financial statements of Equitex, Inc. and
subsidiaries (the "Company") for the three-month periods ended March 31,
2004 and 2003, 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 March 31, 2004, and for
the periods ended March 31, 2004 and 2003, 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 financial statements
should be read in conjunction with a reading of the consolidated 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
14, 2004. The results of operations for the three months ended March 31,
2004, are not necessarily indicative of the results to be expected for the
full year.
BASIS OF PRESENTATION:
The accompanying financial statements present the consolidated financial
position of Equitex, Inc. and its wholly-owned subsidiaries, Chex Services,
Inc. ("Chex"), and its wholly-owned subsidiary Collection Solutions, Inc.
("Collection"), Key Financial Systems, Inc. ("Key"), Nova Financial
Systems, Inc. ("Nova"), and Equitex's majority-owned subsidiary, Denaris
Corporation ("Denaris") as of March 31, 2004 and December 31, 2003. The
excess of the losses for the three months ended March 31, 2004 and 2003
applicable to the minority interest have been charged to the Company, and
no minority interest is reflected in the Company's March 31, 2004 or
December 31, 2003, consolidated financial statements. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
RECENT EVENTS:
CHEX RECENT EVENTS:
In July 2003, the Company executed an Agreement and Plan of Merger (the
"APM") with Cash Systems, Inc. ("Cash Systems"), a publicly-traded Delaware
Corporation. Pursuant to the APM, Chex was to have been acquired by Cash
Systems in exchange for 9,000,000 shares of Cash Systems' common stock. In
December 2003, Cash Systems notified the Company that they were terminating
the APM, which was deemed by the Company as a wrongful termination. In
December 2003, the Company notified Cash Systems that it was terminating
the APM. Both the Company and Cash Systems have filed legal actions against
each other. In April 2004, the Company and Cash Systems reached a
settlement agreement (Note 7).
In November 2003, the Company executed a Stock Purchase Agreement (the "SPA")
with iGames Entertainment, Inc. ("iGames"), a publicly-traded Nevada
Corporation. Pursuant to the SPA, Chex was to have been acquired by iGames
in exchange for 62.5% of iGames' common stock and other consideration. In
March 2004, the Company notified iGames that it was terminating the SPA due
to various material unrelated adverse events that have impacted the
business of iGames. The Company and iGames have each filed legal actions
against each other, whereby each is seeking the $1,000,000 termination fee,
as defined in the SPA, plus damages, pursuant to the SPA.
11
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, BASIS OF PRESENTATION AND RECENT EVENTS
(CONTINUED):
RECENT EVENTS (CONTINUED):
CHEX RECENT EVENTS (CONTINUED):
In addition, the Company declared a default under a $2,000,000 term loan made
by Chex to iGames in January 2004 (Note 7).
In January 2004, Chex received a termination notice from Native American Cash
Systems Florida, Inc. ("NACSF"), terminating Chex's December 2001 contract
to provide cash access services at five Seminole Tribe casino properties
located throughout Florida. The loss of this contract, which provided
approximately $4,000,000 of Chex's revenue for the year ended December 31,
2003, resulted in Chex immediately implementing cost savings measures.
In April 2004, the Company executed an Agreement and Plan of Merger (the
"Merger Agreement") with Seven Ventures, Inc. ("SVI"), OTCBB: SVVI, a
Nevada Corporation, to merge Chex into a wholly-owned subsidiary of SVI.
Under the terms of the Merger Agreement, Equitex is to exchange 100% of its
equity ownership in Chex for 7,700,000 shares of SVI, representing 93% of
SVI's outstanding common stock following the transaction. In addition,
Equitex is to receive warrants to purchse 800,000 shares of SVI common
stock at an exercise price of $0.10 per share, expiring five years from the
date of the closing. As a result, Chex is to become a wholly-owned
subsidiary of SVI, a publicly traded company. At closing, which is
anticipated to occur by June 30, 2004, pending fulfillment of certain
conditions as defined in the Merger Agreement, a bridge loan will be
consummated with an international merchant bank, whereby SVI will receive
$400,000 through the issuance of a convertible promissory note. The
promissory note is to be convertible into 4,000,000 shares of SVI common
stock in stages under certain criteria, including but not limited to, the
execution and delivery to SVI of a list of potential suitable merger
acquisition candidates and the execution of a significant acquisition with
a target entity introduced to the Company by the international merchant
bank.
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. This newly-formed company was to be named Paymaster Worldwide,
Inc. ("PWI"). Under the terms of the agreement, the Company advanced
$500,000 to Paymaster Jamaica that could be converted into stock of PWI if
the Company was formed by August 15, 2003. Because the Company was not
formed by this date, the $500,000 advance became a promissory note under
the terms of the agreement. The note is due in full on August 15, 2008. The
note bears interest at 6%, is due in bi-annual payments of interest only,
and is collateralized by shares of Paymaster Jamaica stock sufficient to
represent on a fully diluted basis, a 20% ownership interest in Paymaster
Jamaica. The shares have been pledged by the President of Paymaster
Jamaica. As of March 31, 2004, PWI had not yet been formed. The Company has
recorded a valuation allowance of $250,000 against this receivable at March
31, 2004 and December 31, 2003, due to uncertainty as to the ultimate
collectability of this receivable.
12
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS, BASIS OF PRESENTATION AND RECENT EVENTS
(CONTINUED):
AGREEMENT WITH PAYMASTER JAMAICA (CONTINUED):
Paymaster Jamaica, headquartered in Kingston, Jamaica, commenced operations
in 1997, and 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 various types of remittances nationally or
internationally via cash or debit cards.
STOCK OPTIONS:
The Company applies Accounting Principles Board Opinion No. 25 (APB 25)
Accounting for Stock Issued to Employees and related interpretations in
accounting for its stock option plans. Accordingly, no compensation expense
has been recognized for options granted with exercise prices equal to or
greater than the quoted market price. No awards of stock-based employee
compensation were granted and accounted for under APB 25 during the three
months ended March 31, 2004 or 2003.
2. DISCONTINUED OPERATIONS:
Through March 1, 2002, Key's credit card products were marketed for Net
First National Bank ("Net First") under an 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, 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. In November 2002, the
Company filed a lawsuit seeking to recover the full amount of a claim with
the FDIC for all funds due from Net First to Key through the date federal
banking regulators closed Net First (Note 7).
The Company immediately implemented steps to eliminate Key's operating
costs associated with marketing and servicing the Net First program. These
steps included employee lay-offs of all but essential management and
employee personnel necessary to re-establish its marketing and servicing
capabilities upon the establishment of a new relationship with another
financial institution. The Company had discussions with financial
institutions to initiate a new credit card program; however, the Company
was not able to establish such a relationship. During the fourth quarter of
2003, "run-off" operations which consisted of processing residual
payments on remaining active accounts in its portfolio ceased.
13
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
2. DISCONTINUED OPERATIONS (CONTINUED):
The carrying amounts of assets and liabilities of Key at March 31, 2004 and
December 31, 2003 are as follows:
March 31, December 31,
2004 2003
----------- ----------
Cash $ 196 $ 1,055
----------- ----------
Total assets $ 196 $ 1,055
=========== ==========
Accounts payable $ 492,804 $ 524,829
Accrued expenses 25,000 25,000
Notes payable, related party 73,211 71,939
----------- ----------
Total liabilities (all current) $ 591,015 $ 621,768
=========== ==========
Key had no revenues for the three months ended March 31, 2004 and $5,694
revenues for the three months ended March 31, 2003, which are included in
discontinued operations. Losses incurred by Key for the three months ended
March 31, 2004 and 2003 were $3,304 and $29,508, respectively.
3. RECEIVABLES:
Receivables at March 31, 2004 and December 31, 2003 consist of the following:
March 31, December 31,
2004 2003
----------- -----------
Credit card and ATM processors $ 1,584,487 $ 2,278,232
Due from Paymaster Jamaica 608,000 608,000
Amount held in trust 250,240 258,642
Credit card receivables, net of allowance for
losses of $1,035 (2004) and $1,545 (2003) 145,879 153,547
Other receivables 257,439 210,699
----------- -----------
$ 2,846,045 $ 3,509,120
=========== ===========
Amounts due from credit card and ATM processors arise primarily from credit
card and ATM advances by Chex to casino patrons. Amounts due from Paymaster
Jamaica are due for services performed by Denaris, which has been recorded
as deferred revenue at March 31, 2004 and December 31, 2003. The amount
held in a trust under an agreement is to secure payment of reservation fees
due to customers. The amount is held by a third party financial
institution. Credit card receivables include refundable and earned fees,
which represent the balance reported to customers. Credit card receivables
are reduced by allowances for refundable fees and losses.
14
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
4. NOTES AND INTEREST RECEIVABLE:
Notes and interest receivables as of March 31, 2004 and December 31, 2003
consist of the following:
March 31, December 31,
2004 2003
----------- -----------
Note receivable, iGames $ 2,000,000
Notes receivable from a shareholder/deceased
Chex officer's estate 1,484,691 $ 1,484,691
Note receivable, customer 350,000 350,000
Note receivable, officer of Chex 485,936 485,936
Note receivable, Paymaster Jamaica 500,000 500,000
Notes receivable from Equitex 2000 1,302,012 1,266,556
Notes receivable from various Chex employees 55,117 53,700
----------- -----------
$ 6,177,756 $ 4,140,883
Interest receivable 208,009 136,633
Less current maturities (727,221) (707,155)
----------- -----------
Notes receivable, net of current portion 5,658,544 3,570,361
Less allowance for uncollectible notes receivable (1,463,299) (1,463,299)
----------- -----------
$ 4,195,245 $ 2,107,062
=========== ===========
As of March 31, 2004 and December 31, 2003, allowances for uncollectible
notes receivable are comprised of allowances of $1,053,299 on the
receivable from a shareholder/deceased Chex officer's estate, a $250,000
allowance on the Paymaster Jamaica note, and a $160,000 allowance on the
notes receivable from Equitex 2000.
In January 2004, Chex advanced iGames $2,000,000 under a Term Loan Note (the
"Note"). Interest accrues at 10% per annum, and the initial maturity was to
scheduled to occur in January 2005, as defined in the Note. The Note was to
be secured by a pledge of capital stock of the borrower pursuant to a stock
pledge agreement. The stock pledge agreement was not executed which
resulted in an event of default under the terms of the Note. Therefore,
Chex has demanded the entire unpaid principal and accrued interest due in
full. Chex has commenced litigation relating to the collection of the Note
(Note 7). The Company has presented the note as a long-term asset at
March 31, 2004 due to uncertainty as to the anticipated litigation
settlement date.
5. GOODWILL, INTANGIBLE AND OTHER ASSETS:
SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, prescribes a two-phase
process for impairment testing of goodwill, which is performed once
annually, absent indicators of impairment. The first phase screens for
impairment, while the second phase (if necessary) measures the impairment.
The Company has elected to perform its annual analysis during the fourth
calendar quarter of each year. No indicators of impairment were identified
during the three months ended March 31, 2004.
15
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
5. GOODWILL, INTANGIBLE AND OTHER ASSETS (CONTINUED):
Intangible and other assets consist of the following at March 31, 2004 and
December 31, 2003:
March 31, 2004 December 31, 2003
-------------------------------------------- --------------------------------------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
amount amortization amount amount amortization amount
------------- ------------- -------------- ------------- ------------- --------------
Casino contracts $ 4,300,000 $ 1,499,440 $ 2,800,560 $ 4,300,000 $ 1,349,440 $ 2,950,560
Non-compete agreements 350,000 179,300 170,700 350,000 163,300 186,700
Customer lists 250,000 197,600 52,400 250,000 178,600 71,400
Trade names 100,000 100,000 100,000 100,000
------------- ------------- -------------- ------------- ------------- --------------
Total intangible assets 5,000,000 1,876,340 3,123,660 5,000,000 1,691,340 3,308,660
Deferred loan costs 484,700 10,771 473,929
Other assets 49,733 49,733 49,733 49,733
------------- ------------- -------------- ------------- ------------- --------------
$ 5,534,433 $ 1,887,111 $ 3,647,322 $ 5,049,733 $ 1,691,340 $ 3,358,393
============= ============= ============== ============= ============= ==============
6. NOTES AND LOANS PAYABLE, AND LONG-TERM DEBT:
NOTES AND LOANS PAYABLE:
Notes and loans payable at March 31, 2004 and December 31, 2003, consist of
the following:
March 31, December 31,
2004 2003
----------- -----------
Notes payable to individual investors $10,722,177 $10,692,177
Note payable to officer of Chex 150,000 150,000
Note payable to affiliate through common ownership 5,496 5,421
Convertible promissory notes 185,000 185,000
Note payable under litigation settlement 400,000 400,000
----------- -----------
$11,462,673 $11,432,598
=========== ===========
LONG-TERM DEBT:
March 31, December 31,
2004 2003
----------- ------------
Convertible promissory note, net of discount [A] $ 4,649,564
Note payable to a bank, repaid in March 2004 $ 150,000
Obligations under capital leases 76,038 88,970
----------- -----------
4,725,602 238,970
Less current maturities (1,022,805) (201,727)
----------- -----------
$ 3,702,797 $ 37,243
=========== ===========
16
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
6. NOTES AND LOANS PAYABLE AND LONG-TERM DEBT (CONTINUED):
LONG-TERM DEBT (CONTINUED):
[A] In March 2004, the Company closed on $5,000,000 of convertible
promissory notes (the "Notes") with two financial institutions (the
"Lenders"). The Notes carry a stated interest rate of 7% per annum and
have a 45-month term. Interest only payments are due April 2004
through June 2004. Beginning in July 2004, principal and interest
payments will amortize over the remaining 42-month period. The Notes
are senior to all other debt of the Company and are collateralized by
all assets of Chex and the Company's stock ownership in Chex.
The Notes are convertible into common stock at $1.35 per share up to an
amount equal to 4.99% of the Company's outstanding common stock. The
Company has the right to make any monthly payment of principal and interest
in shares of its common stock. The common stock is to be issued based on
85% of the average bid price for 20 trading days prior to the payment due
date. The maximum number of shares that can be delivered as payment is to
be equal to 10% of the average monthly trading volume for the month prior
to the payment due date. The Company may also issue common shares each
month in an amount not to exceed 10% of the prior month's total share
volume as payment, to be applied to the outstanding principal balance up to
a value of $100,000.
The Notes contain certain anti-dilution provisions requiring the Company to
pay the Lenders as collateral, the pro-rata number of shares the Lenders
would receive in any spin-off or dividend from the Company as if the
remaining principal balance under the Note was fully converted at $1.35 per
share. The dividend shares are to be segregated and may be liquidated at
the discretion of Lenders. At the end of each quarter, 85% of the proceeds
are to be applied to the principal balance as long as the Company is
current in monthly principal and interest payments.
The Lenders also received 800,000 warrants to acquire up to 800,000 shares of
the Company's common stock at an exercise price of $1.50. The warrants are
exercisable for a period of five years, and include a cashless exercise
provision. These warrants were valued at $358,400 based upon the
Black-Scholes option-pricing model, and therefore $358,400 of the total
proceeds were allocatd to the warrants, resulting in an imputed interest
rate of 7.5%. The Company reduced the carrying value of the Notes for this
amount and is amortizing the discount to interest expense over the 45-month
term of the Note. Accordingly, $7,964 has been recorded as interest expense
for the three months ended March 31, 2004. In addition, 300,000 warrants
exercisable at $1.00 per share for a period of two years were issued to an
advisory firm in connection with the transaction. These warrants were
valued at $164,700 based upon the Black-Scholes option-pricing model. In
addition, the Company paid cash of $320,000 for legal services and finders'
fees in connection with the transaction. The Company recorded the value of
these warrants and the cash paid as deferred loan costs and is amortizing
these costs over the 45-month term of the Notes. Accordingly, $10,771 is
included in general and administrative expenses for the three months ended
March 31, 2004.
The Company is required to register common shares underlying conversion of
the Notes, warrants and shares used to make monthly payments. If the
registration statement is not declared effective within 180 days of
closing, the Company is required to issue additional common stock or
warrants in amounts to be negotiated. If after twelve months from the
closing date, the registration statement is not effective, the Lenders have
the right to call the Notes.
17
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES:
LITIGATION:
In April 2004, the Company executed a settlement agreement with Cash Systems
pursuant to which tHe Company is to pay Cash Systems $125,000 for expenses
related to the terminated APM. As part of the settlement agreement, Cash
Systems is to pay Chex approximately $476,000 for commissions owed to Chex
by Cash Systems and approximately $120,000 related to cash that was in
ATM's at the Seminole Tribe casinos at the time of the APM termination.
Both the Company and Cash Systems agreed to mutually release each other
from further liability related to the APM and the Seminole Tribe
termination, however, the Company has retained the right to legal action
against NASCF, NACS and its President, for the wrongful termination of the
Seminole Tribe casino contracts.
In March 2004, Chex commenced a lawsuit in Hennepin County, Minnesota
demanding repayment of $2,000,000, plus a $1,000,000 termination fee,
accrued interest and other fees, due from iGames under a term note made in
January 2004. In addition, in March 2004, the Company commenced a lawsuit
in Delaware state court (New Castle county) relative to the termination of
the SPA. In March 2004, iGames commenced a lawsuit in United States
District Court for the District of Delaware relative to both the
termination of the SPA and iGames' obligations under the term note, which
is the subject of Chex's lawsuit in Hennepin County, Minnesota. The Company
is confident that its claims in litigation will be upheld and management
believes that the claims made by iGames lack merit. The Company intends to
vigorously prosecute its claims and defend against iGames' claims.
In December 2003, an individual filed a lawsuit against the Company and the
Company's president alleging securities fraud and breach of contract,
claiming that the Company and its president failed to honor an agreement to
purchase, for $500,000, certain shares of a former (prior to August 6,
2001) subsidiary of the Company. The complaint further alleges that the
Company participated in an effort to "pump" the price of its stock in 1999.
The complaint seeks payment of $500,000 plus costs and interest. In March
2004, the Company filed a motion to dismiss the complaint on several
grounds, including failure of the complaint to comply with applicable law,
failure to file the claims within the appropriate statute of limitations
period and lack of standing by the plaintiff under securities laws, among
others. While the outcome of this matter cannot presently be predicted, the
Company intends to vigorously defend against this claim.
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 does not agree with this disallowance. In November
2002, the Company filed a lawsuit in the United States District Court for
the Southern District of Florida seeking to recover the full amount of its
claim. The FDIC answered the complaint, asserting a counterclaim for
$1,000,000, which the FDIC asserts is for refunds to be made to customers
who did not receive credit cards as a result of FDIC actions.
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 allowed for 100% of the net
remaining balance due of $2,151,207 from the FDIC, as receiver for Net
First, in addition to amounts previously allowed for.
18
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
7. COMMITMENTS AND CONTINGENCIES (CONTINUED):
LITIGATION (CONTINUED):
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, 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. In November 2003,
Equitex reached a settlement agreement with the liquidating agent pursuant
to which Equitex is to pay the sum of $400,000 by May 21, 2004, in exchange
for the dismissal of the adversary proceeding and the execution of a mutual
release of claims by both parties. In connection with the Company's
distribution of its assets and liabilities to Equitex 2000, Inc. ("Equitex
2000") on August 6, 2001, Equitex 2000 has agreed to indemnify the Company
and assume defense in this matter. As a result, the Company has recorded a
liability of $400,000 and a corresponding receivable of $400,000 due from
Equitex 2000 as of March 31, 2004 and December 31, 2003.
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.
BONUS TO OFFICER:
In June 2003, the Company's Board of Directors approved a bonus arrangement
with the Company's president. The bonus arrangement, effective June 2,
2003, provides for an annual bonus to be calculated quarterly based on 5%
of the increase in the market value of the Company's common stock, accrued
quarterly, beginning with the closing price as reported by Nasdaq on
December 31 of each year, and ending with the closing price on December 31
of the following year. Payments under the bonus arrangement are to be made
at the discretion of the Company's management from time to time, as cash
flow permits. Total compensation expense recorded under this arrangement
for the year ended December 31, 2003 was approximately $1,490,000. Based on
the bonus calculation, no expense was recorded for the three months ended
March 31, 2004. The Company paid approximately $209,000 in 2003 and
approximately $385,000 in the quarter ended March 31, 2004. As of March 31,
2004, approximately $896,000 is included in accrued liabilities.
8. 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.
19
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED):
SERIES D CONVERTIBLE PREFERRED STOCK (CONTINUED):
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 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.
In January 2004, the Company redeemed 93 shares of Series D Preferred Stock
for $151,000, which included $25,450 of cumulative unpaid dividends.
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 were to automatically
convert into common stock on August 31, 2003. However, the Company has been
negotiating with the holder to extend the terms, therefore the holder has
not elected to convert the preferred shares to common stock. The Series G
Preferred Stock is redeemable at the Company's option at any time prior to
its conversion, at a redemption price equal to $1,350 per share plus any
cumulative unpaid dividends.
SERIES I CONVERTIBLE PREFERRED STOCK:
The Series I 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 $5.98 or 65% of the
average closing price of the Company's common stock as specified in the
agreement.
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.
20
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
8. STOCKHOLDERS' EQUITY (CONTINUED):
STOCK SUBSCRIPTION RECEIVABLE:
In December 2003, Chex sold 1,000,000 shares of Equitex common stock owned by
Chex and which represent treasury stock of the Company, in exchange for
$200,000 cash and an $800,000 promissory note. The note is presented as a
component of stockholders' equity. The note has an interest rate of
7% per annum and is payable in three installments of principal and interest
through June 30, 2004, beginning in February 2004. The note currently is
in default. The note is secured by a pledge agreement which grants Chex a
security interest in 700,000 of the purchased shares.
ISSUANCES OF COMMON STOCK:
During the three months ended March 31, 2004, the Company issued 186,500
shares of common stock upon the exercise of stock options for $126,820, at
an average exercise price of $0.68 per share.
During the three months ended March 31, 2004, the Company also issued 119,406
shares of common stock upon the conversion of warrants for $41,388, at an
average conversion price of $0.35 per share.
In March 2004, the Company converted $10,908 of accounts payable for common
stock previously issued as contingent consideration. The common stock was
issued in December 2003 as contingent consideration for accounts payable.
Under the agreement, as the shares of stock are sold by the holder, the
accounts payable due to holder by the Company are reduced.
TREASURY STOCK TRANSACTIONS:
During the three months ended March 31, 2004, Chex sold 410,000 shares of
Equitex common stock for approximately $410,012 or $1.00 per share (the
market price of the common stock at the date of sale). The stock was
acquired at an average cost of approximately $0.46 per share and the cost
of the shares sold ($188,600) has been removed from treasury stock. The
difference between the sales price and cost of the shares sold ($221,412)
has been classified as additional paid in capital.
During the three months ended March 31, 2004, Chex purchased 25,000 shares of
Equitex common stock for $24,750 or $0.99 per share (the market price of
the Company's common stock on the purchase date). The cost of the shares
has been added to treasury stock.
21
EQUITEX, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(UNAUDITED)
9. OPERATING SEGMENTS:
As of and for the three-month period ended March 31, 2004, segment results
were as follows:
Cash
Credit card disbursement Corporate
services services activities Total
-------------- ------------ ----------- ------------
(Key and Nova) (Chex)
Revenues $ 78,711 $ 3,463,103 - $ 3,541,814
Net loss (16,175) (338,544) $ (276,295) (631,014)
Total assets 399,267 25,295,911 2,351,221 28,046,399
As of and for the three-month period ended March 31, 2003, segment results
were as follows:
Cash
Credit card disbursement Corporate
services services activities Total
-------------- ------------ ----------- ------------
(Key and Nova) (Chex)
Revenues $ 129,049 $ 4,573,951 $ 4,703,000
Net income (loss) 17,947 233,081 $ (557,713) (306,685)
22
ITEM TWO
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, 2003,
2002 and 2001. The financial results presented for the three months ended March
31, 2004 and 2003 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.
LIQUIDITY AND CAPITAL RESOURCES
For the year ending December 31, 2004, we presently anticipate our liquidity and
capital resource needs will be satisfied from cash flows generated from our
operating activities.
Our main operating subsidiary, Chex, anticipates positive cash flows in 2004.
Additionally, Chex has begun to introduce 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.
23
Cash flow activity for the three months ended March 31, 2004 and 2003, includes
The activity of Chex, Key and Nova, Equitex, and Denaris. For the three months
ended March 31, 2004, net cash used in operating activities from continuing
operations was $557,878 compared to $2,370,587 for the three months ended March
31, 2003. The most significant portion of this change was the changes in current
assets and liabilities which used cash and adjusted the net loss by $215,560 for
the three months ended March 31, 2004 compared to the changes in the same assets
and liabilities for the three months ended March 31, 2003 of $2,447,670.
Additionally, non-cash adjustments to the current year's results were $288,696
including depreciation and amortization of $276,738 compared to total non-cash
adjustments of $383,768, mostly comprised of $267,878 and $85,000, respectively,
for depreciation and amortization and stock-based compensation for the three
months ended March 31, 2003.
Cash used in investing activities from continuing activities for the three
months ended March 31, 2004 was $2,121,939 compared to $359,620 for the three
months ended March 31, 2003. Cash used in 2004 investing activities was
primarily attributable to purchases of furniture, fixtures and equipment of
$92,044 and net advances of $2,038,917 on notes receivable. Cash used in 2003
investing activities was primarily due to net advances of $323,300 on notes
receivable, and purchases of furniture, fixtures and equipment of $57,010.
Cash provided by financing activities from continuing activities for the three
months ended March 31, 2004 was $2,451,847 compared to cash used in financing
activities from continuing activities of $372,713 for the three months ended
March 31, 2003. The significant activity for the three months ended March 31,
2004, included the Company receiving proceeds of $5,885,000 upon the issuance of
notes payable, receiving $410,012 upon the sale of 410,000 shares of treasury
stock by Chex and proceeds received of $168,208 upon the exercise of options and
warrants. These proceeds were offset by the repayment of notes payable of
$1,017,857, payment of fees of $320,000 related to the issuance of notes
payable, purchase of Equitex shares for treasury by Chex for $24,750 and
redemption of Series D preferred stock for $151,000 in cash.
The significant financing activity for the three months ended March 31, 2003,
included the Company receiving $194,676 from the exercise of warrants and the
sale of 146,000 shares of treasury stock by Chex for $102,200. The Company
received proceeds of $470,000 upon the issuance of notes payable and repaid
$589,589 of notes payable. In addition, Chex repaid net borrowings of $450,000
under its line of credit. During the three months ended March 31, 2003, the
Company also redeemed 90 shares of its Series I Preferred Stock for $100,000 in
cash.
Net cash used in discontinued operations was $33,198 for the three months ended
March 31, 2004 as compared to $113,261 for the three months ended March 31,
2003. The decrease in cash used in discontinued operations is the result of Key
ceasing its run-off operations during the fourth quarter of 2003.
For the three months ended March 31, 2004, net cash decreased by $261,168
compared to a decrease of $3,216,181 for the three months ended March 31, 2003.
Ending cash at March 31, 2004, was $7,798,612 compared to $5,709,943 at March
31, 2003. Significantly all of the Chex's cash is required to be utilized for
its casino operations and they are prohibited from using it for other corporate
purposes. Consequently Equitex needs to rely on other sources for its liquidity
needs.
In March 2004, the Company closed on $5,000,000 of convertible promissory Notes
(the "Notes") with two financial institutions (the "Lenders"). The Notes carry
an interest rate of 7% per annum and have a 45-month term. Interest only
payments are due monthly beginning in April 2004 through June 2004. Beginning in
July 2004, principal and interest payments will amortize over the remaining
42-month period. The Notes are senior to all other debt of the Company and are
collateralized by all assets of Chex and the Company's stock ownership in Chex.
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.
24
RESULTS OF OPERATIONS
REVENUES
Consolidated revenues for the three months ended March 31, 2004, were,
$3,541,814 compared to consolidated revenues of $4,703,000 for the three months
ended March 31, 2003. The decrease in period was due primarily to the loss of
revenues resulting from the closure of five Seminole Tribe casino locations
located throughout Florida in January 2004.
REVENUE BY SEGMENT
Three months ended
March 31,
Segment 2004 2003
- ------- ----------- -----------
Cash disbursement services $ 3,463,103 $ 4,573,951
Credit card services 78,711 129,049
----------- -----------
$ 3,541,814 $ 4,703,000
=========== ===========
CASH DISBURSEMENT SERVICES SEGMENT
Chex recognizes revenue at the time certain financial services are performed.
Revenues are derived from check cashing fees, credit and debit card advance
fees, automated teller machine ("ATM") surcharge and transaction fees, and NSF
collection fees. Chex revenues as of March 31, 2004 and 2003 were comprised of:
2004 2003
------------ ------------- ------------ ------------ ------------ ------------
Number of Dollars Earned Number of Dollars Earned
Transactions Handled Revenues Transactions Handled Revenues
------------ ------------ ------------ ------------ ------------ ------------
Personal checks 159,183 $ 29,474,085 $ 1,538,879 208,555 $ 34,841,303 $ 1,998,205
"Other" checks 60,767 23,103,174 237,992 92,291 38,325,893 298,818
Credit cards 55,800 18,895,559 680,368 89,769 30,514,027 1,194,462
Debit cards 9,969 3,113,314 40,274 15,138 5,846,463 106,777
ATM transactions 428,158 33,547,520 782,709 896,454 87,342,980 822,279
NSF Collection
Fees -- -- 118,847 -- -- 129,389
Other -- -- 64,034 -- -- 24,021
------------ ------------ ------------ ------------ ------------ ------------
713,877 $108,133,652 $ 3,463,103 1,302,207 $196,870,666 $ 4,573,951
============ ============ ============ ============ ============ ============
Chex cashes personal checks at its cash access locations for fees of between 3
and 10 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.
Chex credit/debit card cash advance services allow patrons to use their VISA,
MasterCard, Discover and American Express cards to obtain cash. Third party
vendors, at their expense, supply, install and maintain the equipment to operate
the cash advance system. Under vendor agreements, the vendor charges each
customer a services fee based upon the cash advance amount and pays a portion of
such service fee to Chex.
Chex receives a surcharge fee for each cash withdrawal from the ATM machines in
locations where Chex provides such services. The surcharge, which is a charge in
addition to the cash advance, is made against the bank account of the customer
and is deposited in the vendor's account. The vendor reimburses Chex for the
cash amount and pays the surcharge commission due.
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Chex utilizes its own in-house collections department to pursue collection of
returned checks, and generally charges an insufficient funds fee when it
ultimately collects the check.
In the ordinary course of business, Chex receives new financial services
agreements or renews existing ones as their original terms expire. Chex may also
not renew contracts from certain expiring agreements. In January of 2004, Chex
was advised that 5 existing casino locations were terminating the agreements for
Chex to provide its services. These locations accounted for $1,007,162 and
$4,089,557 in revenues for the three months ended March 31, 2004, and the year
ended December 31, 2003, respectively. Accordingly, Chex anticipates a decline
in 2004 revenues due to the loss of these contracts and the absence of
significant new contracts to replace the revenues lost. Chex has implemented
cost savings expense reductions to minimize the effect of the loss of these
contracts.
OPERATING EXPENSES
Total operating expenses for the three months ended March 31, 2004, was
$3,912,919 compared to $4,625,903 for the three and months ended March 31, 2003.
Three months ended
March 31,
Segment 2004 2003
- ------- ----------- -----------
Cash disbursement services $3,562,257 $4,014,174
Corporate activities 259,107 530,135
Credit card services 91,555 81,594
----------- -----------
$3,912,919 $4,625,903
=========== ===========
CASH DISBURSEMENT SERVICES SEGMENT
Chex operating expenses of $3,562,257 and $4,014,174 for the three months ending
March 31, 2004 and 2003, were comprised as follows:
Three months ended
March 31,
2004 2003
----------- -----------
Fees to casinos $ 1,166,148 $ 1,508,242
Salaries and related costs 1,283,664 1,481,874
Returned checks, net of collections 98,003 38,114
General operating expenses 748,839 718,330
Depreciation and amortization 265,603 267,614
----------- -----------
$ 3,562,257 $ 4,014,174
=========== ===========
Chex pays a fee to casinos as compensation pursuant to the terms of each
financial services agreement that the company has entered into with each
respective establishment. At locations where Chex provides check cashing
services, Chex pays the location operator a commission based upon the monthly
amount of checks cashed, as defined in the agreement. Chex passes on an agreed
upon percentage of the surcharge commissions to the locations where ATM's are
utilized. At all of the locations at which Chex provides credit/debit card
advance services, it pays the operator a commission for each completed
transaction.
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Chex Services employs personnel at the locations where it provides check cashing
services as well as corporate staff to support its operations. For the three
months ended March 31, 2004, corporate salaries and related costs were $509,631
while location salaries and related costs were $774,033. For the three months
ended March 31, 2003, corporate salaries and related costs were 444,004 and
location salaries and related costs were $1,037,870. Due to the terminated
locations, Chex Services has reduced staff needs going forward. The company has
reduced staff and in some instances reduced salaries for retained employees
beginning in February 2004. It is anticipated that these reductions on an annual
basis should reduce salary costs by approximately $400,000.
The terminated locations accounted for $456,223 of fees to casinos for the three
months ended March 31, 2003. Additional direct costs associated with the
terminated contract locations were $300,673 for the three months ended March 31,
2003.
CORPORATE ACTIVITY
Corporate activity expenses include those of Equitex and Denaris. Total
corporate activity expenses for the three months ended March 31, 2004 and 2003
were comprised as follows:
2004 2003
---- ----
Employee costs $ 111,626 $ 143,740
Other 147,481 301,395
Stock based compensation 85,000
----------- -----------
$ 259,107 $ 530,135
=========== ===========
Employee costs for the three months ended March 31, 2004 decreased by $32,114
from the three months ended March 31, 2003. The 2003 period included $32,966 of
employee costs associated with the start-up of Denaris.
Other expenses for the three months ended March 31, 2004 and 2003 include
professional fees of $60,419 and $99,166, respectively and general operating
costs of $87,062 and $202,229, respectively. Included in the 2003 amount were
costs associated with the start-up of Denaris of $159,280.
Stock based compensation of $85,000 for the three months ended March 31, 2003,
represents non-cash expenses related to issuances of common stock and warrants
to third party consultants for services.
CREDIT CARD SERVICES SEGMENT
Nova's operating expenses were $91,555 and $81,594 for the three months ended
March 31, 2004 and 2003, respectively. The 2004 expenses were comprised of third
party servicing fees of $42,611 and other operating expenses of $48,944,
compared to the 2003 expenses of $74,748 for third party servicing fees and
$6,846 for other operating expenses. The decrease in the third party servicing
fees for the 2004 period compared to the 2003 period is a direct result of the
reduced credit card revenue in the respective periods. The increase in other
expenses in the 2004 period compared to 2003 was due to legal expenses of
approximately $36,000.
OTHER INCOME (EXPENSE):
Consolidated other expenses for the three months ended March 31, 2004 were
$250,605 compared to $342,274 for the three months ended March 31, 2003.
Interest income increased by $70,485 for the three months ended March 31, 2004
compared to March 31, 2003. The most significant portion of the increase was
$46,111 of interest income recorded on the Igames $2.0 million note.
Additionally, the notes receivable from Equitex 2000 were substantially higher
as of March 31, 2004 compared to March 31, 2003. Accordingly, interest income
related to Equitex 2000 was $21,808 for the three months ended March 31, 2004
compared to $11,057 for the three months ended March 31, 2003.
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DISCONTINUED OPERATIONS
Discontinued operations represents the operations of Key, which ceased during
the fourth quarter of 2003. The loss from discontinued operations was $3,304 for
the three months ended March 31, 2004 compared to $29,508 for the three months
ended March 31, 2003.
CONTRACTUAL OBLIGATIONS
In March 2004, the Company closed on $5,000,000 of convertible promissory notes
(the "Notes") with two financial institutions (the "Lenders"). The Notes carry a
stated interest rate of 7% per annum and have a 45-month term. Interest only
payments are due April 2004 through June 2004. Beginning in July 2004, principal
and interest payments will amortize over the remaining 42-month period. The
Notes are senior to all other debt of the Company and are collateralized by all
assets of Chex and the Company's stock ownership in Chex.
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ITEM THREE
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates
and prices, such as interest rates and a decline in the stock market. The
Company does not enter into derivatives or other financial instruments for
trading or speculative purposes. The Company has limited exposure to market risk
related to changes in interest rates. The Company does not currently invest in
equity instruments of public or private companies for business or strategic
purposes.
The principal risks of loss arising from adverse changes in market rates and
prices to which the Company and its subsidiaries are exposed relate to interest
rates on debt. The Company has both fixed and variable rate debt. Chex has
$10,798,216 and $10,931,147 of debt outstanding as of March 31, 2004 and
December 31, 2003, respectively, of which $10,722,177 and $10,692,177 has been
borrowed at fixed rates ranging from 9% to 12% at March 31, 2004 and December
31, 2003, respectively. This fixed rate debt is subject to renewal annually and
is payable upon demand with 90 days written notice by the debt holder. Chex also
has $76,039 and $238,970 of variable rate debt at March 31, 2004 and December
31, 2003, respectively, owed to a bank. The lender presently charges interest at
0.5% to 0.75% over the prime rate.
As most of the Company's average outstanding indebtedness is renewed annually
and carries a fixed rate of interest, a change in interest rates is not expected
to have a material impact on the consolidated financial position, results of
operations or cash flows of the Company during the year ending December 31,
2004.
29
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 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
None
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
(a) Exhibits
Exhibit 31 - Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 32 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K during the quarter ended March 31, 2004
None.
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: May 17, 2004 By: /s/ Henry Fong
-------------------------------------
Henry Fong
President, Treasurer and
Chief Financial Officer
31