-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Epowy2UbXZOtUCkyy0TZRANvUtmRImiEfJAKIhQ7D62LJyU2HKdTWMOlIPdKNs2q n2ZKBBg0QYLKwk4gJdylhw== 0000716101-99-000013.txt : 19990415 0000716101-99-000013.hdr.sgml : 19990415 ACCESSION NUMBER: 0000716101-99-000013 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUITEX INC CENTRAL INDEX KEY: 0000716101 STANDARD INDUSTRIAL CLASSIFICATION: INVESTORS, NEC [6799] IRS NUMBER: 840905189 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 814-00035 FILM NUMBER: 99593974 BUSINESS ADDRESS: STREET 1: 7315 E PEAKVIEW AVE STREET 2: GREENWOOD EXECUTIVE PARK BLDG 8 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037968940 MAIL ADDRESS: STREET 1: 7315 EAST PEAKVIEW AVENUE CITY: ENGLEWOOD STATE: CO ZIP: 80111-6701 10KSB 1 1998 ANNUAL REPORT ON FORM 10-KSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ================================================================================ /X/ ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended: DECEMBER 31, 1998 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For transition period from _____ to _____. ================================================================================ Commission File Number: 0-12374 EQUITEX, INC. (Name of small business issuer in its charter) DELAWARE 84-0905189 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 7315 EAST PEAKVIEW AVENUE, ENGLEWOOD, COLORADO 80111 (Address of principal executive offices)(Zip Code) Issuer's telephone number: (303) 796-8940 Securities registered under Section 12 (b) of the Exchange Act: NONE Securities registered under Section 12 (g) of the Exchange Act: COMMON STOCK, $.02 PAR VALUE (Title of Class) - -------------------------------------------------------------------------------- Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15 (d) of the Exchange during the past 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 Days: Yes /X/ No / / Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained in this form, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB: /X/ Issuer's revenues for its most recent fiscal year: $447,840 The aggregate market value of the voting stock held by non-affiliates of the Registrant was $86,676,429 based on the last sale price of the Registrant's common stock on April 9, 1999, ($17.875 per share) as reported by the Nasdaq Stock Market. The issuer had 6,028,715 shares of common stock outstanding as of April 9, 1999. Documents incorporated by reference: NONE Transitional Small Business Disclosure Format: Yes / / No /X/ EQUITEX, INC. FORM 10-KSB 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 REGISTRANT'S EXPECTATIONS OR BELIEFS, INCLUDING BUT NOT LIMITED TO, STATEMENTS CONCERNING THE REGISTRANT'S OPERATIONS, ECONOMIC PERFORMANCE, FINANCIAL CONDITION, GROWTH AND ACQUISITION STRATEGIES, INVESTMENTS, AND FUTURE OPERATIONAL PLANS. FOR THIS PURPOSE, ANY STATEMENTS CONTAINED HEREIN THAT ARE NOT STATEMENTS OF HISTORICAL FACT MAY BE DEEMED TO BE FORWARD-LOOKING STATEMENTS. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS "MAY", "WILL", "EXPECT", "BELIEVE", "ANTICIPATE", "INTENT", "COULD", "ESTIMATE", "MIGHT", OR "CONTINUE" OR THE NEGATIVE OR OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES, CERTAIN OF WHICH ARE BEYOND THE REGISTRANT'S CONTROL, AND ACTUAL RESULTS MAY DIFFER MATERIALLY DEPENDING ON A VARIETY OF IMPORTANT FACTORS, INCLUDING UNCERTAINTY RELATED TO ACQUISITIONS, GOVERNMENTAL REGULATION, MANAGING AND MAINTAINING GROWTH, THE VALUE OF THE REGISTRANT'S INVESTMENTS, THE OPERATIONS OF THE REGISTRANT'S INVESTEE COMPANIES, VOLATILITY OF STOCK PRICE AND ANY OTHER FACTORS DISCUSSED IN THIS AND OTHER REGISTRANT FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. PART I ITEM 1. DESCRIPTION OF BUSINESS. (a) Business Development (1) The Registrant was organized under the laws of the State of Delaware in 1983 and elected to become a business development company and be subject to the applicable provisions of the Investment Company Act in 1984. Until January 4, 1999, Equitex, Inc. (the "Registrant") was a business development company ("BDC") which is a form of closed-end, non-diversified investment company under the Investment Company Act of 1940 (the "Investment Company Act"). A business development company generally must maintain 70% of its assets in new, financially troubled or otherwise qualified companies, known as investee companies, and offers significant managerial assistance to such companies. Business development companies are not subject to the full extent of regulation under the Investment Company Act. (See Item 1 (b) (8) "Regulation - Business Development Companies" below). The Registrant primarily was engaged in the business of investing in and providing managerial assistance to developing companies which, in its opinion, would have a significant potential for growth. The Registrant's investment objective was to achieve long-term capital appreciation, rather than current income, on its investments. On January 4, 1999, the Registrant withdrew its election to be treated as a BDC subject to the Investment Company Act. The Company has elected to be treated for a maximum period of one year as a "transient investment company" as that term is defined in Rule 3a-2 under the Investment Company Act of 1940. On December 12, 1996, the Registrant announced that it intended to implement a withdrawal of its election as a BDC under the Investment Company Act. The Registrant prepared a detailed plan which addressed the corporate governance issues and process which must be followed for decertification including the legal, accounting, securities listing and other effects of such withdrawal on the Registrant. At a meeting held on April 3, 1998, the Registrant's stockholders authorized the Registrant to change the nature of its business and withdraw its election as a BDC under the Investment Company Act. -1- The withdrawal would become effective only upon the Securities and Exchange Commission's receipt of the Registrant's notice of election of withdrawal within a period of one year from the date of vote. On January 4, 1999, the Registrant filed its withdrawal and elected to be treated for a maximum period of one year as a "transient investment company" as that term is defined under the Investment Company Act. Following the withdrawal, the Registrant is no longer subject to the regulatory provisions of the Investment Company Act for BDCs, such as insurance, custody, composition of the board, affiliated transactions and compensation arrangements. Despite the Registrant's withdrawal of its election as a BDC, the Registrant continues to be subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Under the Exchange Act, the Registrant continues to file periodic reports on Form 10-KSB and Form 10-QSB, as well as reports on Form 8-K and proxy statements and any other reports required under the Exchange Act. The Registrant's Board of Directors adopted a plan which began with stockholder approval for the Registrant to withdraw as a BDC, with the intent of becoming an operating company. On August 13, 1998, the Registrant acquired all of the outstanding stock of First TeleServices Corp. in exchange for 625,000 shares of the Registrant=s common stock. As a result of the transaction, FTC became a wholly owned subsidiary of the Company. FTC is a fee-based financial services organization consisting of a database marketing division, consumer finance division, an inbound/outbound calling center, and an operations center. FTC has developed strategic alliances with a number of nationwide organizations to outsource the products and services it offers. In the fourth quarter of 1998, the Registrant acquired 9.9% of the outstanding common stock of First TeleBanc Corp. ("FTB"), a bank holding company which operates through its wholly owned subsidiary, Boca Raton First National Bank, in Boca Raton, Florida. FTB intends to focus as a `direct to the consumer bank' on a national level. It will use the Internet, including electronic payment processing, to facilitate e-commerce transactions, and call center technology to deliver its products and services to its customers 24 hours a day, 7 days a week. On April 9, 1999, the Registrant signed a letter of intent to merge FTB with and into the Registrant. Consummation of the merger is subject to certain conditions and adjustments. As an operating company, the nature of the Registrant's business will change from investing in a portfolio of securities to achieve gains on appreciation and dividend income, to becoming actively engaged in the management of a business or businesses for the generation of income from those operations. Thus, withdrawal of the Registrant's election as a BDC will result in a significant change in the Registrant's method of accounting from the value method of accounting required of investment companies to either fair value or historical cost accounting, depending on the classification of the investment and the Registrant's intent with respect to the period it intends to hold the investment. Over the past several years as a BDC, the Registrant concentrated its efforts in acquiring interests in more mature investee companies, in some cases, through asset-based financing transactions. In that regard, the Registrant devoted more of its time to providing managerial assistance to fewer companies, most of which time over the past several years was devoted to investees RDM Sports Group, Inc. and IntraNet Solutions, Inc., which constituted a significant portion of the Registrant's investment portfolio. The President of the Registrant was President and a director of RDM Sports Group from 1987 to June 1997 and was director of IntraNet Solutions and its predecessor from February 1991 to October 1997. During the fourth quarter of 1997, the Registrant received 2,000,000 shares of common stock of VP Sports, Inc. ("VP Sports") in payment for the transfer of a letter of intent for the acquisition of an unrelated company involved in the sporting goods business as well as merger and acquisition advisory services rendered to VP Sports. The total value for the transfer and services was $250,000 which represents the Registrant's cost basis for the shares. During -2- 1998, VP Sports executed a letter of intent for the acquisition of a North American manufacturing company. No definitive agreement has been reached to date, however, VP has received a financing commitment for asset based lending and is completing with that lender a final due diligence review. While there is no assurance the acquisition will be completed, VP anticipates signing a definitive agreement during the first half of 1999. During 1998, the Registrant received 1,500,000 shares of the common stock of Triumph Sports, Inc. ("Triumph") in payment of merger and acquisition advisory services totaling $375,000. During 1997, Triumph was unsuccessful in its attempt to acquire a golf accessory manufacturer. During 1998, Triumph acquired and currently operates four health food, nutritional and supplement related retail outlets in the South Florida area. Triumph became an authorized franchisee of General Nutrition Centers ("GNC") which stores comprise two of those operated. As of the date of this report, Triumph is negotiating for the purchase of an additional GNC location, the success of which acquisition cannot be assured. In November 1997, the Registrant was notified by the Nasdaq Stock Market that the Registrant failed to meet the minimum maintenance requirements for continued listing on the Nasdaq National Market. As a result of this notification and subsequent review by Nasdaq of materials provided by the Registrant, on February 19, 1998 a hearing was held to consider the Registrant's plan for continued compliance with the maintenance requirements and a determination was made to move trading of the Registrant's common stock to the Nasdaq SmallCap Market effective March 13, 1998. The Registrant's common stock continues to trade on the Nasdaq Stock Market SmallCap Market under the symbol EQTX. (a)(2)(3) During the year ended December 31, 1998, the Registrant has not been involved in any bankruptcy, receivership or similar proceedings; has not undergone material reclassification, merger or consolidation; has not acquired or disposed of any material amount of assets otherwise than in the ordinary course of business; and has not experienced any material change in its mode of conducting business. However, on January 4, 1999, the Registrant filed a withdrawal of its election as a business development company to become an operating company. [See Item 1(a)(1) above for an explanation of the Registrant's withdrawal on January 4, 1999 of its election as a BDC] (b) Business of Issuer (1)(2)(3)(4) As a result of the Registrant's decertification as a business development company, the Registrant is now a holding company which operates through its wholly owned subsidiary, FTC. FTC is a fee-based financial services organization consisting of a database marketing division, consumer finance division, an inbound/outbound calling center, and an operations center. FTC has developed strategic alliances with a number of nationwide organizations to outsource the products and services it offers. FTC only recently began operations and has not yet generated income. As a marketing arm for financial institutions, FTC will perform as a consumer finance company, offering a broad array of financial products and services to the sub-prime market. These products will be developed and serviced through correspondent relationships with companies specializing in those particular products which include: * debt transfer servicing * balance transfer servicing * secured credit cards * sub-prime mortgage loans * sub-prime auto loans * prepaid calling cards * prepaid residential long distance service * prepaid cellular service * insurance products * other selected products and services -3- The calling center is the engine that drives the product delivery system; eventually handling tens of thousands of inbound and outbound calls monthly. The inbound calls will be the result of various targeted media programs and the by-product of FTC's customer base, which is anticipated to grow to hundreds of thousands of consumers. The outbound calls will be the result of cross selling large data bases of customers a variety of products and services offered on a brokered basis through the Registrant's strategic alliances. Through interactive voice response technology, the latest call center software and hardware, and a well-trained staff of customer service representatives, telemarketers and telebankers, FTC will be able to turn these calls into revenue while operating at the highest level of efficiency. The call center functions have been outsourced to The Scribers, Inc. in Lansing, Michigan, an experienced call center services company. Initially, FTC will offer secured credit cards to large data bases of customers through its debt transfer servicing program. ADebt transfer servicing@ is a term used in the collection industry which means using a new loan account number to service and collect debt purchased in the secondary market. As customers continue to make payments on their new accounts, thereby rehabilitating their credit, the Registrant will begin cross selling other financial and telecommunications products on a fee basis without the risk of extending credit. A debt transfer servicing agreement has already been signed with a Midwest financial services firm that has a large network of collection agencies. In addition, FTC recently entered into a joint venture agreement with a southeastern financial services company which has acquired a portfolio of 13,000 accounts representing receivables in excess of $100 million. FTC believes that it differs from other financial services organizations in that it understands and will specialize in handling the sub-prime consumer and offer that consumer only those products and services they need. The Registrant will target those financial institutions which recognize the potential in the sub-prime market and have relationships with strategic alliances already working with this market. (5) The Registrant does not require raw materials. (6) The Registrant's business is dependent upon the alliance partnerships it maintains with other organizations for referral of debt portfolios which generate new customers. Because the Registrant=s business is ultimately dependent upon the quantity and quality of these alliance partnerships, the Registrant must actively seek out new partnerships while maintaining and evaluating its current relationships. If any of these alliance partners fail to deliver quality products or services on a timely basis, and if the Registrant is unable to develop alternative sources as required, dissatisfied clients may turn to other sources to provide the products or services they desire which may adversely affect the Registrant's business. (7) The Registrant holds no patents or trademarks, and has no interest in any franchises, concessions, royalty agreements or labor contracts. (8)(9) The Registrant is not subject to any governmental approval for its products and services. Because the Registrant is dependent upon alliance partnerships, the Company can provide no assurance that future regulatory, judicial, legislative or political considerations will permit these partners to offer their products and services, that regulators or third parties will not raise material issues regarding the compliance of these partners with applicable laws or regulations, or that these regulatory, judicial, legislative or political decisions will not have an adverse effect on the ability of these alliance partners to provide the products and/or services. (10) The Registrant has incurred no research and development costs in each of the last two fiscal years and does not anticipate any such expenditures in the near future. (11) The Registrant is not subject to any federal, state or local provisions which have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment. -4- (12)The Registrant currently employs four persons all of whom are full-time employees. In addition, FTC employs two full-time employees. ITEM 2. DESCRIPTION OF PROPERTY. (a) Description of Principal Plants and other Property The Registrant's principal office is located at 7315 East Peakview Avenue, Englewood, Colorado 80111. The Registrant leases this space, consisting of approximately 1,800 square feet, for $2,500 per month, from a partnership in which the Registrant's president is the partner. The Registrant believes these terms to be no less favorable than those which could be obtained from a non-affiliated party for similar facilities in the same area. The Registrant also leases at the market rate for such facilities in the area an executive office in Palm Beach Gardens, Florida where it shares secretarial and office facilities with several other lessees. (b) Investment Policies The Registrant currently does not invest in real estate, real estate mortgages, or securities of persons who primarily engage in real estate activities. Although the Registrant does not currently make investments as described above, and currently has no intention to make such investments in the near future, it is limited in making such investments only as described in Item 1.(b) "Regulation - Business Development Companies". (c) Description of Real Estate and Operating Data The Registrant does not own real property, the book value of which amounts to ten percent or more of the total assets of the Registrant. ITEM 3. LEGAL PROCEEDINGS. The Registrant is a plaintiff in a declaratory judgement action, EQUITEX, INC. AND HENRY FONG V. BERTRAND T. UNGAR, Case No. 98 CV 2437 (District Court, Arapahoe County, Colorado), commenced in July 1998, asserting that the Registrant has no obligation to Mr. Ungar for indemnification and defense claims which Ungar had previously asserted against the Registrant. Ungar filed counter-claims which alleged that while acting as an attorney and business advisor for Equitex, he had incurred tort liabilities to third parties, and that Registrant, as his client, owed him a fiduciary duty and other alleged duties, and therefore should indemnify and reimburse him for his losses and costs of defense in the actions with third parties, an amount allegedly in excess of $1,000,000. The Registrant is vigorously pursuing its claims and will defend the counterclaims. The registrant is a defendant in the cases of THEOHAROUS, ET AL. V. HENRY FONG, EQUITEX, INC., CHARLES E. SANDERS AND METROMEDIA INTERNATIONAL GROUP, INC., Civil Action No. 1-98-CV-2366 (U.S. District Court for the Northern District of Georgia), and LESLIE SCHUETTE, ET AL. V. HENRY FONG, EQUITEX, INC., CHARLES E. SANDERS AND METROMEDIA INTERNATIONAL GROUP, INC., Civil Action No. 1-98-CV-2366 (U.S. District Court for the Northern District of Georgia). These alleged class actions on behalf of a purported class of stockholders of RDM Sports Group, Inc. ("RDM") were filed on August 19, 1998, and October 19, 1998, respectively. Both cases assert that during 1996 and 1997, the defendants (including the Registrant) made numerous allegedly false statements and overly optimistic predictions regarding the business and financial condition of RDM in the press releases and public filings of RDM, with knowledge of their falsehood, thereby misleading RDM stockholders. The complaints allege that the defendants, (including the Registrant) violated Section 10 (b) of the Securities Exchange Act and SEC Rule 10b-5, and that the individual defendants violated Section 20 (a) of the Exchange Act, and seek unspecified compensatory damages, costs, expenses and attorney fees. Registrant did not prepare or review the alleged false statements or predictions. Registrant was not a controlling stockholder of RDM after December 1994, when Metromedia International Group, Inc. acquired 40% of RDM's common stock, while the Registrant held just over 10% of RDM"s outstanding stock. The Registrant intends to seek dismissal of both cases and to vigorously defend these actions. -5- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On December 4, 1998, the Registrant held an Annual Meeting of its Stockholders. The stockholders re-elected each of the Registrant's three directors to serve until the next Annual Meeting of Stockholders and the votes were cast as follows: For Withhold Authority --- ------------------ Henry Fong 3,457,146 67,056 Russell L. Casement 3,461,444 62,758 Aaron Grunfeld 3,461,444 62,758 Additionally, the following two proposals were presented and voted upon at the meeting and the votes were cast as follows: To ratify the appointment of Davis & Co., CPA's, P.C. as the independent auditor of the Registrant for the year ending December 31, 1998. For Against Abstain Non-Voted --- ------- ------- --------- Shares voted 3,446,317 53,260 4,625 -0- To approve the issuance of warrants, options or other securities that may be changed into common stock of the Company. For Against Abstain Non-Voted --- ------- ------- --------- Shares voted 2,128,266 1,001,925 18,255 375,756 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. (a) Market Information The principal market in which the Registrant's Common Stock is traded is the over-the-counter market. The Registrant's Common Stock trades on the Nasdaq Stock Market under the symbol EQTX. The table below states the quarterly high and low last sale prices for the Registrant's Common Stock as reported by The Nasdaq Stock Market, and represent actual high and low last sale prices. Last Sale Quarter ended High Low ---------------------------------------------------------------- 1997 ---- March 31, 1997 $3.00 $1.88 June 30, 1997 $2.13 $1.50 September 30, 1997 $1.88 $0.69 December 31, 1997 $1.56 $0.69 1998 March 31, 1998 $3.57 $0.81 June 30, 1998 $5.31 $3.00 September 30, 1998 $7.13 $4.50 December 31, 1998 $7.50 $6.50 -6- (b) Holders The number of record holders of the Registrant's Common Stock as of April 9, 1999, was 2,460 according to the Registrant's transfer agent. This figure excludes an indeterminate number of shareholders whose shares are held in "street" or "nominee" name. (c) Dividends The Registrant has not declared or paid cash dividends on its Common Stock, nor does it anticipate paying any cash dividends in the foreseeable future. The Registrant currently intends to retain any future earnings to fund operations and for the continued development of its business. While a BDC, the Registrant made an in-kind distribution of its larger investment positions to its stockholders. Any further in-kind distribution will be made only when, in the judgment of the Registrant's Board of Directors, it is in the best interest of the Registrant's stockholders to do so. It is possible that the Registrant may make an in-kind distribution of securities which have appreciated or depreciated from the time of purchase depending upon the particular distribution. The Registrant has not established a policy as to the frequency or size of distributions and indeed there can be no assurance that any future distributions will be made. To date, only one such distribution has been approved by the Board of Directors and was distributed in April 1988. (d) Recent Sales of Unregistered Securities On November 20, 1997, the Registrant commenced a private placement under which 600,000 shares of its Common Stock were sold to a group of accredited investors for $0.75 per share. No underwriting discounts or commissions were paid. The Company relied upon Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated under the Act. On March 13, 1998, the Registrant commenced a private placement under which 499,200 shares of its Common Stock were sold to a group of accredited investors for $1.16 per share. No underwriting discounts or commissions were paid. The Company relied upon Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated under the Act. On June 29, 1998, the Registrant commenced a private placement under which 750,000 shares of its Common Stock were sold to a group of accredited investors for $0.75 per share. No underwriting discounts or commissions were paid. The Company relied upon Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated under the Act. ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS. (a) Plan of Operation Not applicable (b) 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 Registrant's expectations or beliefs, including but not limited to, statements concerning the Registrant's operations, economic performance, financial condition, growth and acquisition strategies, investments, and future operational plans. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, words such as "may", "will", "expect", "believe", "anticipate", "intent", "could", "estimate", "might", or "continue" or the negative or other variations thereof or comparable -7- terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Registrant's control, and actual results may differ materially depending on a variety of important factors, including uncertainty related to acquisitions, governmental regulation, managing and maintaining growth, the value of the Registrant's investments, the operations of the Registrant's investee companies, volatility of stock price and any other factors discussed in this and other Registrant filings with the Securities and Exchange Commission. RESULTS OF OPERATIONS. Revenues for the year ended December 31, 1998 were $447,840, an increase of 18% as compared to $378,391 for the year ended December 31, 1997. This increase is primarily the result of an increase in consulting and transaction fees related to the Registrant's receipt of stock in lieu of fees from Triumph Sports. In the past, as a BDC, the Registrant received consulting fees on both a monthly contract basis as well as on a per transaction basis when assisting investees with acquisitions, refinancing or restructuring. With the Registrant's decertification as a BDC and the resulting change to an operating company, the Registrant will rely on the operations of its subsidiary or subsidiaries to generate a majority of its revenues. As the Company only recently decertified as a BDC to become an operating company, the timing, nature and amount of these revenues cannot be predicted. The Registrant cannot accurately predict anticipated revenues for the fiscal year ended December 31, 1999 as a result. The realized gain on investments before income taxes for 1998 was $1,108,340 as compared to a gain of $1,003,951 in 1997. A majority of the sales of investments in both 1998 and 1997 were IntraNet Solutions common stock. While the restrictions as to resale on most of the Registrant's publicly traded investments have diminished, the opportunity for the sale of large portions of the investments cannot be predicted. However, the Registrant currently has fewer positions in its portfolio which are valued utilizing the public market method and presently believes there is sufficient market liquidity for the Registrant to conduct an orderly sale of any position over a relatively short period of time. Expenses for 1998 were $2,418,245 as compared to $1,813,926 in 1997, an increase of 33%. A significant portion of the increase in expenses can be attributed to an officer's bonus and legal and accounting fees. During 1998, the Registrant changed the nature of the President's compensation with a majority of his annual bonus tied to increases in the market value of the Registrant's common stock. The market value of the Registrant's common stock rose significantly during 1998 and is continuing to do so in 1999. Legal fees increased primarily as a result of costs involved with researching and implementing the Registrant's plan for withdrawal as a BDC. The Registrant currently believes that expenses for the year ending December 31, 1999 will be higher than those of 1998, the amount of which is difficult to predict. The Registrant anticipates higher expenses relating to the Registrant's withdrawal as a BDC coupled with the legal, accounting and other expenses relating to the proposed acquisition of FTB. Should the market value of the Registrant's common stock continue to rise significantly, expenses relating to an officer's bonus could also increase without a change in his compensation structure. The Registrant's net investment loss and realized gain on investments after taxes for the year ended December 31, 1998 was a loss of $(925,245) as compared to a loss of $(401,649) in 1997. The Registrant's increased net realized loss is directly related to higher expenses and lower realized gain on the sale of investments. At December 31, 1998, unrealized appreciation of investments decreased $(1,056,054) as compared to a decrease of $(5,773,305) at December 31, 1997. With the exception of the addition of Triumph Sports during 1998, the Registrant made no significant investments in new investee companies in anticipation of decertifying as a BDC to become an operating company. The resulting lack of new investments caused the value of the Registrant's investment portfolio to remain at levels similar to 1997 following the loss of nearly all the value of the Registrant's investment in RDM Sports due to bankruptcy. The net decrease in net assets resulting from operations was $(1,981,299) for 1998 as compared to a decrease of $(3,923,367) for 1997. In July of 1984, the Registrant elected to become a BDC. Utilizing the "at value" method of evaluating fair value as described in Note 1 of the Registrant's financial statements, the Registrant's assets as of December 31, 1998 were $5,859,075 with a net asset value of $4,088,229. Comparatively, as of December 31, 1997, the Registrant's assets were valued at $5,038,425 and it had -8- net assets of $3,539,916. At a special meeting of stockholders held on April 3, 1998, the Registrant's stockholders approved a proposal authorizing the Registrant to change the nature of its business and withdraw its election as a BDC under the Investment Company Act. On January 4, 1999, the Registrant filed for withdrawal. [See Part I. Item 1(a) Business Development]. LIQUIDITY AND CAPITAL RESOURCES. Of the Registrant's current liabilities of $1,770,846 at December 31, 1998, the Registrant had no amounts due to banks. This compares to total liabilities of $1,498,509 at December 31, 1997. The Registrant is not obligated to discharge a significant portion of its current liabilities in the near future; however, the Registrant intends to extinguish these liabilities as cash flow permits. In connection with its investments while operating as a BDC, the Registrant was required, from time to time, to make loans to its investees in order to protect its investments. As a result of these loans as well as other notes receivable, the Registrant carried notes receivable of $1,225,232 and $418,210 at years ended December 31, 1998 and 1997, respectively. The majority of the increase in notes receivable at year end 1998 as compared to 1997 is the result of the Registrant covering portions of expenses and start-up costs for two new investees during each of the past two years, as well as loans made to the Registrant's wholly owned subsidiary during 1998. As these companies complete mergers or acquisitions, or raise capital through private or public offerings, these notes may be repaid or otherwise extinguished although no assurance can be given at this time that such repayments will take place. The Registrant's cash position increased by $23,303 at December 31, 1998 as compared to a decrease of $(44,608) at December 31, 1997. Net cash used by operating activities was $(2,098,204) for 1998 as compared to $(672,835) used in 1997. No single use of cash for operating activities accounted for the change from 1997 to 1998. Cash flows from investing activities used $(10,396) for the purchase of fixed assets in 1998 compared to $(1,872) in 1997 due mainly to upgrading and purchasing new computer equipment. Cash flows from financing activities provided $2,131,903 as compared to $630,099 used during 1997. During 1997, the Registrant completed one private offering of the Registrant's common stock and began two others. As a result, the Registrant received $2,002,174 in proceeds providing the significant increase in cash from financing activities. [See also Part III, Item 12. Certain Relationships and Related Transactions and Part IV, Item 13. Financial Statements]. As a BDC, the Registrant's sources of income to defray operating overhead were derived from consulting fees, transaction fees gained from the Registrant assisting both existing and new investees in structuring and completing mergers, acquisitions or asset-based financing transactions, administrative fees through which the Registrant directly apportions a certain amounts of its operating overhead to investees as warranted to help defray operating costs, and sales of the Registrant's investments. During 1998, the Registrant also utilized funds received from the private placement of the Registrant's common stock. As an operating company, the Registrant will be dependent primarily on the operations of its subsidiaries to defray operating overhead. The Registrant's sources of income were sufficient to cover its operating overhead during 1998. The Registrant believes that its sources of income will also be sufficient to cover its operating expenses for 1999. The Registrant's liquidity has primarily been affected by the business success, securities prices and marketability of its investee companies and by the amount and timing of any new or incremental investments it makes. As an operating company, the Registrant will be reliant on cash flows from operations. The Registrant believes that its present liquidity and capital resources are adequate to finance anticipated needs arising from or relating to its business in 1999 due to funds received from private placements of both common and convertible preferred stock. Although the Registrant's ability to liquidate portions of its portfolio companies have increased as the restrictions as to resale end, the Registrant generally has been a long-term holder if its investments and therefore does not necessarily liquidate them upon the expiration of these restrictions. In addition, with the Registrant's change to an operating company and resulting proposed acquisition of FTB, the company is -9- contemplating spinning off certain of its non-financial services assets to its stockholders through the creation of a new publicly traded company. As a result, the Registrant currently does not anticipate it will liquidate significant portions of its portfolio in the near future. As of December 31, 1998, the Registrant had made no other material commitments for capital expenditures or loans to investees however the Registrant may be required to make such expenditures or loans during 1999 the amount of which is unknown at this time. It is possible the Registrant will continue to sell certain of its investments, resulting in additional realized gains, during the remainder of the current year. At the discretion of the Board of Directors, the Registrant also may sell certain of its investments resulting in a realized loss in order to prevent further losses from occurring. YEAR 2000 READINESS The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process date field containing a two-digit year is commonly referred to as the "Year 2000 Issue." As the year 2000 approaches, such systems may recognize a date using "00" as the year 1900 rather than the year 2000 and be unable to accurately process certain date-based information. This error could potentially result in a system failure or miscalculation causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in similar normal business activities. The Registrant has reviewed its computer system in order to evaluate necessary modifications for the Year 2000 readiness. In addition, The Registrant is in the process of communicating with others with whom it does significant business to determine their Year 2000 readiness status and the extent to which the Company could be affected by any third party Year 2000 readiness issues. Although the Registrant has not received responses from all third parties with which it does business, The Registrant does not anticipate that it will be materially affected by any third party Year 2000 readiness issues. However, the systems of the Registrant or those of other companies on which the Registrant=s systems rely may not be timely converted. A failure to convert by another company, or a conversion that is incompatible with the Company's systems, could have a material adverse effect on the Registrant. The anticipated costs and timeliness of completion of Year 2000 modifications are based on management's best estimates, which were derived using numerous assumptions relating to future events, including, without limitation, the continued availability of certain resources and third party modification plans. However, these estimates and assumptions may turn out to be inaccurate. ITEM 7. FINANCIAL STATEMENTS. The financial statements are listed under Item 13. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no changes in or disagreements with accountants during the most recent two fiscal years. -10- PART III ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. (a) Identification of Directors and Executive Officers Length of Name Age Offices held Service - ---- --- ------------ --------- Henry Fong 63 President, Treasurer, Since Inception Principal Executive, Financial and Accounting Officer and Director Thomas B. Olson 33 Secretary Since 1988 Russell L. Casement 55 Director Since 1989 Aaron A. Grunfeld 52 Director Since 1991 The directors of the Registrant are elected to hold office until the next annual meeting of the stockholders and until their respective successors have been elected and qualified. Officers of the Registrant are elected by the Board of Directors and hold office until their successors are duly elected and qualified. No arrangement exists between any of the above officers and directors pursuant to which any one of those persons was elected to such office or position. The Registrant has appointed an audit committee currently consisting of Dr. Casement as chairman and Mr. Grunfeld and a compensation committee currently consisting of Mr. Grunfeld as chairman and Dr. Casement. HENRY FONG. Mr. Fong has been the President, Treasurer and a director of the Registrant since inception. From 1987 to June 1997, Mr. Fong was chairman of the board and chief executive officer of RDM Sports Group, Inc. (f/k/a Roadmaster Industries, Inc.) a publicly-held investee of the Registrant and was its president and treasurer from 1987 to 1996. Subsequent to Mr. Fong's departure from RDM, the company filed on August 29, 1997 Chapter 11 bankruptcy petitions for the company and all of its subsidiaries with the U.S. Bankruptcy Court for the Northern District of Georgia. From July 1996 to October 1997, Mr. Fong was a director of IntraNet Solutions, Inc., a publicly-held investee company which provides internet/intranet solutions to Fortune 1000 companies and was the chairman of the board and treasurer of its predecessor company, MacGregor Sports and Fitness, Inc. from February 1991 until the two companies merged in July 1996. From January 1993 to January 20, 1999, Mr. Fong was chairman of the board and Chief Executive Officer of California Pro Sports, Inc., a publicly-traded manufacturer and distributor of in-line skates, hockey equipment and related accessories. From 1959 to 1982 Mr. Fong served in various accounting, finance and budgeting positions with the Department of the Air Force. During the period from 1972 to 1981 he was assigned to senior supervisory positions at the Department of the Air Force headquarters in the Pentagon. In 1978, he was selected to participate in the Federal Executive Development Program and in 1981, he was appointed to the Senior Executive Service. In 1970 and 1971, he attended the Woodrow Wilson School, Princeton University and was a Princeton Fellow in Public Affairs. Mr. Fong received the Air Force Meritorious Civilian Service Award in 1982. Mr. Fong is a certified public accountant. In March 1994, Mr. Fong was one of twelve CEOs selected as Silver Award winners in FINANCIAL WORLD magazine's corporate American "Dream Team." -11- THOMAS B. OLSON. Mr. Olson has been Secretary of the Registrant since January 1988. Since February 1990, Mr. Olson has been a director, and since May 1994 secretary, of Immune Response, Inc. a publicly held investee of the Registrant formerly engaged in laboratory medical testing and related research activities but which now is seeking other business opportunities. Mr. Olson has attended Arizona State University and the University of Colorado at Denver. RUSSELL L. CASEMENT. Dr. Casement has been a director of the Registrant since February 1989. In 1994, Dr. Casement became the President of ProMark, Inc. a privately-held investee of the Registrant which currently is inactive. Since 1969, Dr. Casement has been the president of his own private dental practice, Russell Casement, D.D.S., P.C., in Denver, Colorado. Dr. Casement earned a Doctor of Dental Science degree from Northwestern University in 1967. Dr. Casement is a member of the American Dental Association, the Colorado Dental Association and the Metro Denver Dental Association. AARON A. GRUNFELD. Mr. Grunfeld has been a director of the Registrant since November 1991. Mr. Grunfeld has been engaged in the practice of law for the past 27 years and has been of counsel to the firm of Resch, Polster, Alpert, and Berger, LLP, Los Angeles, California since November 1995. From April 1990 to November 1995, Mr. Grunfeld was a member of the firm of Spensley Horn Jubas & Lubitz, Los Angeles, California. Mr. Grunfeld received an A.B. in Political Science from UCLA in 1968 and a J.D. from Columbia University in 1971. He is a member of the California Bar Association. (b) Significant Employees JOHN CAHILL. Mr. Cahill has been President of the FTC since June 1, 1998. From 1992 to April 1998 Mr. Cahill was Senior Vice President of First Data Card Services Group. Mr. Cahill has over twenty year experience in the bank card/credit Card industry. (c) Family Relationships Not applicable (d) Involvement in Certain Legal Proceedings Not applicable SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 ("Section 16") requires the Registrant's officers, directors and persons who own more than ten percent of the Registrant's voting securities to file reports of their ownership and changes in such ownership with the Securities and Exchange Commission (the "Commission"). Commission regulations also require that such persons provide the Registrant with copies of all Section 16 reports they file. Based solely upon its review of such reports received by the Registrant, or written representations from certain persons that they were not required to file any reports under Section 16, the Registrant believes that, during 1998, its officers and directors have complied with all Section 16 filing requirements. ITEM 10. EXECUTIVE COMPENSATION. (a) General Henry Fong, the President of the Registrant and the only officer of the Registrant whose total compensation exceeded $100,000 for the fiscal year ended December 31, 1998, received an annual salary of $183,013. In January, 1998, the Compensation Committee of the Registrant's board of directors retained an independent consultant to review the President's compensation. As a result of that review, a new compensation arrangement was instituted based on -12- recommendations made by the independent consultant. In addition to Mr. Fong's annual salary, beginning January 1, 1998, Mr. Fong is to receive an annual bonus equaling 1% of the Registrant's total assets combined with 5% of the increase in the market value of the Company's common stock calculated quarterly from January 1 to December 31 of any fiscal year. During the year ended December 31, 1998, this bonus totaled $1,208,042. This new compensation arrangement replaces the previous bonus of 3% of the Registrant's total assets at year end which totaled $151,153 for the year ended December 31, 1997. On April 1, 1992, the Registrant obtained a life insurance policy with retirement benefits for Mr. Fong which pays his beneficiary $2,600,000 in the event of Mr. Fong's death or provides for retirement benefits for Mr. Fong upon his retirement at or after age 65 utilizing the cash value of the policy at that time. This benefit is being provided to Mr. Fong in consideration of his sixteen years of service to the Registrant and in anticipation of his serving the Registrant until retirement. The Registrant has no other retirement or pension plan for Mr. Fong. The annual premium on this policy is $105,414 per year for seven years until March 30, 1999, and may be considered other future compensation to Mr. Fong. For the year ended December 31, 1998, $105,414 was paid toward the policy and an additional $59,586 was paid to Mr. Fong for deferred income taxes on the policy. Concurrently, the Registrant obtained a Key-man Life Insurance policy which pays the Registrant $3,000,000 in the event of Mr. Fong's death. The Registrant paid $20,223 on this policy in 1998 which is not considered compensation to Mr. Fong. (b) Summary Compensation Table The following table sets forth information regarding compensation paid to the officers of the Registrant during the years ended December 31, 1998, 1997 and 1996:
SUMMARY COMPENSATION TABLE -------------------------- Annual Compensation ($$)Long-Term ----------------------------------- Compensation Awards ------------- (a) (b) (c) (d) (e) (g) (i) Other All Name & Annual Other Principal Salary Bonus Compensation Options Compensation Position Year ($) ($) ($) & SARs(#) ($) - ---------------------------------------------------------------------------------------------------------- Henry Fong 1998 183,013 1,208,042 -0- 469,655 165,000 (1) President, Treasurer Principal Executive Officer and Accounting Officer Henry Fong 1997 183,013 151,153 -0- -0- 165,000 (1) Henry Fong 1996 183,013 314,328 -0- -0- 165,000 (1)
- ----------------- (1) Includes payments and tax liability on the life insurance policy as explained more fully in "Item 10 (a) General" above. -13- (c) Option/SAR Grants Table
Option/SAR Grants in Last Fiscal Year ------------------------------------- Grant Date Individual Grants Value (a) (b) (c) (d) (e) (f) Number of Securities % of Total Under- Options/ Lying SARs Options/ Granted to Exercise Grant SARs Employees or Base Date Granted in Fiscal Price Expiration Present Name (#) Year ($/Sh) Date Value($) - ------------------------------------------------------------------------------------------ Henry Fong 469,655 87% $3.19 6/2/2003 1,498,200
(d) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Value Table Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values --------------------------------------------------- (a) (b) (c) (d) (e) Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options/SARs Options/SARs Shares at FY-End (#) at FY-End (#) Acquired on Value Exercisable/ Exercisable/ Name Exercise (#) Realized ($) Unexercisable Unexercisable - -------------------------------------------------------------------------------- Henry Fong 100,000 508,250 576,200/-0- $2,143,541/-0- (e) Long Term Incentive Plans - - Awards in Last Fiscal Year. The Registrant has no long term incentive plans, and consequently has made no such awards. (f) Compensation of Directors (1) Standard Arrangements Each independent member of the Registrant's Board of Directors, Messrs. Russell L. Casement and Aaron A. Grunfeld, receive $10,000 per year payable monthly and $500 for each Board of Director's meeting attended either in person or by telephone. For the year ended December 31, 1998, Messrs. Casement and Grunfeld each received a total of $12,500. Members of the Board of Directors also receive reimbursement for expenses incurred in attending board meetings. -14- (2) Other Arrangements 1993 Stock Option Plan for Non-Employee Directors The Registrant has adopted the 1993 Stock Option Plan for Non-Employee Directors (the "Directors' Plan") reserving an aggregate of 250,000 shares of Common Stock for issuance pursuant to the exercise of stock options (the "Options") which may be granted to non-employee directors of the Registrant. On July 5, 1995, an order was issued by the Securities and Exchange Commission authorizing the Directors' Plan and the options granted thereunder. The Directors' Plan is for a ten-year term commencing July 5, 1995 (the "Effective Date"). Each non-employee director automatically, as of the Effective Date, was granted an option to purchase 50,000 shares of common stock at $3.00 per share. Thereafter, each director who first becomes a non-employee director shall automatically, as of the date 90 days following the date such person becomes a non-employee director, be granted an option to purchase 50,000 shares of common stock. No additional options can be granted under the Directors' Plan except to an individual who first becomes a non-employee director after the Effective Date. No discretionary grants can be made under the Directors' Plan. On June 2, 1998, the Registrant's board of directors authorized the granting of 75,000 options to purchase common stock of the Registrant to each of the Registrant's two independent directors at $3.19 per share for a period of five years. The grant of these options was contingent upon the Company's successful withdrawal as a business development company. On January 4, 1999 the Registrant filed for withdrawal as a business development company [see Part I, Item 1 (a) Business for a description of the Registrant's withdrawal of its election as a business development company]. On January 5, 1999, the Registrant's board of directors adopted a new stock option plan, the 1999 Stock Option Plan. On January 5, 1999, the Registrant's two independent directors each received options to purchase 158,700 shares of the Registrant's common stock at an exercise price of $6.75 per share expiring on January 5, 2004. These options were granted in lieu of the 75,000 options at $3.19 per share, which were cancelled. In addition, each director received 86,800 options to purchase 86,800 shares of the Registrant's common stock at an exercise price of $6.75 per share under the 1999 Plan. (g) Employment Contracts and Termination of Employment and Change-in-Control Arrangements On April 1, 1992, the Registrant obtained a life insurance policy on the Registrant's President, Henry Fong, which policy provides for a payment to Mr. Fong's beneficiary of $2,600,000 in the event of his death or a retirement benefit to Mr. Fong consisting of the cash value of the policy upon Mr. Fong's retirement from the Registrant at or after age 65 [See-Item 11. (a) "General." above]. The Registrant has no other compensation plan or arrangement with respect to any executive officer which plan or arrangement results or will result from the resignation, retirement or any other termination of such individual's employment with the Registrant. The Registrant has no plan or arrangement with respect to any such persons which will result from a change in control of the Registrant or a change in the individual's responsibilities following a change in control. (h) Report on Repricing of Options/SARs Not applicable ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. (a) (b) Security Ownership of Certain Beneficial Owners and Security Ownership of Management. The following table contains information at March 31, 1999, as to the beneficial ownership of shares of the Registrant's Common Stock by each person who, to the knowledge of the Registrant at that date, was the beneficial owner of five percent or more of the outstanding shares of the class, each person who is a director or executive officer of the Registrant and all persons as a group who are executive officers and directors of the Registrant and as to the percentage of outstanding shares so held by them at April 9, 1999. -15- Name and address Amount and Nature of of beneficial owner Beneficial Ownership (1) Percent of Class - ------------------- ------------------------ ---------------- Henry Fong 1,574,384 (2)(3) 22.3% 7315 East Peakview Avenue Englewood, Colorado 80111 Wayne W. Mills 475,000 7.9% 5020 Blake Road South Edina, Minnesota 55436 Russell L. Casement 506,900 (4) 8.0% 1355 S. Colorado Blvd., Suite 320 Denver, Colorado 80222 Aaron A. Grunfeld 334,700 (5) 5.3% 10390 Santa Monica Blvd, Fourth Floor Los Angeles, California 90025 All officers and directors 2,484,284 (2)(3)(6)(7) 32.2% as a group (four persons)
(1) The beneficial owners exercise sole voting and investment power. (2) Includes 576,200 shares underlying options granted under the Registrant's 1993 Stock Option Plan and 469,700 shares underlying options granted under the Registrant's 1999 Stock Option Plan. (3) Includes 479,544 shares owned by a corporation in which Mr. Fong is an officer and director; and 48,940 owned by a partnership in which the reporting person is a general partner. (4) Includes 36,400 shares underlying options granted under the Registrant's 1993 Stock Option Plan for Non-Employee Directors and 245,500 shares underlying options granted under the Registrant's 1999 Stock Option Plan. [See also Item 10.(f)(2) "Other Arrangements"] (5) Includes 50,000 shares underlying options granted under the Registrant's 1993 Stock Option Plan for Non-Employee Directors and 245,500 shares underlying options granted under the Registrant's 1999 Stock Option Plan. [See also Item 10.(f)(2) "Other Arrangements"] (6) Includes 86,400 shares underlying options granted under the Registrant's 1993 Stock Option Plan for Non-Employee Directors and 491,000 shares underlying options granted under the Registrant's 1999 Stock Option Plan. (7) Includes 25,000 shares underlying options granted under the Registrant's 1993 Stock Option Plan and 31,300 shares underlying options granted under the Registrant's 1999 Stock Option Plan. The Registrant does not know of any arrangements, the operation of which may, at a subsequent date, result in a change in control of the Registrant. -16- ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. (a) Transactions with Management and Others. The Registrant currently leases approximately 1,800 square feet of office space in Greenwood Executive Park, 6400 South Quebec, Englewood, Colorado from a partnership in which its President is the sole partner, on terms comparable to the existing market for similar facilities. During the year ended December 1, 1997, the Registrant's President loaned the Registrant a total of $531,000. Of this amount, $353,401 was repaid leaving a principal balance due at December 31, 1997 of $177,599 plus accrued interest. These uncollateralized loans were due on demand and carried an interest rate of 8% per annum. All of the remaining balance was repaid during the first quarter of 1998. During 1998, a company in which the Registrant's President is an officer and director loaned the Registrant a total of $165,000 which is due on demand and bears interest at 8% per annum. Of that amount, $22,672 was repaid during 1998 leaving a principal balance due at December 31, 1998 of $142,328. In addition, a related entity loaned the Registrant $100,000 in August 1997. This loan carried an interest rate of 12% per annum, was due on demand and was collateralized by 25,000 shares of the Registrant's investment in an investee company's common stock. The Registrant paid $30,000 in principal due on this note during 1998 leaving a principal balance due of $70,000 at December 31, 1998. As of the filing of this report, all principal and interest due under this note has been repaid. During 1998, the Registrant made loans totaling $160,000 to its wholly owned subsidiary, FTC. Additional loans totaling $325,000 were advanced during the first quarter of 1999. All of these loans bear interest at 10% per annum and are due on demand. During 1998, the Registrant loaned VP Sports a total of $89,000. All loans are due on demand and bear interest at the rate of 10% per annum. As of December 31, 1998, $24,734 of these loans had been repaid leaving an outstanding principal balance at year end of $64,266. During the first quarter of 1999, the Registrant loaned VP an additional $70,000 under terms identical to the previous loans. During 1997 and 1998, the Registrant loaned Triumph Sports a total of $963,087 in various separate loans. On December 8, 1997, the Registrant forfeited 41,835 shares of IntraNet common stock which had a fair market value on that date of $6.50 per share or $271,928. A note for this amount is included in the above referenced total. These shares were pledged by the Registrant on behalf of Triumph Sports relating to an acquisition which subsequently was not completed. All notes are due on demand and bear interest at 10% per annum. During 1998, $60,068 in principal was repaid on these notes leaving a balance due at year end of $899,018. Additional loans totaling $85,000 were made to Triumph during the first quarter of 1999 and a principal payment of $51,500 was received during the quarter. During 1998, a director of the Registrant purchased 39,200 shares of common stock of the Registrant pursuant to a private placement at $1.16 per share. In payment of the shares, the director executed a note payable to the Registrant in the amount of $45,472, which was due on December 15, 1998 and carried interest at 8% per annum. The due date on this note was subsequently extended to February 15, 1999. All principal and interest due was paid on this note prior to the extended expiration date. -17- Effective October 29, 1997, the Registrant entered into an agreement with an investee company, IntraNet Solutions, Inc. ("IntraNet"). Because the Registrant had entered into a prior indemnification agreement with IntraNet in July 1996, it agreed to purchase a certain note receivable in the amount of $564,755 which IntraNet had from an RDM subsidiary, Hutch Sports USA ("Hutch"). Hutch had filed bankruptcy on August 29, 1997. The Registrant paid $414,755 of the purchase amount to IntraNet on October 29, 1997. The balance of $150,000 was due on demand but no later than December 31, 1997 carried an interest rate of 8.75% per annum, was secured by an officer's pledging of a common stock purchase warrant relating to 62,550 shares of IntraNet and was also personally guaranteed by the Registrant's President. This note was repaid on January 23, 1998. Furthermore, the Registrant's President agreed to resign from the Board of IntraNet, both IntraNet and the Registrant agreed to terminate effective October 29, 1997 the indemnification agreement under which the Registrant's maximum exposure was $2,000,000, and agreed to mutually release each other from any claims relating to this agreement and certain other items. The Registrant has placed members of its Board and its officers on the boards of directors of certain investee companies and other companies in which it has obtained an equity interest or to which it has made loans or guarantees. In most instances, the board representation was subsequent to these acquisitions, loans or guarantees. The Registrant may be considered to be in control of certain of its investee companies. (b) Information which May be Excluded Not applicable (c) Parents of Registrant Not applicable (d) Transactions with Promoters Not applicable -18- PART IV ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report immediately following the signature page. 1. Financial Statements and Supplementary Data. Page ---- Report of Independent Certified Public Accountants......................F-1 Statements of Assets and Liabilities at December 31, 1997, and 1996...........................................F-3 Schedule of Investments at December 31, 1998 and December 31, 1997......F-5 Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1998 and 1997...............................F-11 Statements of Operations for the Years Ended December 31, 1998 and 1997...........................................F-15 Statements of Cash Flows for the Years Ended December 31, 1998 and 1997...........................................F-17 Notes to Financial Statements..........................................F-19 2. Financial Statements Schedules. Schedule II - Valuation and Qualifying Accounts and Reserves............S-1 3. Exhibits. 3.1 Articles of Incorporation (1) 3.2 Bylaws (1) 10.1 1993 Stock Option Plan (2) 10.2 1993 Stock Option Plan for Non-Employee Directors (2) 10.3 Custody Agreement between Colorado National Bank and the Registrant (2) 10.4 1999 Stock Option Plan. FILED HEREWITH. 21 List of Subsidiaries. FILED HEREWITH. (1) Incorporated by reference from the like numbered exhibits filed with the Registrant's Registration Statement on Form S-18, No. 2-82104-D effective April 11, 1983. (2) Incorporated by reference form the like numbered exhibits filed with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the period covered by this report. -19- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: April 14, 1999 EQUITEX, INC. (Registrant) By /S/ HENRY FONG -------------------------------------- Henry Fong, President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: April 14, 1999 /S/ HENRY FONG ----------------------------------------- Henry Fong, President, Treasurer and Director (Principal Executive, Financial, and Accounting Officer) Date: April 14, 1999 /S/ RUSSELL L. CASEMENT ----------------------------------------- Russell L. Casement, Director Date: April 14, 1999 /S/ AARON A. GRUNFELD ----------------------------------------- Aaron A. Grunfeld, Director -20- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors Equitex, Inc. We have audited the accompanying statements of assets and liabilities and schedule of investments of Equitex, Inc. as of December 31, 1998 and 1997 and the related statements of changes in stockholders' equity, operations and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1998 and 1997 financial statements referred to above present fairly, in all material respects, the financial position of Equitex, Inc. at December 31, 1998 and 1997 and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. As explained more fully in Note 1b., the financial statements at December 31, 1998 and 1997 include securities and receivables, valued at $2,799,145 (68.2% of net assets) and $1,468,214 (41.5% of net assets), respectively, whose values have been estimated by the Board of Directors in the absence of readily attainable market values. We have reviewed the procedures used by the Board of Directors in arriving at its estimate of value of such securities and receivables and have inspected underlying documentation, and, in the circumstances, we believe the procedures are reasonable and the documentation appropriate. However, because of the inherent uncertainty of valuation of restricted securities and receivables, those estimated values may differ significantly from the values that would have been used had a ready market for the restricted securities and receivables existed, and had the precise recoverability of the receivables been determinable; and the differences could be material. (Continued) F-1 Report of Independent Certified Public Accountants Page Two Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule on S-1 is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not a required part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audit of the basic financial statements and, in our opinion, fairly states in all material respects the 1998 and 1997 financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Davis & Co., CPAs, P.C. Certified Public Accountants Englewood, Colorado March 27, 1999 F-2 EQUITEX, INC. Statements of Assets and Liabilities DECEMBER 31, 1998 1997 ---- ---- ASSETS Investments, at fair value: Securities (cost of $4,917,848 and $3,568,045 in 1998 and 1997, respectively) .... $ 4,226,541 $ 4,165,993 Notes receivable, net of allowance for uncollectible accounts of $100 and $40,293 in 1998 and 1997, respectively ........ 1,225,232 418,210 Accrued interest receivable, net of allowance for uncollectible interest of $1,830 and $35 in 1998 and 1997, respectively .................................. 32,134 5,701 Trade receivables, net of allowance for uncollectible accounts of $57,705 and $53,742 in 1998 and 1997, respectively .... 108,286 110,954 ------------ ------------ 5,592,193 4,700,858 Cash ............................................. 32,490 9,187 Accounts receivable - brokers .................... 22,798 73,741 Contract deposit receivable, net of allowance for uncollectibility of $150,000 .... 150,000 150,000 Income taxes refundable .......................... 2,150 2,150 Furniture and equipment, net of accumulated depreciation of $129,924 and $117,750 in 1998 and 1997, respectively ... 26,220 29,204 Deferred income tax benefit ...................... -- 63,180 Other assets ..................................... 33,224 10,105 ------------ ------------ $ 5,859,075 $ 5,038,425 ============ ============ (Continued) The accompanying notes are a part of this statement. F-3 EQUITEX, INC. Statements of Assets and Liabilities DECEMBER 31, 1998 1997 ---- ---- LIABILITIES AND NET ASSETS Liabilities Notes payable - officer ....................... $ 142,328 $ 177,599 Notes payable - others ........................ 220,000 250,000 Accounts payable and other accrued liabilities ......................... 76,290 121,349 Accounts payable to brokers ................... 656,060 650,302 Accrued bonus to officer ...................... 676,168 299,259 ------------ ------------ 1,770,846 1,498,509 Net Assets Preferred stock, par value $.01; 2,000,000 shares authorized; no shares issued Common stock, par value $.02; 7,500,000 shares authorized; 5,417,665 and 3,494,465 shares issued; 5,384,315 and 3,461,115 shares outstanding in 1998 and 1997, respectively ................................ 108,353 69,889 Additional paid-in capital .................... 7,368,624 4,644,275 Retained earnings Accumulated deficit prior to becoming a BDC ............................ (118,874) (118,874) Accumulated net investment loss ............. (15,698,055) (13,431,269) Accumulated net realized gains from sales and permanent write-downs of investments ............................ 13,233,525 12,125,185 Unrealized net gains (losses) on investments (net of deferred income taxes of $233,201 in 1997) ................ (691,307) 364,747 Less: treasury stock at cost (33,350 shares) ........................... (114,037) (114,037) ------------ ------------ 4,088,229 3,539,916 ------------ ------------ $ 5,859,075 $ 5,038,425 ============ ============ The accompanying notes are a part of this statement. F-4 EQUITEX, INC. Schedule of Investments December 31, 1998
NUMBER COST OF AND/OR FAIR COMPANY SHARES OWNED EQUITY VALUE CONTROLLED COMPANIES COMMON STOCKS - PRIVATE MARKET METHOD OF VALUATION (a)(e) VP Sports, Inc. Entity formed to seek acquisitions in the manufacturing segment of the sporting goods and leisure- time industry ......................... 2,000,000 $ 250,000 $1,000,000 COMMON STOCKS - BOARD APPRAISAL METHOD OF VALUATION (a) First TeleServices Corporation Fee-based financial services .......... 1,000 565,639 565,639 COMMON STOCKS - COST METHOD OF VALUATION Triumph Sports Group Entity formed to seek acquisitions in the non-manufacturing licensed and supplemental segments of the sporting goods and leisure-time industry .............................. 1,500,000 375,000 375,000 First TeleBanc Corporation Bank holding company .................. 40,000 400,000 350,000 AFFILIATED COMPANIES COMMON STOCKS - PUBLIC MARKET METHOD OF VALUATION (c)(e) RDM Sports Group Manufacturer of fitness equipment and juvenile products ....... 4,979,437 1,088,815 8,963 OTHER - PUBLIC MARKET METHOD OF VALUATION RDM Sports Group 8% Convertible Manufacturer of fitness Subordinated equipment and juvenile products ....... Debentures 50,681 -- ---------- ---------- Sub-Total CONTROLLED AND AFFILIATED COMPANIES .. 2,730,135 2,299,602 ---------- ----------
(Continued) The accompanying notes are a part of this statement. F-5 EQUITEX, INC. Schedule of Investments (Page 2) December 31, 1998
NUMBER COST OF AND/OR FAIR COMPANY SHARES OWNED EQUITY VALUE UNAFFILIATED COMPANIES COMMON STOCKS - PUBLIC MARKET METHOD OF VALUATION IntraNet Solutions, Inc. (formerly MacGregor Sports & Fitness, Inc.) Document management services, web-based internet software, electronic document management and demand printing ................. 188,585 1,053,200 919,351 Zamba (formerly Racotek) Medical technology .................... 275,000 961,013 532,813 NevStar Gaming Corporation Gaming development .................... 7,000 38,500 6,562 COMMON STOCKS - PRIVATE MARKET METHOD OF VALUATION (a)(e) All Systems Go Software development .................. 20,000(b) 25,000 25,000 Ocean Power Technology Alternative energy .................... 35,714(b) 40,000 98,213 research and development .............. 100,000 -- 275,000 Gain, Inc. .............................. Male vascular devices ................. 20,000(b) 50,000 50,000 Juice Island Health food stores .................... 10,000(b) 20,000 20,000 WARRANTS (f)(e) Juice Island Health food stores .................... 2,500 -- -- ---------- ---------- Sub-total UNAFFILIATED COMPANIES ................ 2,187,713 1,926,939 ---------- ---------- Total ALL COMPANIES ......................... $4,917,848 $4,226,541 ========== ==========
(Continued) The accompanying notes are a part of this statement. F-6 EQUITEX, INC. Schedule of Investments (Page 3) December 31, 1998 RESTRICTIONS AS TO RESALE (a) Non-public company whose securities are privately owned. The Board of Directors determines fair value in good faith using cost information, but also taking into consideration the impact of such factors as available financial information of the investee, the nature and duration of any restrictions on resale, and other factors which influence the market in which a security is purchased and sold. (b) May be sold under the provisions of Rule 144 of the Securities Act of 1933 after an initial holding period expires. (c) Since the Company is an affiliate, it may be affected by sales limitations of one percent of the investee's outstanding common stock during any three-month period, or four-week average trading volume during any three-month period. (e) Since certain of these securities have certain restrictions as to resale, the Board of Directors determines fair value in good faith using public market information, but also taking into consideration the impact of such factors as available financial information of the investee, the nature and duration of restrictions on the disposition of securities, and other factors which influence the market in which a security is purchased and sold. (f) Valued at higher of cost or fair market value of underlying stock less exercise price, subject to valuation adjustments as determined in good faith by the Board of Directors, taking into consideration the impact of such factors as available financial information of the investee, the nature and duration of any restrictions on resale, and other factors which influence the market in which a security is purchased and sold. The accompanying notes are a part of this statement. F-7 EQUITEX, INC. Schedule of Investments December 31, 1997
NUMBER COST OF AND/OR FAIR COMPANY SHARES OWNED EQUITY VALUE CONTROLLED COMPANIES COMMON STOCKS - PRIVATE MARKET METHOD OF VALUATION (a)(e) VP Sports, Inc. ......................... Entity formed to seek-out acquisitions in the sports and health products industries ........ 2,000,000 $ 250,000 $1,000,000 AFFILIATED COMPANIES COMMON STOCKS - PUBLIC MARKET METHOD OF VALUATION (c)(e) IntraNet Solutions, Inc. (formerly MacGregor Sports & Fitness, Inc.) Document management services, web-based internet software, electronic document management and demand printing ................. 473,250 1,410,776 2,498,529 RDM Sports Group (formerly Roadmaster Industries, Inc.) Manufacturer of fitness equipment and juvenile products ....... 4,979,437 1,088,815 4,481 OTHER - PUBLIC MARKET METHOD OF VALUATION RDM Sports Group 8% Convertible Manufacturer of fitness Subordinated equipment and juvenile products ....... Debentures 150,682 1,750 ---------- ---------- Sub-Total CONTROLLED AND AFFILIATED COMPANIES .. 2,900,273 3,504,760 ---------- ---------- UNAFFILIATED COMPANIES COMMON STOCKS - PUBLIC MARKET METHOD OF VALUATION IVI Publishing Publishing technology ................. 25,000 116,881 64,063 Racotek Medical technology .................... 75,000 377,391 110,156 NevStar Gaming Corporation Gaming development .................... 7,000 38,500 18,750
(Continued) The accompanying notes are a part of this statement. F-8 EQUITEX, INC. Schedule of Investments (Page 2) December 31, 1997
NUMBER COST OF AND/OR FAIR COMPANY SHARES OWNED EQUITY VALUE COMMON STOCKS - PRIVATE MARKET METHOD OF VALUATION (a)(e) All Systems Go Software development .................. 20,000(b) 25,000 25,000 Ocean Power Technology Alternative energy research and development .............. 35,714(b) 40,000 98,214 100,000 -- 275,000 Gain, Inc. .............................. Male vascular devices ................. 20,000(b) 50,000 50,000 Juice Island Health food stores .................... 10,000(b) 20,000 20,000 WARRANTS (f)(e) Nationsmart Consumer services ..................... 10,000 -- 50 Juice Island Health food stores .................... 2,500 -- -- ---------- ---------- Sub-total UNAFFILIATED COMPANIES ................ 667,772 661,233 ---------- ---------- Total ALL COMPANIES ......................... $3,568,045 $4,165,993 ========== ==========
(Continued) The accompanying notes are a part of this statement. F-9 EQUITEX, INC. Schedule of Investments (Page 3) December 31, 1997 RESTRICTIONS AS TO RESALE (a) Non-public company whose securities are privately owned. The Board of Directors determines fair value in good faith using cost information, but also taking into consideration the impact of such factors as available financial information of the investee, the nature and duration of any restrictions on resale, and other factors which influence the market in which a security is purchased and sold. (b) May be sold under the provisions of Rule 144 of the Securities Act of 1933 after an initial holding period expires. (c) Since the Company is a greater than five percent shareholder, it may be affected by a sales limitation of one percent of the investee's outstanding common stock during any three-month period. (e) Since certain of these securities have certain restrictions as to resale, the Board of Directors determines fair value in good faith using public market information, but also taking into consideration the impact of such factors as available financial information of the investee, the nature and duration of restrictions on the disposition of securities, and other factors which influence the market in which a security is purchased and sold. (f) Valued at higher of cost or fair market value of underlying stock less exercise price, subject to valuation adjustments as determined in good faith by the Board of Directors, taking into consideration the impact of such factors as available financial information of the investee, the nature and duration of any restrictions on resale, and other factors which influence the market in which a security is purchased and sold. The accompanying notes are a part of this statement. F-10 EQUITEX, INC. Statements of Changes in Stockholders' Equity For the Years Ended December 31, 1998 and 1997
ACCUMULATED (DEFICIT) ADDITIONAL PRIOR TO COMMON STOCK TREASURY PAID-IN BECOMING SHARES AMOUNT STOCK CAPITAL A BDC Balance at Dec. 31, 1996 ............................ 3,224,465 $ 64,489 $ (114,037) $4,447,175 $ (118,874) Common stock sold to officer/director at $.75 per share .................. 270,000 5,400 197,100 Net investment (loss) Net realized gain on investments Unrealized gain (loss) on investments --------- ---------- ---------- ---------- ---------- Balance at Dec. 31, 1997 ............................ 3,494,465 69,889 (114,037) 4,644,275 (118,874) Common stock sold to officer at $1.16 per share ....................... 10,000 200 11,400 Common stock sold to o/s directors at $1.16 per share ................. 139,200 2,784 158,688 Common stock sold to officers pursuant to option conversions at: $3.00 per share .............. 74,000 1,480 220,520 $3.19 per share .............. 29,000 580 91,930 Common stock sold to others at: $.75 per share .............. 330,000 6,600 240,900 $1.16 per share ............. 350,000 7,000 399,000 $3.25 per share ............. 366,000 7,320 1,812,180
(Continued) The accompanying notes are a part of this statement. F-11 EQUITEX, INC. Statements of Changes in Stockholders' Equity For the Years Ended December 31, 1998 and 1997 (Page 2)
ACCUM. REALIZED ACCUM. ACCUM. NET GAINS UNREA- TOTAL NET FROM SALES LIZED NET STOCK- INVEST. OF INVEST- APPREC. ON HOLDERS' LOSS MENTS INVESTMENTS EQUITY Balance at Dec. 31, 1996 ....... $(12,025,669) $ 11,121,234 $ 3,886,465 $ 7,260,783 Common stock sold to officer/director at $.75 per share ............... 202,500 Net investment (loss) .......... (1,405,600) (1,405,600) Net realized gain on investments ............... 1,003,951 1,003,951 Unrealized gain (loss) on investments ............... (3,521,718) (3,521,718) ------------ ------------ ------------ ------------ Balance at Dec. 31, a1997 ......................... (13,431,269) 12,125,185 364,747 3,539,916 Common stock sold to officer at $1.16 per share .................... 11,600 Common stock sold to o/s directors at $1.16 per share .............. 161,472 Common stock sold to officers pursuant to option conversions at: $3.00 per share ........... 222,000 $3.19 per share ........... 92,510 Common stock sold to others at: $.75 per share ........... 247,500 $1.16 per share .......... 406,000 $3.25 per share .......... 1,189,500
(Continued) The accompanying notes are a part of this statement. F-12 EQUITEX, INC. Statements of Changes in Stockholders' Equity For the Years Ended December 31, 1998 and 1997 (Page 3)
ACCUMULATED (DEFICIT) ADDITIONAL PRIOR TO COMMON STOCK TREASURY PAID-IN BECOMING SHARES AMOUNT STOCK CAPITAL A BDC Stock issued in exchange for First TeleServices Corporation ..................... 625,000 12,500 553,139 Commissions/fees paid on 1998 private placement sales ................. (133,408) Net investment (loss) Net realized gain (loss) on investments Unrealized gain (loss) on investments Balance at Dec. 31, 1998 ............................ 5,417,665 $ 108,353 $ (114,037) $7,368,624 $ (118,874) ========== ========== ========== ========== ==========
(Continued) The accompanying notes are a part of this statement. F-13 EQUITEX, INC. Statements of Changes in Stockholders' Equity For the Years Ended December 31, 1998 and 1997 (Page 4)
ACCUM. REALIZED ACCUM. ACCUM. NET GAINS UNREA- TOTAL NET FROM SALES LIZED NET STOCK- INVEST. OF INVEST- APPREC. ON HOLDERS' LOSS MENTS INVESTMENTS EQUITY Stock issued in exchange for First TeleServices Corporation .................. 565,639 Commissions/fees paid on 1998 private placement sales .............. (133,408) Net investment (loss) ....................... (2,266,786) (2,266,786) Net realized gain (loss) on investments .................. 1,108,340 1,108,340 Unrealized gain (loss) on investments .................. (1,056,054) (1,056,054) ------------ ------------ ------------ ------------ Balance at Dec. 31, a1998 ......................... $(15,698,055) $ 13,233,525 $ (691,307) $ 4,088,229 ============ ============ ============ ============
The accompanying notes are a part of this statement. F-14 EQUITEX, INC Statements of Operations FOR THE YEARS ENDED DECEMBER 31, 1998 1997 ---- ---- Revenues Interest and dividends ......................... $ 70,445 $ 34,784 Consulting and transaction fees ................ 375,000 250,000 Administrative fees ............................ 2,371 26,495 Miscellaneous .................................. 24 67,112 ------------ ------------ 447,840 378,391 Expenses Salaries and consulting fees ................... 300,613 300,164 Officers' bonus ................................ 1,208,042 151,153 Office rent .................................... 31,188 38,575 Advertising and promotion ...................... 48,612 2,951 Legal and accounting ........................... 276,359 69,502 Loss on indemnity agreement .................... -- 509,054 Other general and administrative ............... 266,129 190,261 Interest ....................................... 101,002 87,005 Bad debt expense ............................... (34,435) 240,991 Depreciation and amortization .................. 12,833 11,388 Employee benefits .............................. 207,902 212,882 ------------ ------------ (2,418,245) 1,813,926 ------------ ------------ Net investment (loss) ............................ (1,970,405) (1,435,535) ------------ ------------ Net realized gain on investments and net unrealized gain on investments: Proceeds from sales of investments ............. 1,712,802 1,508,629 Less: cost of investments sold ................. (604,462) (504,678) ------------ ------------ Realized gain from sales of investments ...... 1,108,340 1,003,951 Permanent write-down of investments ............ (--) (--) ------------ ------------ Realized gain on investments before income taxes .............................. 1,108,340 1,003,951 ------------ ------------ Net investment (loss) and realized gain on investments before income taxes ........ (862,065) (431,584) Less: income taxes (provision) benefit Current ...................................... -- (56,307) Deferred ..................................... (63,180) 86,242 ------------ ------------ (63,180) 29,935 Income tax benefit of NOL carryforward .......................... -- -- ------------ ------------ -- 29,935 (Continued) The accompanying notes are a part of this statement. F-15 EQUITEX, INC Statements of Operations (Page 2) FOR THE YEARS ENDED DECEMBER 31, 1998 1997 ---- ---- Net investment (loss) and realized gain on investments after income taxes .............. (925,245) (401,649) (Decrease) in unrealized appreciation of investments ................... (1,056,054) (5,773,305) Less: income tax benefit applicable to (decrease) in unrealized appreciation of investments ................... 431,361 2,251,587 Add: allowance for income tax benefit ............ (431,361) -- ------------ ------------ (1,056,054) (3,521,718) ------------ ------------ Net (decrease) in net assets resulting from operations ..................... $ (1,981,299) $ (3,923,367) ============ ============ (Decrease) in net assets per share - primary ............................... $ (.45) $ (1.25) ============ ============ Weighted average number of common shares ......... 4,416,988 3,192,600 ============ ============ The accompanying notes are a part of this statement. F-16 EQUITEX, INC. Statements of Cash Flows FOR THE YEARS ENDED DECEMBER 31, 1998 1997 ---- ---- Cash flows from operating activities: Change in net assets ........................... $ (1,981,299) $ (3,923,367) Adjustments to reconcile change in net assets to net cash provided by operating activities: Depreciation and amortization .............. 12,833 11,388 Provision for bad debts on notes receivable ............................... (40,193) 40,193 Realized (gain) on sale of investments ..... (1,108,340) (1,003,951) Unrealized loss on investments ............. 1,056,054 5,773,305 Donation of stock of investee company ...... -- 4,136 Proceeds from sales of investments ............... 1,712,802 1,508,629 Purchases of investments ......................... (1,388,626) (309,551) Issuance of notes receivable ..................... (943,365) (458,402) Collections of notes receivable .................. 177,083 20,250 Changes in assets and liabilities: (Increase) in interest receivable .............. (26,433) (3,799) (Increase) decrease in accounts receivable - broker .......................... 50,943 (68,975) (Increase) decrease in other assets ............ (23,119) 3,671 (Increase) decrease in trade receivables ....... 2,668 (71,331) (Increase) in contract deposit receivable ...... -- (150,000) Decrease in income taxes refundable ............ -- 164,459 Increase (decrease) in accounts payable and other accrued liabilities ................ (45,059) 65,908 (Decrease) increase in accounts payable to brokers ........................... 5,758 (88,721) (Decrease) increase in deferred income taxes ................................. 63,180 (2,337,830) Increase in bonus due to officer ............... 376,909 151,153 ------------ ------------ Net cash (used) by operating activities ................................... (2,098,204) (672,835) Cash flows from investing activities: Purchase of fixed assets ....................... (10,396) (1,872) Proceeds from sale of fixed assets ............. -- -- ------------ ------------ Net cash (used) by investing activities .......... (10,396) (1,872) (Continued) The accompanying notes are a part of this statement. F-17 EQUITEX, INC. Statements of Cash Flows (Page 2) FOR THE YEARS ENDED DECEMBER 31, 1998 1997 ---- ---- Cash flows from financing activities: Common stock issued for cash ................... $ 2,197,174 $ 202,500 Issuance of notes payable - officer ............ 165,000 531,000 Issuance of notes payable - other .............. 250,000 250,000 Repayment of notes payable ..................... (480,271) (353,401) ------------ ------------ Net cash provided by financing activities ................................... 2,131,903 630,099 Change in cash and cash equivalents .............. 23,303 (44,608) Cash and cash equivalents, beginning of period ............................ 9,187 53,795 ------------ ------------ Cash and cash equivalents, end of period .................................. $ 32,490 $ 9,187 ============ ============ Supplemental disclosures of cash flow information: Interest paid ................................ $ 95,677 $ 79,305 ============ ============ Interest received ............................ $ 42,217 $ 30,985 ============ ============ Income taxes paid (refunded) ................. $ -- $ (116,496) ============ ============ Non-cash financing activities: Common stock issued for common stock of previously unrelated entity ......... $ 565,639 $ -- ============ ============ Supplemental disclosure of non-cash investing activities: On August 13, 1998, the Company acquired all of the outstanding stock of First TeleServices Corporation in exchange for 625,000 shares of the Company's common stock. The accompanying notes are a part of this statement. F-18 EQUITEX, INC. Notes to the Financial Statements Note 1: SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies are as follows: a. BUSINESS HISTORY Equitex, Inc. (the "Company") was incorporated under the laws of the State of Delaware on January 19, 1983. On July 30, 1984 the Company elected to become a "Business Development Company" (BDC), as that term is defined in the Small Business Investment Incentive Act of 1980, which Act is an amendment to the Investment Company Act of 1940. This change resulted in the Company becoming a specialized type of investment company. Consistent with this change in type of business entity, the Company changed its method of valuation of investments from cost to fair value. On January 4, 1999, the Company withdrew its election to be treated as a BDC subject to the Investment Company Act. b. INVESTMENT VALUATION The fair value method adopted in 1984 provides for the Company's Board of Directors to be responsible for the valuation of the Company's investments, including notes receivable and interest receivable. Fair value is the value which could reasonably be expected to be realized in a current arm's length sale. Investments are carried at fair value using the following four basic methods of valuation: 1. Cost - The cost method is based on the original cost to the Company adjusted for amortization of original issue discounts, accrued interest for certain capitalized expenditures of the corporation, and other adjustments as determined to be appropriate by the Board of Directors in good faith taking into consideration such factors as available financial information of the investee, the nature and duration of any restrictions as to resale, and other factors which influence the market in which a security is purchased and sold. Such method is to be applied in the early stages of an investee's development until significant positive or adverse events subsequent to the date of the original investment require a change to another method. 2. Private market - The private market method uses actual or proposed third party transactions in the investee's securities as a basis for valuation, utilizing actual firm offers as well as historical transactions, provided that any offer used is seriously considered and well documented by the investee, and adjusted (if applicable) by the Board of Directors in good faith taking into consideration such factors as available financial information of the investee, the nature and duration of any restrictions as to resale, and other factors which influence the market in which a security is purchased and sold. 3. Public market - The public market method is the preferred method of valuation when there is an established public market for the investee's securities. In determining whether the public market method is sufficiently established for valuation purposes, the Company examines the trading volume, the number of shareholders and the number of market makers in the investee's securities, along with the trend in trading volume as compared to the Company's proportionate share of the investee's securities. Investments in unrestricted securities that are traded in the over-the-counter market are generally valued at the high bid price on the last day F-19 EQUITEX, INC. Notes to the Financial Statements Note 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) of the year. If the security is restricted as to resale or has significant escrow provisions or other significant restrictions, appropriate adjustments are determined in good faith by the Board of Directors taking into consideration such factors as available financial information of the investee, the nature and duration of restrictions on the ultimate disposition of securities, and other factors which influence the market in which a security is purchased and sold. 4. Appraisal - The appraisal method is used to value an investment position after analysis of the best available outside information where there is no established public or private market in the investee's securities. c. STATEMENT OF CASH FLOWS Consistent with the reporting requirements of a BDC, cash and cash equivalents consist only of demand deposits in banks and cash on hand. Financial statement account categories such as investments and notes receivable, which relate to the Company's activity as a BDC, are included as operating activities in the statement of cash flows. d. FURNITURE AND EQUIPMENT Expenditures for furniture and equipment and for renewals and betterments which extend the originally estimated economic life of assets or convert the assets to a new use are capitalized at cost. Expenditures for maintenance, repairs and other renewals of items are charged to expense. When items are disposed of, the cost and accumulated depreciation are eliminated from the accounts and any gain or loss is included in the results of operations. The provision for depreciation is calculated using the straight-line method over a five or seven year life. e. SECURITIES TRANSACTIONS Purchases and sales of securities transactions are accounted for on the trade date which is the date the securities are purchased or sold. The cost of securities sold is reported on the first-in first-out cost basis for financial statement purposes. f. REVENUE RECOGNITION Due to the uncertainty of collection, the Company recognizes all types of consulting fee revenues from portfolio companies (except for RDM Sports Group) as cash is received. All other types of revenues are recognized on the accrual basis. g. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. The estimate that is particularly sensitive to future change is the determination of the fair value of the Company's investments in and various receivables due from its investee companies (see Note 1b., herein). Management believes that its estimates and assumptions provide a reasonable basis for the fair presentation of the Company's financial position and results of operations. F-20 F-20 EQUITEX, INC. Notes to the Financial Statements Note 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) h. CAPITAL STRUCTURE In February 1997, the Financial Accounting Standards Board issued SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS No. 129"), which requires all companies to disclose all relevant information regarding their capital structure. The Company has adopted SFAS No. 129 in 1998. For both years ended December 31, 1998 and 1997, there is no impact on the financial statements or disclosures. i. SEGMENT REPORTING In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS No. 131"), which amends the requirements for a public enterprise to report financial and descriptive information about its reportable operating segments. Operating segments, as defined in the pronouncement, are components of an enterprise about which separate financial information is available that is evaluated regularly by the Company in deciding how to allocate resources and in assessing performance. The financial information is required to be reported on the basis that is used internally for evaluating segment performance and deciding how to allocate resources to segments. The disclosures required by SFAS No. 131 are effective for all fiscal years beginning after December 15, 1997. The Company adopted SFAS No. 131 in 1997. For both years ended December 31, 1998 and 1997, there is no impact on the financial statements or disclosures. j. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which establishes standards for the reporting of comprehensive income for all fiscal years beginning after December 15, 1997. This pronouncement had no effect on the Company since it is following the fair value accounting guidelines required for BDCs. k. PENSION AND OTHER POST RETIREMENT BENEFITS Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pension and Other Post Retirement Benefits" is effective for financial statements with fiscal years beginning after December 31, 1997. Earlier application is permitted. The new standard revises employers' disclosures about pension and other post retirement benefit plans but does not change the measurement of recognition of those plans. SFAS No. 132 standardizes the disclosure requirements for pensions and other post retirement benefits to the extent practicable, requires additional information on change in the benefit obligations and fair values of the plan assets that will facilitate financial analysis, and eliminates certain disclosure previously required when no longer useful. The Company adopted SFAS No. 132 in 1998, with no material impact on its results of operations. l. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The FASB has recently issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 established standards for recognizing all derivative instruments including those for hedging F-21 EQUITEX, INC. Notes to the Financial Statements Note 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) l. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED) activities as either assets or liabilities in the statement of financial position. The adoption of this standard during 1998 by the Company had no effect on its financial position or results of operation. m. STOCK-BASED COMPENSATION Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), was issued in October 1995 by the Financial Accounting Standards Board. SFAS No. 123 provides an alternative method of accounting for stock-based compensation arrangements, based on fair value of the stock-based compensation utilizing various assumptions regarding the underlying attributes of the options and stock rather than the existing method of accounting for stock-based compensation which is provided in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). The Financial Accounting Standards Board encourages entities to adopt the fair-value based method but does not require adoption of this method. The Company will continue its current accounting policy under APB No. 25 but has adopted the disclosure-only provisions of SFAS No. 123 for any options and warrants issued to non-employees, directors or consultants. Accordingly, no compensation expense was recognized in the statement of operations for the options granted during June 1998 to an officer, officer/director, and employees. The following represents the pro-forma change in net assets and pro-forma change in net assets per share (primary) had the Company elected to account for these options using the fair-value based method beginning in June 1998. In estimating the pro-forma compensation expense for the options granted during the year ended December 31, 1998, the Company used the Black-Scholes option pricing model, a risk-free interest rate of 6.5%, expected dividend yield of zero, expected option lives of 5 years and expected volatility of 83%. The estimated pro-forma results may not be representative of actual results had the Company accounted for equity awards using the fair-value based method. 1998 Net (decrease) in net assets - as reported $(1,981,299) Pro-forma net (decrease) in net assets (2,724,153) (Decrease) in net assets per share - primary as reported (.45) Pro-forma (decrease) in net assets per share - primary (.62) n. INCOME TAXES The Company is not entitled to the special treatment available to regulated investment companies and is taxed as a regular corporation for Federal and state income tax purposes. Until 1986, the Company had made no provision for income taxes because of financial statement and tax losses. Effective January 1, 1993, the Company adopted FASB Statement No. 109, "Accounting for Income Taxes". The adoption of the new accounting statement had no significant effect on the tax provision or net income for 1993. F-22 EQUITEX, INC. Notes to the Financial Statements Note 1: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) o. RECLASSIFICATIONS Certain reclassifications have been made to the December 31, 1997 financial statements to conform to the December 31, 1998 presentation. p. NET ASSETS PER SHARE In accordance with the fair value accounting method used by regulated investment companies, net assets (total stockholders' equity) per share at December 31, 1998 and 1997 were as follows: NUMBER OF SHARES BASIS 1998 1997 1998 1997 ---- ---- ---- ---- Primary 5,384,315 3,461,115 $.74 $1.03 ========= ========= ==== ===== Fully diluted 6,156,015 3,772,660 $.65 $ .95 ========= ========= ==== ===== Note 2: DETAIL OF RECEIVABLES AND SOURCES OF REVENUE a. RECEIVABLES Receivables are from the following types of companies at December 31, 1998 and 1997, respectively. PORTFOLIO COMPANIES CONTROLLED AFFILIATED OTHER TOTAL 1998 Notes receivable $1,123,284 $56,575 $45,473 $1,225,332 Interest receivable 29,843 1,829 2,292 33,964 Trade receivables 111,287 11,427 43,277 165,991 Less: allowances for uncollectible receivables (5,527) (7,685) (46,423) (59,635) ---------- ------- ------- ---------- $1,258,887 $62,146 $44,619 $1,365,652 ========== ======= ======= ========== 1997 Notes receivable $ 401,928 $56,575 $ -- $ 458,503 Interest receivable 3,917 1,819 -- 5,736 Trade receivables 123,283 41,413 -- 164,696 Less: allowances for uncollectible receivables (52,913) (41,157) -- (94,070) ---------- ------- ------- ---------- $ 476,215 $58,650 $ -- $ 534,865 ========== ======= ======= ========== Included in notes, interest, and accounts receivable above are amounts totaling $1,271,542 and $534,865 at December 31, 1998 and 1997, respectively, which have been valued at fair value and whose collectibility cannot be determined due to future events (such as the success of investees' public/private offerings), the outcome of which cannot be determined at this time. b. SOURCES OF REVENUES Sources of revenues are from the following types of companies for the year ended December 31, 1998 and 1997, respectively. F-23 EQUITEX, INC. Notes to the Financial Statements Note 2: DETAIL OF RECEIVABLES AND SOURCES OF REVENUE (CONTINUED) b. SOURCES OF REVENUES (CONTINUED) PORTFOLIO COMPANIES CONTROLLED AFFILIATED OTHER TOTAL 1998 Interest and other income $ 68,043 $ 10 $2,416 $ 70,469 Consulting/transaction fees 375,000 -- -- 375,000 Administrative fees -- 2,371 -- 2,371 -------- -------- ------ -------- $443,043 $ 2,381 $2,416 $447,840 ======== ======== ====== ======== 1997 Interest and other income $ 3,917 $ 88,967 $9,012 $101,896 Consulting/transaction fees 250,000 -- -- 250,000 Administrative fees -- 26,176 319 26,495 -------- -------- ------ -------- $253,917 $115,143 $9,331 $378,391 ======== ======== ====== ======== During 1998 one investee company accounted for 96% of the Company's total revenues of $447,840. Note 3: INVESTMENTS Investments consist of holdings of securities in and receivables of publicly and privately held companies. The Company has representation on the boards of directors of four of its investee companies. Several investments are in companies in which there is either direct or indirect ownership or control of five percent or more of the outstanding voting shares. a. INVESTMENT IN RDM SPORTS GROUP (FORMERLY ROADMASTER INDUSTRIES, INC.) On August 29, 1997, RDM Sports Group (RDM) and all of its operating subsidiaries filed concurrent Chapter 11 petitions with the U.S. Bankruptcy Court. As a result of this, the fair market value of this investee company dropped to almost zero as reflected in the Schedule of Investments, herein. The Company has also reserved 100% of its $7,685 trade receivable from RDM at December 31, 1998. During 1998 the Company was included as a alleged defendant in two class- action lawsuits filed by shareholders of RDM Sports Group following RDM's bankruptcy filing. The Company intends to seek dismissal of both cases and to vigorously defend these actions. During July of 1997, prior to the bankruptcy filing, the Company sold 127,600 shares of RDM on the open market for cash proceeds of $126,366. During 1998 and 1997, the Company recorded administrative fees from RDM totaling $25,893 and $649, respectively. At December 31, 1998, the Company is holding a note receivable from Hutch Sports USA (an RDM subsidiary) with a face value of $564,755 (See Note 3 b. below). The note is recorded at an estimated net realizable value from bankruptcy proceeds of $56,475. F-24 EQUITEX, INC. Notes to the Financial Statements Note 3: INVESTMENTS (CONTINUED) b. INVESTMENT IN INTRANET SOLUTIONS, INC. (FORMERLY MACGREGOR SPORTS & FITNESS, INC.) On July 31, 1996, MacGregor Sports & Fitness, Inc. merged with Technical Publishing Solutions, Inc. (TPSI) through a tax-free exchange of common stock. As part of the merger agreement the Company agreed to indemnify the new entity up to a maximum limit of $2,000,000 against any subsequent claims relating to MacGregor (pre-merger). On October 31, 1997, the Company entered into an agreement with IntraNet relative to this indemnification agreement whereby the Company agreed to purchase a certain note receivable in the amount of $564,755 which IntraNet had from an RDM subsidiary, Hutch Sports USA (Hutch). Hutch had filed bankruptcy on August 29, 1997 (see Note 3a. above). The Company paid $414,755 of the purchase amount to IntraNet during 1997. The remaining balance of $150,000 was paid on January 21, 1998. Also, the Company's President agreed to resign from the Board of IntraNet and both IntraNet and the Company agreed to terminate the indemnification agreement under which the Company's maximum exposure was $2,000,000, and agreed to mutually release each other from any claims relating to this agreement and certain other items. During 1997, the Company sold and/or forfeited 171,835 shares of IntraNet for $814,653 used to pay the above mentioned indemnity settlement and also raise working capital, resulting in an ownership position of 473,250 shares (or 5.7%) at December 31, 1997. During 1998, the Company sold 284,665 shares of IntraNet for proceeds of $1,240,613 used to provide working capital, resulting in an ownership position of 188,585 shares (less than 5%) at December 31, 1998. c. INVESTMENT IN VP SPORTS, INC. In December of 1997, the Company received 2,000,000 shares (or 88%) of the common stock of VP Sports, Inc., a private company formed for the purpose of seeking out and acquiring an operating entity in the sporting goods/recreation industry. The stock was received in exchange for consulting services and an acquisition letter of intent valued at $250,000. The Company's president is also the President and a director of VP. During 1998 the Company loaned $103,131 to VP for working capital purposes, of which $38,865 was repaid. In September of 1998 VP Sports, Inc. entered into an agreement to purchase a Canadian bicycle manufacturer. d. INVESTMENTS IN FIRST TELESERVICES CORPORATION/FIRST TELEBANC CORPORATION On August 13, 1998, the Company acquired all of the outstanding stock of First TeleServices Corporation (FTC) in exchange for 625,000 shares of the Company's common stock. As a result of the transaction, FTC became a wholly-owned subsidiary of the Company. FTC is a fee-based financial services organization consisting of a database marketing division, consumer finance division, an inbound/outbound calling center, and an operations center. FTC has developed strategic F-25 EQUITEX, INC. Notes to the Financial Statements Note 3: INVESTMENTS (CONTINUED) d. INVESTMENTS IN FIRST TELESERVICES CORPORATION/FIRST TELEBANC CORPORATION (CONTINUED) alliances with a number of nationwide organizations to outsource the products and services it offers. The Board of Directors used the Board appraisal method of valuation for this investment and recorded FTC at $565,639, which was the net asset value of FTC's underlying assets and liabilities at the acquisition date. Since the date of the acquisition, the Company has loaned $160,000 to FTC for working capital purposes. During 1998 the Company acquired for $300,000 a 9.9% interest in First TeleBanc Corporation ("First TeleBanc"), a closely-held Florida corporation. First TeleBanc was incorporated in March of 1997 for the purpose of becoming a one-bank holding company and to acquire 100% of the outstanding stock of Boca Raton First National Bank. The acquisition by First TeleBanc of all of the outstanding stock of Boca Raton First National Bank was completed on December 30, 1998. As a one-bank holding company, First TeleBanc may engage in any activity which the Board of Governors of the Federal Reserve System has previously approved or approves subsequent to an application. e. INVESTMENT IN TRIUMPH SPORTS GROUP During the first and second quarter of 1998, the Company received 1,000,000 and 500,000 shares, respectively, of the common stock of Triumph Sports Group, a private company formed for the purpose of seeking out and acquiring operating entities in the non-manufacturing licensed and supplemental segments of the sporting goods and leisure-time industry. The stock was received in exchange for consulting services valued at $375,000. The Company's president is also the President and a director of Triumph Sports. During 1997 and 1998 the Company loaned $401,927 and $561,569 to Triumph, respectively, which has been used by Triumph primarily to acquire four retail vitamin/health supplement centers in south Florida. $64,478 of these notes and $39,939 of interest were repaid by Triumph during 1998, resulting in balances due the Company at December 31, 1998 of $899,018 and $23,088 for note, principal and accrued interest, respectively. Note 4: COMMON STOCK a. STOCK OPTIONS During 1993 the Company adopted two stock option plans: the 1993 Stock Option Plan (the "Option Plan") and the 1993 Stock Option Plan for Non- Employee Directors (the "Directors' Plan"). Effective April 1, 1993 the Company's Board of Directors granted options to purchase a total of 211,545 shares of common stock under the Option Plan to an officer/director and an officer of the Company. These options are exercisable at $3.00 per share and expire March 31, 1998. The Option Plan and the options granted thereunder were approved by the Company's stockholders on December 28, 1993. F-26 EQUITEX, INC. Notes to the Financial Statements Note 4: COMMON STOCK (CONTINUED) a. STOCK OPTIONS (CONTINUED) Under the terms of the Directors' Plan, each non-employee director of the Company was automatically granted as of July 5, 1995, an option to purchase 50,000 shares of common stock at an exercise price of $3.00 per share. These options expire ten years from the date of grant. The Directors' Plan and the options granted thereunder were also approved by the Company's stockholders on December 28, 1993. In June 1998, the Board of Directors also granted the following stock options to officers and employees of the Company: OPTION TYPE TO WHOM NO. OF SHARES OPTION PRICE Incentive Officer 31,000 $3.19 Non-qualified Officers 478,655 $3.19 Non-qualified Employees 28,800 $3.19 All of these options were issued at the closing stock price at date of grant and all options expire five years from date of grant. During 1998 101,000 shares of the non-qualified options issued to officers and employees, respectively, were exercised. b. TREASURY STOCK On October 21, 1992, the Board of Directors authorized the Company to repurchase up to 500,000 shares of its own common stock in the open market. During 1996 the Company purchased 26,500 shares of its common stock on the open market for $89,191. c. REVERSE STOCK SPLIT The Company's stockholders approved a reverse stock split effective January 2, 1996 whereby each two shares of $.01 par value common stock were exchanged for one share of $.02 par value common stock. Information included herein has been adjusted to reflect this reverse split. d. SALE OF STOCK TO OFFICER During December of 1997, the Company's President purchased 270,000 shares of common stock at $.75 each. e. During 1998 the Company sold to an officer 10,000 shares of common stock at $1.16 each. Another 139,200 shares were sold to outside directors at $1.16 each. Common stock sales to unrelated individuals during 1998 were as follows: SHARE PRICE NUMBER SOLD $.75 330,000 1.16 350,000 3.19 24,000 3.25 306,000 F-27 EQUITEX, INC. Notes to the Financial Statements Note 4: COMMON STOCK (CONTINUED) d. SALE OF STOCK TO OFFICER (CONTINUED) In March 1998 the Company's Board of Directors authorized a private placement offering of up to 500,000 shares of the Company's common stock at $1.16 per share. As of the close of the private placement on May 21, 1998, 499,200 shares were sold. On June 29, 1998 the Company's Board of Directors authorized an additional private placement of up to 750,000 of the Company's common stock at $3.25 per share. As of December 31, 1998, 306,000 shares were sold under this placement. Note 5: INCOME TAXES The provision (benefit) for income taxes for the years ended December 31, 1998 and 1997, consists of the following: DECEMBER 31, 1998 1997 Current: Federal and state $ -- $(56,307) Benefit of net operating loss carryback/carryforward -- -- ------- -------- Total current (provision) benefit $ -- $(56,307) ======= ======== Deferred: Accrued unpaid bonus $ -- $(48,930) Bad debt expense -- 93,948 Other 63,180 41,224 ------- -------- Total deferred (provision) benefit $63,180 $ 86,242 ======= ======== Deferred taxes reflect the tax effects of differences between the amounts recorded as assets and liabilities for financial reporting purposes and the amounts recorded for income tax purposes. The tax effects of significant temporary differences giving rise to deferred tax assets and liabilities are as follows: DECEMBER 31, 1998 1997 Deferred tax assets: Accrued items not currently deductible $263,140 $203,417 Excess "tax" basis on investment -- 92,964 Tax benefit of unrealized loss on investments 431,361 -- Valuation allowance (694,501) -- -------- -------- Total deferred tax assets -- 296,381 -------- -------- Deferred tax liabilities: Tax on unrealized gain on investments -- (233,201) -------- -------- Total deferred tax liabilities -- (233,201) -------- -------- Net deferred tax asset (liability) $ -- $ 63,180 ======== ======== Recognition of a deferred tax asset is allowed if future realization is more-likely-than-not. The Company has provided a full valuation allowance for its deferred tax assets (relative to accrued items not currently deductible and unrealized loss on investments) because its realization is not considered more-likely-than-not. F-28 EQUITEX, INC. Notes to the Financial Statements Note 5: INCOME TAXES (CONTINUED) Tax years prior to 1994 are "closed" to adjustments by the running of the statute of limitations. Note 6: RELATED PARTY TRANSACTIONS a. OFFICE RENTAL The Company rents office space on a month-to-month basis for $2,500 per month from Beacon Investments, a partnership in which the Company's President is the sole partner. b. BONUSES TO OFFICERS In November, 1989 the Board of Directors adopted a bonus arrangement whereby the Company's President is entitled to an annual bonus equal to 3 percent of the Company's total assets as of each year end. All bonuses are paid out of the Company's cash flow. In August 1998 the Company's Board of Directors approved a new bonus arrangement with the Company's president as recommended by an outside consulting firm, with the annual bonus to be calculated quarterly based on a combination of 1 percent of the Company's assets and 5 percent of the increase in the market value of the Company's common stock each quarter. The new bonus arrangement is effective January 1, 1998. The bonus accrual at December 31, 1998 has been adjusted to reflect the terms of the new bonus arrangement. The unpaid portion of these bonuses, amounts totaling $676,168 and $299,259 have been accrued as a "Bonus to Officer" in the December 31, 1998 and 1997 balance sheets, respectively. During 1997 the Company's Corporate Secretary received a bonus of $6,744. c. DIRECTORS' FEES During 1998 and 1997 the Company paid $12,500 to each of its two outside directors for their attendance at the meetings held in each year. d. NOTE PAYABLE TO OFFICER During 1998 the Company's President loaned the Company a total of $165,000 primarily for working capital needs. Of this amount $22,672 was repaid during the year leaving an unpaid balance of $142,328 at December 31, 1998. These uncollaterialized loans are all due on demand and bear interest at 8% per annum. e. NOTE PAYABLE TO RELATED ENTITY A related entity loaned the Company $100,000 in August 1997 pursuant to a note agreement, which is due on demand, pays interest at 12% per annum and is collateralized by 25,000 common shares of IntraNet Solutions. Of this amount, $30,000 was repaid during 1998 leaving an unpaid balance at December 31, 1998 of $70,000. Note 7: CONTRACT DEPOSIT RECEIVABLE The Company is the plaintiff in an action whereby it is seeking to recover $300,000 deposited into escrow pending the receipt of documentation needed pursuant to a contractual agreement. The defendant never delivered the required documents. This item has been recorded at an estimated net realizable value of $150,000 under "Contract Deposit Receivable", herein. F-29 EQUITEX, INC. Notes to the Financial Statements Note 8: OFF-BALANCE-SHEET RISK AND CONCENTRATIONS OF CREDIT RISK The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet financing needs of its portfolio companies. These financial instruments consist primarily of financial guarantees including pledges of the Company's investment portfolio. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the financial statements. At December 31, 1998, the Company's primary concentration of credit risk relates to its investments in certain portfolio companies, certain of which are highly leveraged companies within the United States and which are involved in the sporting goods and manufacturing industries. Consideration was given to the financial position of these portfolio companies when determining the appropriate fair values at December 31, 1998 and 1997. Note 9: RETIREMENT PLAN FOR OFFICER As part of the President's total compensation package, the Company purchased a whole life insurance policy on April 1, 1992 in order to provide compensation for the President's retirement. The Company pays an annual premium of $105,413 per year for 7 years (ending March 31, 1999) on behalf of the President and also reimburses the President each year for the personal income tax on this additional compensation. Should the President die prior to age sixty-five, the policy pays a $2,600,000 death benefit to his spouse. Upon retirement, provided the President is at least age sixty-five, the cash surrender value and death benefit rider become the President's property. For the year ended December 31, 1998, the Company paid $105,413 in premiums and $59,586 of additional compensation to the President for related income taxes. Note 10: SUBSEQUENT EVENTS Since December 31, 1998, the Company has sold an additional 384,000 shares of its June 29, 1998 private placement of common stock at $3.25 per share to unrelated private investors. Since December 31, 1998, the Company has loaned $70,000 and $30,000 to VP Sports, Inc. and Triumph Sports Group pursuant to note agreements which are uncollateralized, due on demand and pay interest at 10% per annum. Since December 31, 1998 the Company has loaned $325,000 to First TeleServices Corporation pursuant to note agreements which are uncollateralized, due on demand and pay interest at 10% per annum. The Company has also loaned $200,000 to First TeleBanc under similar terms. On January 5, 1999, the Registrant's two independent directors each received options to purchase 158,700 shares of the Registrant's common stock at an exercise price of $6.75 per share expiring on January 5, 2004. On the same date under the 1999 plan, the two independent directors wre granted an additional 86,800 options each (exercisable at $6.75 per share) and the oficers and employes of the Company were granted a total of 509,000 options at the same exercise price. F-30 EQUITEX, INC. Notes to the Financial Statements Note 10: SUBSEQUENT EVENTS (CONTINUED) During the first quarter of 1999 the Company issued the following 6% convertible preferred stock: SERIES NUMBER SHARES PROCEEDS A 900 $ 900,000 B 600 600,000 C 600 600,000 ---------- $2,100,000 The preferred stockholders may convert their stock into common shares at 65% of the current market quote on common at the date of conversion. The Company is required to convert the preferred stock into common stock at the 3 year anniversary date. F-31 EQUITEX, INC. VALUATION AND QUALIFYING ACCOUNTS AND RESERVES SCHEDULE II
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ADDITIONS BALANCE CHARGED BALANCE BEGINNING CHARGED TO OTHER AT END OF TO COSTS/ ACCOUNTS- DEDUC- OF PERIOD EXPENSES DESCRIBE TIONS PERIOD For the year ended Dec. 31, 1998: Allowance for un- collectible accounts Notes receivable ............ $ 40,293 $ -- $ $(40,193) $ 100 Interest receivable ......... 35 1,795 -- 1,830 Accounts receivable ......... 53,742 3,936 -- 57,705 For the year ended Dec. 31, 1997: Allowance for un- collectible accounts Notes receivable ............ $ 100 $ 40,193 $ $ -- $ 40,293 Interest receivable ......... 35 -- -- 35 Accounts receivable ......... 2,943 50,799 -- 53,742
The accompanying notes are a part of this schedule. S-1 EX-10 2 EXHIBIT 10.4 EQUITEX, INC. 1999 STOCK OPTION PLAN 1. PURPOSES OF AND BENEFITS UNDER THE PLAN. This 1999 Stock Option Plan (the "Plan") is intended to encourage stock ownership by employees, officers and directors of EQUITEX, INC., its divisions, Subsidiary corporations and Parent corporations (the "Corporation"), so that they may acquire or increase their proprietary interest in the Corporation, to (i) induce qualified persons to become employees, officers, consultants to or employee directors of the Corporation; (ii) reward employees and employee directors for past services to the Corporation and (iii) encourage such persons to remain in the employ of or associated with the Corporation and to put forth maximum efforts for the success of the business of the Corporation. It is intended that options granted by the Committee pursuant to Section 6(a) of this Plan shall constitute "incentive stock options" ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code, and the regulations issued thereunder, and options granted by the Committee pursuant to Section 6(b) of this Plan shall constitute "non-statutory stock options" ("Non- statutory Stock Options"). 2. DEFINITIONS. As used in this Plan, the following words and phrases shall have the meanings indicated: a. "Board" means the Board of Directors of the Corporation. b. "Code" means Internal Revenue Code of 1986, as amended from time to time. c. "Committee" means the Compensation Committee appointed by the Board, if one has been appointed. If no Committee has been appointed, the term "Committee" shall mean the Board. d. "Common Stock" means the Corporation's $.02 par value common stock. e. "Disability" means a Recipient's inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months, or such other meaning ascribed in Section 22(e)(3) of the Code or any successor provision. If the Recipient has a disability insurance policy, the term "Disability" shall be as defined therein; provided that said definition is not inconsistent with the meaning ascribed in Section 22(e)(3) of the Code or any successor provision. f. "Exchange Act" means Securities Exchange Act of 1934, as amended from time to time. -1- g. "Option" means either a Non-statutory Stock Option or Incentive Stock Option. h. "Option Price" means the purchase price of the shares of Common Stock covered by an Option determined in accordance with Section 7(c) hereunder. i. "Parent" means any corporation which is a "parent corporation" as defined in Section 424(e) of the Code, with respect to the Corporation. j. "Plan" means this 1999 Stock Option Plan. k. "Recipient" means any person granted an Option hereunder. l. "Retirement" means retirement from active employment with the Corporation at or after age 60. The Committee's determination regarding an individual's retirement shall be conclusive on all parties. m. "Securities Act" means the Securities Act of 1933, as amended from time to time. n. "Subsidiary" means any corporation which is a "subsidiary corporation" as defined in Section 424(f) of the Code, with respect to the Corporation. 3. ADMINISTRATION. a. The Plan shall be administered by the Committee. The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically conferred under the Plan or necessary or advisable in the administration of the Plan, including the authority to grant Options; to determine the vesting schedules and other restrictions, if any, relating to Options; to determine the Option Price; to determine the persons to whom, and the time or times at which, Options shall be granted; to determine the number of shares to be covered by each Option; to determine fair market value per share; to interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Option agreements (which need not be identical) entered into in connection with Options granted under the Plan; and to make all other determinations deemed necessary or advisable for the administration of the Plan. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. b. Options granted under the Plan shall be evidenced by duly adopted resolutions of the Committee included in the minutes of the meeting at which they are adopted or in a unanimous written consent. -2- c. The Committee shall endeavor to administer the Plan and grant Options hereunder in a manner that is compatible with the obligations of persons subject to Section 16 of the Exchange Act ("Section 16 Persons"), however compliance with Section 16 is a personal responsibility of each Section 16 person and is not the responsibility of the Corporation or the Committee, or any person thereof. None of the Committee, the Board or the Corporation shall assume any legal responsibility for a Recipient's compliance with his obligations under Section 16 of the Exchange Act. Any Option granted hereunder which would subject or subjects the Recipient to liability under Section 16(b) of the Exchange Act is void ab initio as if it had never been granted. d. No member of the Committee or the Board shall be liable for any action taken or determination made in good faith with respect to the Plan or any Option granted hereunder. 4. ELIGIBILITY. a. Subject to certain limitations hereinafter set forth, Options may be granted to employees, officers and directors of the Corporation. In determining the persons to whom Options shall be granted and the number of shares to be covered by each Option, the Committee shall take into account the duties of the respective persons, their present and potential contributions to the success of the Corporation and such other factors as the Committee shall deem relevant to accomplish the purposes of the Plan. b. A Recipient shall be eligible to receive more than one grant of an Option during the term of the Plan, on the terms and subject to the restrictions herein set forth. 5. STOCK RESERVED. a. The stock subject to Options hereunder shall be shares of Common Stock. Such shares, in whole or in part, may be authorized but unissued shares or shares that shall have been or that may be reacquired by the Corporation. The aggregate number of shares of Common Stock as to which Options may be granted from time to time under the Plan (the "Available Shares") initially shall not exceed 1,000,000 shares. The number of Available Shares shall be subject to adjustment as provided in Section 7(i) hereof. b. If any outstanding Option under the Plan for any reason expires or is terminated without having been exercised in full, the shares of Common Stock allocable to the unexercised portion of such Option shall become available for subsequent grants of Options under the Plan unless the Plan shall have been terminated. 6. STOCK OPTIONS a. INCENTIVE STOCK OPTIONS. (1) Options granted pursuant to this Section 6(a) are intended to constitute Incentive Stock Options and shall be subject to the following special terms and conditions, in addition to the general terms and conditions specified in Section 7 hereof. Only employees of the Corporation -3- (as the term "employees" is defined for the purposes of the Internal Revenue Code) shall be entitled to receive Incentive Stock Options. (2) The aggregate fair market value (determined as of the date the Incentive Stock Option is granted) of the shares of Common Stock with respect to which Incentive Stock Options granted under this and any other plan of the Corporation or any Parent Corporation or Subsidiary Corporation are exercisable for the first time by any Recipient during any calendar year may not exceed the amount set forth in Section 422(d) of the Internal Revenue Code. (3) Incentive Stock Options granted under this Plan are intended to satisfy all requirements for incentive stock options under Section 422 of the Internal Revenue Code and the Treasury Regulations thereunder and, notwithstanding any other provision of this Plan, the Plan and all Incentive Stock Options granted under it shall be so construed, and all contrary provisions shall be so limited in scope and effect and, to the extent they cannot be so limited, they shall be void. b. Non-statutory Stock Options. Options granted pursuant to this Section 6(b) are intended to constitute Non-statutory Stock Options and shall be subject only to the general terms and conditions specified in Section 7 hereof. 7. TERMS AND CONDITIONS OF OPTIONS. Each Option granted pursuant to the Plan shall be evidenced by a written Option agreement between the Corporation and the Recipient, which agreement substantially shall be in the form of Exhibit A hereto as modified from time to time by the Committee in its discretion, and which shall comply with and be subject to the following terms and conditions: a. NUMBER OF SHARES. Each Option agreement shall state the number of shares of Common Stock covered by the Option. b. TYPE OF OPTION. Each Option agreement shall specifically identify the portion, if any, of the Option which constitutes an Incentive Stock Option and the portion, if any, which constitutes a Non-statutory Stock Option. c. OPTION PRICE. (1) The Option Price of any Non-statutory Stock Option granted under the Plan shall be fixed by the Committee at the time of grant of such option and shall not be less than 80% of the fair market value of the Common Stock at the time the Option is granted. The Committee shall, in good faith, determine the fair market value of the Common Stock (without regard to any restrictions other than a restriction which, by its terms, will never lapse) based upon a reasonable method of valuation adopted by the Committee, or such other method as may be permitted by the Code, or regulations or rulings promulgated thereunder. In no event shall the Option Price be less than the par value of the Common Stock. The Committee will use its best efforts to determine the fair market value of the Common Stock subject to the Option, but neither the Committee or the Company will be responsible for the payment of any tax imposed upon the participants, nor will they reimburse participants for their payment of any tax so imposed. Neither the Company, the Committee -4- nor any member thereof shall make any representation or warranty to any participant regarding federal or state income tax consequences or effects of participating in the Plan. (2) The Option Price of any Incentive Stock Option granted under the Plan to a person owning less than ten percent of the total combined voting power of the Common Stock shall be at a price not less than 100% of the fair market value per share, determined by the Committee pursuant to Paragraph 7(c)(1), above, on the date of grant of the Incentive Stock Option. (3) The Option Price of any Incentive Stock Option granted under the Plan to a person owning more than ten percent of the total combined voting power of the Common Stock shall be at a price not less than 110% of the fair market value per share, determined by the Committee pursuant to Paragraph 7(c)(1), above, on the date of grant of the Incentive Stock Option. (4) The Option Price shall be subject to adjustment as provided in Section 7(i) hereof. (5) The date on which the Committee adopts a resolution expressly granting an option shall be considered the day on which such option is granted, unless a future date is specified in the resolution. d. Term of Option. Each Option agreement shall state the period during and times at which the Option shall be exercisable; provided, however: (1) The date on which the Committee adopts a resolution expressly granting an Option shall be considered the day on which such Option is granted, although such grant shall not be effective until the Recipient has executed an Option agreement with respect to such Option. (2) Except as further restricted in paragraph 7(d)(3), the exercise period shall not exceed ten years from the date of grant of the option. (3) The exercise period for Incentive Stock Options granted to a person owning more than ten percent of the total combined voting power of the Common Stock of the Corporation shall be for no more than five years. (4) The Committee shall have the authority to accelerate or extend the exercisability of any outstanding option at such time and under such circumstances as it, in its sole discretion, deems appropriate. No exercise period may be extended to increase the term of the option beyond ten years from the date of the grant. (5) The exercise period shall be subject to earlier termination as provided in Sections 7(f) and 7(g) hereof, and furthermore shall be terminated upon surrender of the Option by the holder thereof if such surrender has been authorized in advance by the Committee. -5- e. METHOD OF EXERCISE AND MEDIUM AND TIME OF PAYMENT. (1) An Option may be exercised as to any or all whole shares of Common Stock as to which it then is exercisable. (2) Each exercise of an Option granted hereunder, whether in whole or in part, shall be by written notice to the secretary of the Corporation designating the number of shares as to which the Option is being exercised, and shall be accompanied by payment in full of the Option Price for the number of shares so designated, together with any written statements required by any applicable securities laws. (3) The Option Price shall be paid in cash, in shares of Common Stock having a fair market value equal to such Option Price, as determined by the Committee in its sole discretion, or in a combination of cash and shares and, subject to approval of the Committee, may be effected in whole or in part (A) with monies received from the Corporation at the time of exercise as a compensatory cash payment, or (B) with monies borrowed from the Corporation pursuant to repayment terms and conditions as shall be determined from time to time by the Committee, in its discretion, separately with respect to each exercise of an Option and each Recipient; provided, however, that each such method and time for payment and each such borrowing and the terms and conditions of repayment shall be permitted by and be in compliance with applicable law. (4) The Recipient shall make provision for the withholding of taxes as required by Paragraph 8 hereof. f. TERMINATION. Except as provided herein or in any option agreement entered into pursuant hereto, an Option may not be exercised unless the Recipient then is an employee, officer or director of or consultant to the Corporation, and unless the Recipient has remained continuously as an employee, officer or director of or consultant to the Corporation since the date of grant of the Option. (1) If the Recipient ceases to be an employee, officer or director of, or consultant to, the Corporation for cause (other than by reason of death, Disability or retirement), and except as otherwise provided in any option agreement for the grant of Non-statutory Stock Options pursuant to Section 6(b) hereof, all Options theretofore granted to such Recipient but not theretofore exercised shall immediately terminate. (2) If the Recipient ceases to be an employee, officer or director of, or consultant to, the Corporation (other than by reason of death, Disability or retirement), other than for cause, and except as otherwise provided in any option agreement for the grant of Non-statutory Stock Options pursuant to Section 6(b) hereof, all Options theretofore granted to such Recipient but not theretofore exercised shall terminate three months following the date the Recipient ceased to be an employee, officer or director of, or consultant to, the Corporation. -6- (3) Nothing in the Plan or in any Option granted hereunder shall confer upon an individual any right to continue in the employ of or other relationship with the Corporation or interfere in any way with the right of the Corporation to terminate such employment or other relationship between the individual and the Corporation. g. DEATH, DISABILITY OR RETIREMENT OF RECIPIENT. If a Recipient shall die while an employee, officer or director of or a consultant to the Corporation, or if the Recipient's employment, officer or director status or consulting relationship, shall terminate by reason of Disability or Retirement, all Options theretofore granted to such Recipient, whether or not otherwise exercisable, unless earlier terminated in accordance with their terms, may be exercised by the Recipient or by the Recipient's estate or by a person who acquired the right to exercise such Options by bequest or inheritance or otherwise by reason of the death or Disability of the Recipient, at any time within one year after the date of death, Disability or Retirement of the Recipient; provided, however, that in the case of Incentive Stock Options such one-year period shall be limited to three months in the case of Retirement. h. TRANSFERABILITY RESTRICTION. (1) Options granted under the Plan shall not be transferable other than by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code or Title I of the Employee Retirement Income Security Act of 1974, or the rules thereunder. Options may be exercised, during the lifetime of the Recipient, only by the Recipient and thereafter only by his or her legal representative. (2) Any attempted sale, pledge, assignment, hypothecation or other transfer of an Option contrary to the provisions hereof and the levy of any execution, attachment or similar process upon an Option shall be null and void and without force or effect and shall result in a termination of the Option. (3) As a condition to the transfer of any shares of Common Stock issued upon exercise of an Option granted under this Plan, the Corporation may require an opinion of counsel, satisfactory to the Corporation, to the effect that such transfer will not be in violation of the Securities Act or any other applicable securities laws or that such transfer has been registered under federal and all applicable state securities laws. Further, the Corporation shall be authorized to refrain from delivering or transferring shares of Common Stock issued under this Plan until the Committee determines that such delivery or transfer will not violate applicable securities laws and the Recipient has tendered to the Corporation any federal, state or local tax owed by the Recipient as a result of exercising the Option or disposing of any Common Stock when the Corporation has a legal liability to satisfy such tax. The Corporation shall not be liable for damages due to delay in the delivery or issuance of any stock certificate for any reason whatsoever, including, but not limited to, a delay caused by listing requirements of any securities exchange or any registration requirements under the Securities Act, the Exchange Act, or under any other state or federal law, rule or regulation. The Corporation is under no obligation to take any action or incur any expense in order to register or qualify the delivery or transfer of shares of Common Stock under applicable securities laws or to perfect any exemption from such registration or qualification. Furthermore, the Corporation will not -7- be liable to any Recipient for failure to deliver or transfer shares of Common Stock if such failure is based upon the provisions of this paragraph. i. EFFECT OF CERTAIN CHANGES. (1) If there is any change in the number of shares of Common Stock through the declaration of stock dividends, or through a recapitalization resulting in stock splits, or combinations or exchanges of such shares, the number of shares of Common Stock available for Options and the number of such shares covered by outstanding Options, and the exercise price per share of the outstanding Options, shall be proportionately adjusted by the Committee to reflect any increase or decrease in the number of issued shares of Common Stock; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. (2) In the event of the proposed dissolution or liquidation of the Corporation, or any corporate separation or division, including, but not limited to, split-up, split-off or spin-off, or a merger or consolidation of the Corporation with another corporation, the Committee may provide that the holder of each Option then exercisable shall have the right to exercise such Option (at its then current Option Price) solely for the kind and amount of shares of stock and other securities, property, cash or any combination thereof receivable upon such dissolution, liquidation, corporate separation or division, or merger or consolidation by a holder of the number of shares of Common Stock for which such Option might have been exercised immediately prior to such dissolution, liquidation, or corporate separation or division, or merger or consolidation; or in the alternative the Committee may provide that each Option granted under the Plan shall terminate as of a date fixed by the Committee; provided, however, that not less than 30 days' written notice of the date so fixed shall be given to each Recipient, who shall have the right, during the period of 30 days preceding such termination, to exercise the Option as to all or any part of the shares of Common Stock covered thereby, including shares as to which such Option would not otherwise be exercisable. (3) Paragraph (2) of this Section 7(i) shall not apply to a merger or consolidation in which the Corporation is the surviving corporation and shares of Common Stock are not converted into or exchanged for stock, securities of any other corporation, cash or any other thing of value. Notwithstanding the preceding sentence, in case of any consolidation or merger of another corporation into the Corporation in which the Corporation is the surviving corporation and in which there is a reclassification or change (including a change to the right to receive cash or other property) of the shares of Common Stock (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination, but including any change in such shares into two or more classes or series of shares), the Committee may provide that the holder of each Option then exercisable shall have the right to exercise such Option solely for the kind and amount of shares of stock and other securities (including those of any new direct or indirect Parent of the Corporation), property, cash or any combination thereof receivable upon such reclassification, change, consolidation or merger by the holder of the number of shares of Common Stock for which such Option might have been exercised. -8- (4) In the event of a change in the Common Stock of the Corporation as presently constituted, which is limited to a change of all of its authorized shares with par value into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the Common Stock within the meaning of the Plan. (5) To the extent that the foregoing adjustments relate to stock or securities of the Corporation, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive, provided that each Incentive Stock Option granted pursuant to this Plan shall not be adjusted in a manner that causes such option to fail to continue to qualify as an Incentive Stock Option within the meaning of Section 422 of the Internal Revenue Code. (6) Except as expressly provided in this Section 7(i), the Recipient shall have no rights by reason of any subdivision or consolidation of shares of stock of any class or the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger, or consolidation or spin-off of assets or stock of another corporation; and any issue by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock subject to the Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes of its capital or business structures or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or part of its business or assets. j. RIGHTS AS SHAREHOLDER - NON-DISTRIBUTIVE INTENT. (1) Neither a person to whom an Option is granted, nor such person's legal representative, heir, legatee or distributee, shall be deemed to be the holder of, or to have any rights of a holder with respect to, any shares subject to such Option until after the Option is exercised and the shares are issued to the person exercising such Option. (2) Upon exercise of an Option at a time when there is no registration statement in effect under the Securities Act relating to the shares issuable upon exercise, shares may be issued to the Recipient only if the Recipient represents and warrants in writing to the Corporation that the shares purchased are being acquired for investment and not with a view to the distribution thereof and provides the Corporation with sufficient information to establish an exemption from the registration requirements of the Securities Act. A form of subscription agreement is attached hereto as Exhibit B. (3) No shares shall be issued upon the exercise of an Option unless and until there shall have been compliance with any then applicable requirements of the Securities and Exchange Commission, or any other regulatory agencies having jurisdiction over the Corporation. -9- (4) No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distribution or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 7(i) hereof. k. OTHER PROVISIONS. Option Agreements authorized under the Plan shall contain such other provisions, including, without limitation, (i) the imposition of restrictions upon the exercise of an option, and (ii) in the case of an Incentive Stock Option, the inclusion of any condition not inconsistent with such option qualifying as an Incentive Stock Option, as the Committee shall deem advisable. 8. AGREEMENT BY RECIPIENT REGARDING TAXES. a. Each Recipient agrees that upon exercise of an Option granted under this Plan, in addition to the payment of the Option Price as provided in Section 7(e) hereof, the Recipient shall pay in cash to the Corporation, an amount sufficient to allow the Corporation to pay federal, state and local taxes of any kind required by law to be withheld upon the exercise of such Option from any payment of any kind otherwise due to the Recipient. b. Each Option Recipient must acknowledge the possible availability of an election under Section 83(b) of the Code, or any successor provision. 9. TERM OF PLAN. Options may be granted under this Plan from time to time within a period of five years from the date the Plan is adopted by the Board. 10. AMENDMENT AND TERMINATION OF THE PLAN. The Committee at any time and from time to time may suspend, terminate, modify or amend the Plan. Except as provided in Section 7 hereof, no suspension, termination, modification or amendment of the Plan may adversely affect any Option previously granted, unless the written consent of the Recipient is obtained. 11. ASSUMPTION. Subject to Section 7, the terms and conditions of any outstanding Options granted pursuant to this Plan shall be assumed by, be binding upon and shall inure to the benefit of any successor corporation to the Corporation and continue to be governed by, to the extent applicable, the terms and conditions of this Plan. Such successor corporation may but shall not be obligated to assume this Plan. 12. TERMINATION OF RIGHT OF ACTION. Every right of action arising out of or in connection with the Plan by or on behalf of the Corporation, or by any shareholder of the Corporation against any past, present or future member of the Board, or against any employee, or by an employee (past, present or future) against the Corporation, irrespective of the place where an action may be brought and of the place of residence of any such shareholder, director or employee, will cease and be barred by the expiration of three years from the date of the act or omission in respect of which such right of action is alleged to have risen or such shorter period as may be provided by law. -10- 13. ADOPTION. a. This Plan was approved by the Board of Directors of the Corporation on January 4, 1999. b. If this Plan is not approved by the shareholders of the Corporation within 12 months of the date the Plan was approved by the Board as required by Section 422(b)(1) of the Internal Revenue Code, this Plan and the options granted hereunder shall be and remain effective for all Recipients, but the reference to Incentive Stock Options herein shall be deleted and all options granted hereunder shall be Non-statutory Stock Options pursuant to Section 6(b) hereof. c. Notwithstanding any other provision of this Plan, if any person who is granted options under this Plan prior to shareholder approval of this Plan, ceases to be an officer or employee of the Company prior to shareholder approval of this Plan, all options granted to that person shall immediately terminate. EQUITEX, INC. By /S/ HENRY FONG ___________________________________ Henry Fong, President, Treasurer and Chief Financial Officer -11- Exhibit A FORM OF STOCK OPTION AGREEMENT STOCK OPTION AGREEMENT made as of this ___ day of _______, 199__, between EQUITEX, INC., a Delaware corporation (the "Corporation"), and ________________ (the "Recipient"). In accordance with its 1999 Stock Option Plan (the "Plan"), a copy of which is attached and is incorporated herein by reference, the Corporation desires, in connection with the services of the Recipient, to provide the Recipient with an opportunity to acquire no par value common stock ("Common Stock") of the Corporation on favorable terms and thereby increase the Recipient's proprietary interest in the Corporation and as incentive to put forth maximum efforts for the success of the business of the Corporation. NOW, THEREFORE, in consideration of the premises and mutual covenants herein set forth and other good and valuable consideration, the Corporation and the Recipient agree as follows: Confirmation of Grant of Option. Pursuant to a determination of the Compensation Committee of the Board of Directors of the Corporation (the "Committee") (if such a Committee has been appointed) or in the absence of a Committee, by the Board of Directors of the Corporation (the "Board) made on _______, ___ 199__ (the "Date of Grant"), the Corporation, subject to the terms of the Plan and of this Agreement, confirms that the Recipient has been irrevocably granted on the Date of Grant, as a matter of separate inducement and agreement, and in addition to and not in lieu of salary or other compensation for services, [an Incentive/a Non-statutory] Stock Option pursuant to Section 6 of the Plan (the "Option") to purchase an aggregate of ______ shares of Common Stock on the terms and conditions herein set forth, subject to adjustment as provided in Paragraph 8 hereof. 1. OPTION PRICE. The Option Price of shares of Common Stock covered by the Option will be $_____ per share (the "Option Price") subject to adjustment as provided in Paragraph 7(i) of the Plan. 2. VESTING OF OPTION. This Option shall vest as follows \\to be tailored to each optionee\\ 3. EXERCISE OF OPTION. Except as otherwise provided in Section 7 of the Plan, the Option may be exercised in whole or in part at any time during the term of the Option, provided, however, no Option shall be exercisable after the expiration of the term thereof, and no Option shall be exercisable unless the holder shall at the time of exercise have been an employee, officer, consultant to or employee director of the Corporation for a period of at least three months. The Option may be exercised, as provided in this Paragraph 4, by notice and payment to the Corporation as provided in Paragraph 11 hereof and Section 7(e) of the Plan. -1- 4. TERM OF OPTION. The term of the Option will be through ______ years from the Date of Grant, subject to earlier termination or cancellation as provided in this Agreement. The holder of the Option will not have any rights to dividends or any other rights of a shareholder with respect to any shares of Common Stock subject to the Option until such shares shall have been issued upon purchase of such shares through exercise of the Option. 5. TRANSFERABILITY RESTRICTION. The Option may not be assigned, transferred or otherwise disposed of, or pledged or hypothecated in any way (whether by operation of law or otherwise) except in strict compliance with Section 7(h) of the Plan. Any assignment, transfer, pledge, hypothecation or other disposition of the Option or any attempt to make any such levy of execution, attachment or other process will cause the Option to terminate immediately upon the happening of any such event, provided, however, that any such termination of the Option under the foregoing provisions of this Paragraph 6 will not prejudice any rights or remedies which the Corporation may have under this Agreement or otherwise. 6. EXERCISE UPON TERMINATION. The Recipient's rights to exercise this Option upon termination of employment or cessation as an officer or employee director shall be as set forth in Section 7(f) of the Plan. 7. DEATH, DISABILITY OR RETIREMENT OF RECIPIENT. The Recipient's rights to exercise this Option upon the death, Disability or Retirement of the Recipient shall be as set forth in Section 7(g) of the Plan. 8. ADJUSTMENTS. The Option shall be subject to adjustment upon the occurrence of certain events as set forth in Section 7(i) of the Plan. 9. NO REGISTRATION OBLIGATION. The Recipient understands that the Option is not registered under the Securities Act of 1933, as amended (the "Securities Act") and the Corporation has no obligation to register under the Securities Act the Option or any of the shares of Common Stock subject to and issuable upon the exercise of the Option. The Recipient represents that the Option is being acquired by him or her and that such shares of Common Stock will be acquired by him or her for investment and all certificates for the shares issued upon exercise of the Option will bear the following legend unless such shares are registered under the Securities Act prior to their issuance: The shares represented by this Certificate have not been registered under the Securities Act of 1933 (the "Securities Act"), and are "restricted securities" as that term is defined in Rule 144 under the Securities Act. The shares may not be offered for sale, sold or otherwise transferred except pursuant to an effective registration statement under the Securities Act or pursuant to an exemption from registration under the Securities Act, the availability of which is to be established to the satisfaction of the Company. -2- The Recipient further understands and agrees that the Option may be exercised only if at the time of such exercise the Recipient and the Corporation are able to establish the existence of an exemption from registration under the Securities Act and applicable state laws. 10. NOTICES. Each notice relating to this Agreement will be in writing and delivered in person or by certified mail to the proper address. Notices to the Corporation shall be addressed to the Corporation, 7315 East Peakview Avenue, Englewood, Colorado 80111, Attn: Secretary. Notices to the Recipient or other person or persons then entitled to exercise the Option shall be addressed to the Recipient or such other person or persons at the Recipient's address below specified. Anyone to whom a notice may be given under this Agreement may designate a new address by notice to that effect given pursuant to this Paragraph 10. 11. AGREEMENT BY RECIPIENT REGARDING TAXES. (a) The Recipient agrees that upon exercise of an Option, in addition to the payment of the Option Price as provided in Section 7(e) of the Plan, the Recipient shall pay in cash to the Corporation, an amount sufficient to allow the Corporation to pay federal, state and local taxes of any kind required by law to be withheld upon the exercise of such Option from any payment of any kind otherwise due to the Recipient. (b) The Recipient acknowledges the possible availability of an election under Section 83(b) of the Code and agrees to give the Corporation prompt written notice of any election made by such person under Section 83(b) of the Code, or any similar provision thereof. 12. SECTION 16 COMPLIANCE. The Recipient acknowledges that it is solely responsible for filing all reports that may be required under Section 16 of the Securities Exchange Act of 1934, and that the filing of such reports is not the responsibility of the Corporation or the Committee, or any person thereof. 13. APPROVAL OF COUNSEL. The exercise of the Option and the issuance and delivery of shares of Common Stock pursuant thereto shall be subject to approval by the Corporation's counsel of all legal matters in connection therewith, including compliance with the requirements of the Securities Act, the Securities Exchange Act of 1934, as amended, applicable state securities laws, the rules and regulations thereunder, and the requirements of any national securities exchange upon which the Common Stock then may be listed. 14. BENEFITS OF AGREEMENT. This Agreement will inure to the benefit of and be binding upon each successor and assign of the Corporation. All obligations imposed upon the Recipient and all rights granted to the Corporation under this Agreement will be binding upon the Recipient's heirs, legal representatives and successors. 15. GOVERNMENTAL AND OTHER REGULATIONS. The exercise of the Option and the Corporation's obligation to sell and deliver shares upon the exercise of rights to purchase shares is subject to all applicable federal and state laws, rules and regulations, and to such approvals by any -3- regulatory or governmental agency which may, in the opinion of counsel for the Corporation, be required. 16. INCORPORATION OF THE PLAN. The Plan is attached hereto and incorporated herein by reference. In the event that any provision in this Agreement conflicts with a provision in the Plan, the Plan shall govern. All capitalized terms not otherwise defined herein shall be as defined in the Plan. Executed in the name and on behalf of the Corporation by one of its duly authorized officers and by the Recipient all as of the date first above written. EQUITEX, INC. By________________________________ Name___________________________ Title__________________________ The undersigned Recipient understands the terms of this Option Agreement and the attached Plan and hereby agrees to comply therewith. Date __________ ___, 19__ _______________________________ Recipient: _____________________ Tax ID Number:_________________ Address: _____________________ =============================== -4- FORM OF SUBSCRIPTION AGREEMENT THE SECURITIES OF EQUITEX, INC. BEING SUBSCRIBED FOR HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR APPLICABLE STATE BLUE SKY OR SECURITIES LAWS AND ARE OFFERED UNDER EXEMPTIONS FROM THE REGISTRATION PROVISIONS OF SUCH LAWS. IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. This Subscription Agreement is entered for the purpose of the Undersigned acquiring _____________ shares of the $.02 par value common stock (the "Securities") of EQUITEX, INC., a Delaware corporation (the "Corporation") from the Corporation upon the exercise of an Option pursuant to the Equitex, Inc. 1999 Stock Option Plan (the "Plan"). It is understood that no exercise of an Option at a time when no registration statement relating thereto is effective under the Securities Act of 1933, as amended (the "Securities Act") can be completed until the Undersigned executes this Subscription Agreement and delivers it to the Corporation, and then such exercise is effective only in accordance with the terms of the Plan and this Subscription Agreement. In connection with the Undersigned's acquisition of the Securities, the Undersigned represents and warrants to the Corporation as follows: 1. The Undersigned has been provided with the following information: \\need to insert at the time of exercise\\ (all of which is referred to herein as the "Available Information"). 2. The Corporation has given the Undersigned the opportunity to ask questions of and to receive answers from persons acting on the Corporation's behalf concerning the terms and conditions of this transaction and the opportunity to obtain any additional reasonable information -1- regarding the Corporation, its business and financial condition which the Corporation possesses or can acquire without unreasonable effort or expense. 3. The Securities are being acquired by the Undersigned for his or her own account and not on behalf of any other person or entity. The Undersigned's present financial condition is such that it is unlikely that it would be necessary for the Undersigned to dispose of any portion of the Securities in the foreseeable future. 4. The Undersigned understands that the Securities being acquired hereby have not been registered under the Securities Act or any state or foreign securities laws, and are and will continue to be restricted securities within the meaning of Rule 144 of the General Rules and Regulations under the Securities Act and applicable state statutes, and consents to the placement of an appropriate restrictive legend or legends on any certificates evidencing the Securities and any certificates issued in replacement or exchange therefor and acknowledges that the Corporation will cause its stock transfer records to note such restrictions. 5. By the Undersigned's execution below, it is acknowledged and understood that the Corporation is relying upon the accuracy and completeness hereof in complying with certain obligations under applicable securities laws. 6. This Agreement binds and inures to the benefit of the representatives, successors and permitted assigns of the respective parties hereto. 7. Incorporation of the Plan. The Plan is attached hereto and incorporated herein by reference. In the event that any provision in this Agreement conflicts with a provision in the Plan, the Plan shall govern. All capitalized terms not otherwise defined herein shall be as defined in the Plan. (Undersigned) ______________, 19__ ____________________________ Recipient: _________________ Tax ID Number:______________ Address: __________________ ============================ -2- EX-21 3 SUBSIDIARIES The Registrant's subsidiaries are: First TeleServices Corp., a Delaware Corporation EX-27 4 FDS -- 1998 ANNUAL REPORT ON FORM 10-KSB
5 This schedule contains summary financial information extracted from the financial statements contained in the Registrant's Annual Report on Form 10-KSB for the year ended December 31, 1998, and is qualified in its entirety by reference to such financial statements. 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 32,490 4,226,541 1,750,235 209,635 0 1,456,314 156,144 129,924 5,859,075 1,770,846 0 0 0 108,353 5,750,722 5,859,075 1,712,802 447,840 604,462 2,317,243 0 0 101,002 (862,065) 63,180 0 0 0 0 (925,245) (.45) (.45)
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