SECURITIES EXCHANGE ACT OF 1934
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT AND RESTATEMENT
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12 (b) or (g) of the Securities Exchange Act of 1934
FIDELITY HOLDINGS, INC.
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(Exact name of registrant as specified in its Charter)
Nevada 11-3292094
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Identification No.)
Organization)
80-02 Kew Gardens Road Kew Gardens, New York 11415
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(Address of Principal Executive Offices)
Issuer's telephone number (718) 520-6500
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Securities to be registered under Section 12 (b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
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Securities to be registered under Section 12 (g) of the Act:
COMMON STOCK
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(Title of Amount)
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TABLE OF CONTENTS
PAGE
PART I
Item 1 Description of Business 1
Item 2 Management's Discussion and Analysis 27
Item 3 Description of Property 37
Item 4 Security Ownership of Certain Beneficial 38
Owners and Management
Item 5 Directors, Executive Officers, Promoters and 41
Control
Item 6 Executive Compensation 42
Item 7 Certain Relationships and Related Transactions 47
Item 8 Description of Securities 50
PART II
Item 1 Market for Price of Common and Dividends on 57
the Registrant's Stockholder Matters
Item 2 Legal Proceedings 59
Item 3 Changes in and Disagreements with Accountants 60
on Accounting and Financial Disclosure
Item 4 Indemnification of Directors and Officers 60
Item 5 Recent Sales of Registered Securities 62
FINANCIAL STATEMENTS
See attached amended Financial Statements
EXHIBIT INDEX
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PART I.
Item 1. Description Of Business
Introduction
Fidelity Holdings, Inc. (the "Company") was incorporated in Nevada on
November 7, 1995. The Company is a holding company, which has no operations and
derives revenues from operating subsidiaries. The operating subsidiaries of the
Company are grouped into three divisions: (i) Computer Telephony and
Telecommunications; (ii) Leasing; and (iii) Plastics and Utility Products. A
proposed acquisition of Major Automotive Group, Inc. ("Major Auto") will add a
fourth, Automotive Sales. Unless otherwise indicated, all references to the
Company include reference to subsidiaries of the Company.
Computer Telephony and Telecommunications Division
The Company, through Computer Business Sciences, Inc., a New York
corporation ("Computer Business Sciences"), 786710 (Ontario) Limited, an Ontario
corporation doing business as Info Systems, Inc. ("Info Systems"), C.B.S.
Computer Business Sciences Ltd., an Israeli corporation ("Computer Business
Sciences (Israel)"), and Reynard Service Bureau, Inc., a Florida corporation
("Reynard"), the four wholly-owned subsidiaries comprising its Computer
Telephony and Telecommunications division, currently develops, manufactures,
markets, sells and services two product lines. The first product line utilizes
"Talkie" technology, which consists of proprietary computer software and
hardware that (i) permits end users of the technology to place long-distance
international telephone calls at discounted rates and (ii) offers end users a
broad range of interactive voice-response applications such as voice-mail,
automatic receptionist, automated order entry, conference calling and faxing.
The second product line, "Business Control Software," is a proprietary computer
software system that provides multi-lingual general accounting and business
management applications.
The Company acquired the technology for its telecommunications products in
April 1996 through its acquisition from Dr. Zvi Barak and Sarah Barak of all of
the issued and outstanding stock of Info Systems. A portion of the purchase
price for such stock consists of twenty monthly installment payments of $15,000
from the Company to the Baraks. In order to secure such installment payments,
the Company has granted a security interest to the Baraks in the stock of Info
Systems and the other assets purchased by the Company from the Baraks. The
monthly installment payments commenced in September 1996 and are scheduled to
continue through June 1998. To date, the Company has withheld $85,000 of such
installment payments as collateral for the Baraks' obligation to make certain
indemnification payments to the Company. The Company has agreed to pay the
Baraks the $85,000 by July 1998.
Talkie
"Talkie" is the trademark for, and the name used by the Company to
describe, the technology relating to the Company's telephonic and interactive
voice response software applications. The Company has three products that use
Talkie technology. The first product, the "Talkie Power Web Line Machine," is a
computer-based telephone "switch" that enables small or start-up telephone
companies to purchase blocks of international telephone calling time from
suppliers such as AT&T and MCI and resell the time in smaller units to callers
at discounted rates. The second product is a group of related telephonic and
interactive voice response software programs, such as voice-mail, automatic
receptionist, automated order entry, conference calling and faxing. The third
product, called "Talkie-Globe," is an international call-back, debit card and
long-distance reselling system.
The Talkie Power Web Line Machine is a programmable electronic telephone
switch based on personal computer technology. It consists of a proprietary
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software program, and hardware components most of which are available from a
number of different sources. The machine currently contains 96 channels, but may
be expanded to carry up to 120 channels. Each channel provides 43,200 available
minutes of telephone time per 30-day month that may be sold. As is typical of
industry utilization of available telephone time, approximately 30-40% of these
available minutes are actually sold. Of the 43,200 available minutes,
approximately 10,560 are considered peak time (defined to be the 480 minutes
comprising the typical eight-hour work day in the destination country and
assuming 22 work days in the typical 30-day month) and the balance are
considered off-peak time, however the determination of actual peak minutes in a
destination country is based upon demand for calling time, which in turn is
based upon such factors as calling patterns and the differences in time zones
between the country from which a call is placed and the destination county. Peak
minutes are generally able to be sold at higher rates than off-peak minutes.
The Talkie Power Web Line Machine includes an integrated programmable
telephone call switching system known as the Talkie Web Smart Switch. The
programmability of this switching system allows the machine to handle a variety
of international telephone-based services including resale of long-distance
telephone time the Company purchases in bulk, international call-back services
(described below), telemarketing, Internet access and facsimile transmission.
The Company, through its subsidiary Computer Business Sciences, sells the
Talkie Power Web Line Machines to various service providers (known as "master
agents"). A master agent then establishes a telephone connection between a
foreign country and the Talkie Power Web Line Machine, which is located at the
Company's offices in Kew Gardens, New York. This connection is typically a
dedicated telephone line that runs from the Talkie Power Web Line Machine to
certain equipment located in the foreign country that is used to connect the
dedicated line to the local telephone lines. The master agent typically leases
the dedicated telephone line, which has a specific capacity for simultaneous
calls, from MCI Communications Corp. or Sprint Corporation for a fixed monthly
fee. Callers in the foreign country place a local call to connect to the
dedicated telephone line and are provided a United States dial tone by the
Talkie Power Web Line Machine. The caller then dials the number for the desired
destination and the call is carried over the dedicated telephone line to the
Talkie Power Web Line Machine and then redirected to the desired destination.
Because the Talkie Power Web Line Machine's software program is able to process
both voice and data, callers may place international telephone calls and send
facsimiles to the desired destination and may also connect to the Internet.
The master agent generates revenues by selling the available telephone
time generated by the Talkie Power Web Line Machine to callers in the foreign
country. There are two elements to the master agent's cost of carrying a call
from the foreign country to the desired destination: the cost of the dedicated
telephone line from the Talkie Power Web Line Machine to the foreign country
(which is typically a fixed monthly cost) and the cost of the call directed from
the Talkie Power Web Line Machine to the desired destination (which is based
upon United States calling rates). The master agent charges the caller in the
foreign country some markup over the cost of the call to the desired
destination. The cost to the caller is considerably lower than the alternative
of placing the same call through the caller's own local telephone system which,
in many cases, is a state-owned monopoly. The experience of the Company's master
agents has generally been a very substantial reduction in per minute call costs.
The Company's billing records indicate that the reduction in most cases is a
factor of 15, that is, the country-to-country portion of an international call
normally costing $0.75 per minute, costs $0.05 per minute when placed through
the Talkie Power Web Line Machine. Once the master agent arranges for a certain
monthly volume of calls from a given foreign country, the master agent will
recoup the cost of the dedicated telephone line to that foreign country and will
thereafter generate profits.
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The Company and Summa Four, Inc., a publicly owned communications
equipment manufacturer located in New Hampshire, have entered into a value-added
reseller agreement. Under the agreement, the parties will jointly develop an
improved version of the Talkie Power Web Line Machine and associated software,
which the Company will then purchase from Summa Four, Inc. for resale to the
Company's master agents.
Arrangements with Nissko
In March 1996, the Company's subsidiary Computer Business Sciences formed a
joint venture with Nissko Telecom, L.P. ("Nissko"). The joint venture is a
general partnership named Nissko Telecom Associates ("Associates"). Computer
Business Sciences owns 45% of the joint venture and Nissko owns 55%. Nissko is a
limited partnership the general partner of which is one of the Company's master
agents, Nissko Telecom, Ltd. (the "Agent"), and the limited partners of which
are four individuals, three of whom, including Yossi Koren, one of the Company's
directors, are shareholders of the Agent (such three individuals being
collectively referred to herein as the "Nissko Principals"). Pursuant to an
informal agreement, the Agent has grranted to Associates the right to market and
sell the available telephone time generated by the Talkie Power Web Line
Machines that the Agent purchases as a master agent, in exchange for the Agent's
interest in the joint venture through its general partnership interest in
Nissko. Through its interest in Associates, Computer Business Sciences realizes
45% of the revenues generated from Associates' sale of such telephone minutes.
Since the inception of Associates, the Company has derived $19,645 in net income
after expenses and start-up costs from Computer Business Science's participation
in Associates.Under its master agent agreement, dated March 1996, with Computer
Business Sciences, the Agent is obligated to purchase 15 Talkie Power Web Line
Machines from Computer Business Sciences and has the right to acquire 15
additional machines, each for $125,800, and 30 machine upgrades, each for
$60,000. Each upgrade consists of an attachment module which increases the
channel capacity of the machines and the related software. The Agent has a right
of first refusal to sell the telephone time generated by the machines that it
has purchased in all geographical locations in the world. This means that
whenever a master agent other than the Agent proposes to resell telephone time
in a country the other master agent has not previously served, Computer Business
Sciences must first offer the Agent the opportunity to service that country.
Under the terms of its master agent agreement, the Agent (i) paid Computer
Business Sciences a deposit of $629,000 at the time the agreement was executed
toward the purchase of the 15 machines that the Agent is obligated to purchase
and (ii) issued to Computer Business Sciences 45% of its then issued and
outstanding common stock. In return, (i) the Company issued to the Nissko
Principals, including Yossi Koren, who subsequently became a director of the
Company, (a) warrants, exercisable through the date that is 60 days after the
effectiveness of any public offering of the Company's securities (including this
offering), to acquire an aggregate of 750,000 shares of the Company's Common
Stock at an exercise price of $1.25 per share (the "Class A Warrants") and (b)
warrants, exercisable through March 19, 1998, to acquire an aggregate of 750,000
shares of the Company's Common Stock at an exercise price of $1.25 per share
(the "Class B Warrants") and (ii) Computer Business Sciences agreed to make a
$10,000 contribution to the capital of the Agent upon its purchase of each of
the first 15 machines. Certificates evidencing the Class A Warrants and the
Class B Warrants have not yet been issued.
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Pursuant to the master agent agreement, if, by March 31, 1998, the sum of
(i) Computer Business Sciences' $10,000 contributions ("Contributions") to the
Agent's capital plus (ii) the Agent's aggregate earnings ("Earnings") before
depreciation, interest expense and taxes from the first five machines purchased
by it, does not equal or exceed the $629,000 deposit paid to Computer Business
Sciences, the Agent may, but is not obligated to, exercise one of two remedies.
First, it can terminate the master agent agreement, in which event it will be
relieved of any obligation to purchase additional machines and will retain and
operate the machines it has purchased. Second, it can declare the master agent
agreement in default, in which event the Nissko Principals will have the right
to recover the excess of $629,000 over Contributions plus Earnings. If Computer
Business Sciences pays to the Nissko Principals the full amount of such excess,
the Nissko Principals will be required to transfer to Computer Business Sciences
the remaining 55% of the issued and outstanding common stock of the Agent.
To secure the payment required in case the Agent elects the second
alternative, Bruce Bendell, the Company's Chairman, and Doron Cohen, the
Company's Chief Executive Officer, President and Treasurer, have each pledged to
the Agent 500,000 shares of the Company's Common Stock. In the event that the
sum of Contributions plus Earnings is less than $629,000 and Computer Business
Sciences does not pay the Nissko Principals the full amount of the deficit, the
Nissko Principals will have the right to foreclose on the pledged Common Stock.
If the proceeds of liquidating the pledged shares are sufficient to cover the
deficit, the Nissko Principals will be required to transfer to Mr. Bendell and
Mr. Cohen in equal shares the remaining 55% of the Agent's issued and
outstanding common stock. Messrs. Bendell and Cohen have agreed that upon
receipt of that stock, they will transfer it to the Company in exchange for
reimbursement by the Company for the market value of their shares of the
Company's Common Stock foreclosed upon by the Nissko Principals.
Restructuring of Nissko Arrangements
The Company has entered into a Memorandum of Understanding (the "MOU") with
the Agent, the Nissko Principals, and with the remaining limited partner of
Nissko, Robert L. Rimberg. The transactions contemplated by the MOU are
conditioned on the consummation of the Major Auto Acquisition. The MOU provides
that (i) Nissko will transfer to the Agent and the Agent will assume, all of the
assets and liabilities of Nissko and (ii) Computer Business Sciences will
acquire all of the issued and outstanding shares of common stock of the Agent in
a tax-free reorganization. Upon execution of the MOU, an aggregate $653,750
deposit that the Nissko Principals and Mr. Rimberg had previously paid towards
the full exercise price of the Class A Warrants was converted to a partial
exercise of the Class A Warrants. Upon such conversion, the Company issued an
aggregate of 523,000 shares of its Common Stock to the Nissko Principals and Mr.
Rimberg, 173,583 of which were issued to Yossi Koren, a director of the Company.
Resales of all these shares during the two-year period commencing on execution
of the definitive documentation referred to below will be permitted only under
an applicable exemption from the Securities Act. Permitted resales will be
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expressly subject to the voting rights of Bruce Bendell who holds a proxy to
vote 500,000 of these shares during the two-year restriction period.
The MOU provides that upon execution of definitive documentation containing
the terms and conditions outlined in the MOU, (i) each of the Nissko Principals
will receive 257,500 shares of the Company's Common Stock and Mr. Rimberg will
receive 27,500 shares of the Company's Common Stock, resales of all of which
shares will be subject to restrictions on transfer and voting that are identical
to those described immediately above, and (ii) each of the Nissko Principals
will receive warrants to acquire up to 68,917 shares of the Company's Common
Stock and Mr. Rimberg will receive warrants to acquire up to 20,250 shares of
the Company's Common Stock, in each case for $1.25 per share, exercisable until
30 days after the effective date of a registration statement on Form SB-2 to be
filed with the Securities and Exchange Commission. Such warrants represent the
unexercised balance of the Class A Warrants remaining after the conversion of
the $653,750 partial payment into a partial exercise as described above.
Nissko Jewelry Trading, Inc. ("NJT"), a company 33-1/3% owned by Mr. Koren,
has entered into agreements for the Agent's benefit with MCI, Sprint and Bell
Atlantic (formerly NYNEX). These agreements provide for the purchase by NJT on
behalf of the Agent of telephone time or transmission lines. The MOU provides
that the Company will indemnify NJT against any liability it may incur under
these agreements and will place 200,000 shares of its Common Stock into an
escrow to secure this indemnification obligation.
Upon the effectiveness of the definitive documentation relating to the
transactions contemplated by the MOU, (i) the Agent's master agent agreement
will terminate, (ii) the Class B Warrants will be canceled, and the pledge by
each of Mr. Bendell and Mr. Cohen of 500,000 shares of the Company's Common
Stock, referred to above, will be released.
The second product group, interactive voice response software programs,
consists of the following applications:
Talkie-Ad: permits callers to browse through pre-recorded messages based on
their search criteria, similar to a talking classified ad.
Talkie-Attendant: automated receptionist features, including dial "O" for
operator, name directories, call blocking, call screening, music or company
messages while on hold, paging, personalized menus, call queuing and
conversation recording.
Talkie-Audio: delivers pre-recorded information in response to telephone
inquiries and can serve as a talking bulletin board.
Talkie-Conference: permits the user to schedule a conference call and then,
when the conference call is to occur, either calls the participants or permits
them to dial in, and provides the chairperson with various options during the
call.
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Talkie-Dial: places a telephone call, using a user-supplied list of
telephone numbers and delivers voice information with the capability of asking
questions, accepting answers and updating the system to reflect the answers.
Talkie-Fax: permits the user to program a facsimile into the system and
transmit it to a user-supplied list of numbers and permits users to transmit to
callers upon their request written information programmed into the system such
as directions, product information, price lists or news releases.
Talkie-Form: permits the user to set up a questionnaire and collect answers
to pre-recorded questions.
Talkie-Mail: permits the user to record, send, receive and retrieve voice
messages from personal mailboxes.
Talkie-Query: responds to callers' inquiries using information stored in
the system database.
Talkie-Trans: accepts orders, issues orders (including delivery
instructions) and faxes order confirmations.
Users of the Talkie interactive voice response system can also customize
the foregoing applications to create new applications using Talkie-Gen, which is
an application generator that uses a simple programming language.
In addition to the applications listed above, users may also purchase any
of the following off-the-shelf applications:
Talkie-Dating: permits the user to supply a dating service that will permit
the user's customers to place and browse through personal ads, register for
service and record and listen to messages.
Talkie-Follow-Me: permits the user to supply a telephone tracking service
that enables the user's customers to obtain a single telephone number that will
continually forward incoming calls to a user-defined series of telephone numbers
(such as work, cellular, home, pager and voice-mail).
Talkie-Wake-Up/Reminder: permits the user to supply a wake-up or reminder
service that will call a user-supplied number with a user-supplied message at a
specified time.
All of the Talkie interactive voice response applications operate in up to
nine languages.
Info Systems also provides customers with industry-specific and customized
applications of its interactive voice response technology. For example, Info
Systems has developed a product called Talkie AutoCom for use by automobile
dealers. See "Automotive Sales Division--Operating Strategy."
The Talkie interactive voice response software package is sold by the
Company through Info Systems, its wholly-owned Canadian subsidiary.
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Talkie-Globe, the trademark for, and the name used by the Company to
describe, its third telecommunications product, is a software-based integrated
call-back, debit-card and long-distance reselling system and includes all of the
Talkie interactive voice response software prograMs. Typically, international
callers based in countries where the telephone system is a state-owned monopoly
must pay high per-minute rates fixed by the state-owned company. One method of
securing a lower rate is the "call-back" system offered by Info Systems'
Talkie-Globe. Using Talkie-Globe, the foreign caller first places a telephone
call from the foreign country to the United States or Canadian telephone number
where the Talkie-Globe system is located and hangs up without the call being
connected so that no charge is assessed for the call. Talkie-Globe recognizes
the telephone number from which the foreign call was placed and then places a
call to that telephone number from the location in the United States or Canada
where the Talkie-Globe system is located to the foreign caller and provides the
foreign caller with a dial tone. The foreign caller then places a telephone call
through the United States or Canada to the desired destination. The foreign
caller thus pays for two calls: (i) the call back from the Talkie-Globe system
located in the United States or Canada to the caller in the foreign market and
(ii) the call that the caller places through the United States or Canada to the
desired destination. The sum of the costs of the two calls placed from the
Talkie-Globe system located in the United States or Canada will be lower than
the cost of a single call placed directly from the applicable foreign market to
the desired destination. The Talkie-Globe system also has a debit card feature,
which permits a caller to purchase a stated value of calling time, and debits
that value as the caller uses the prepaid calling time.
Talkie-Globe is sold by the Company through Info Systems, its wholly-owned
Canadian subsidiary.
Business Control Software
The Company's business control software is an interconnected series of
accounting and business management software applications that includes the
following systems: general ledger, accounts receivable, accounts payable, sales
order, purchase order, inventory control, bills of materials, job costing and
production control. The business control software can assist users, among other
things, to define market trends, analyze sales force effectiveness, determine
the profitability of a job, department or company, or determine a geographical
sales spread. One of the software's principal features is its ability to process
information in multiple currencies. For example, a Japanese distributor
transacting business in France and Italy can use the software to maintain data
relating to sales, purchases and costs in French francs and Italian lira and to
generate reports in Japanese yen (or in several multiple currencies
simultaneously) while automatically posting currency exchange rates. In
addition, the business control software is a multi-lingual system of software
applications that permits multiple users, each selecting a different language,
to access simultaneously a common database.
Marketing and Sales
Through June 30, 1997, the Company has sold 18 Talkie Power Web Line
Machines to six master agents. The aggregate amount of gross revenues resulting
from these sales is $4,308,093, which accounts for approximately 72.9% of the
Company's total revenues since its inception. The Company's profit margin on
sales of the Talkie Power Web Line Machines since its inception is 12.1%. Each
master agent is required to purchase a minimum annual volume of machines. The
minimum purchase requirement is ten machines or machines having an aggregate
sales price of $1.8 million, whichever is less. "Master agents" are smaller
companies wishing to enter the international telephone time resale market
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without incurring the high cost of purchasing, installing and maintaining
traditional telephone switching equipment. Although the master agents purchase
the machines, the purchase terms require that the machines be located at the
Company's premises and that all maintenance be performed by the Company (as
described below). An added benefit to master agents of housing the machines at
the Company's premises is that a Bell Atlantic Switch is located there and the
physical connection between the machines and such switch is short, as a result
of which the Company pays a relatively inexpensive charge (a component of which
is based upon the length of the connection from such switch) to connect to such
switch and experiences no connection delays resulting from the length of the
connection.
The Company's strategy with respect to the Talkie Power Web Line Machine
is threefold. First, it intends to sell additional machines through its existing
master agents as they expand their businesses by providing telephone service to
additional foreign markets. Second, as demand for the machines increases, it
intends to add additional master agents and/or replace any existing master
agents who are not complying with their master agent agreements and to enter
into strategic partnerships with such new and replacement master agents that
will permit the Company to share in the revenue generated by the master agents'
sale of telephone time. Third, it intends continually to adapt advancing
computer and telecommunications technology to improve and customize the
performance of the machines.
The Company installs, maintains and services all Talkie Power Web Line
Machines at the Company's offices in Kew Gardens, New York, where the machines
are housed. For these services, the Company receives both a fixed fee and a
volume-based fee. To date, billing arrangements have been informal, and the cost
to each master agent has been calculated by determining the aggregate
maintenance and service costs for all the machines, adding a percentage markup
and charging each master agent its ratable portion based upon the number of
machines it has purchased. The Company also customizes the performance of the
machines for the respective master agents and for use in particular countries,
for which it receives a fee that is negotiated by the Company and the applicable
master agent based upon the complexity of the customization. As noted above, all
master agents are required by contract with the Company to locate their
purchased Talkie Power Web Line Machines at the Company's principal office and
to have all required installation, service and maintenance performed by the
Company. In addition to the services it provides with respect to the Talkie
Power Web Line Machines, the Company also provides services for the various
other Talkie products and for the Business Control Software, if requested by the
users.
The Company typically sells its interactive voice response software
programs to entrepreneurs who wish to operate a telephone-based service business
with low overhead and fixed costs. The typical interactive voice response
software package requires only a personal computer and voice card for use and
costs $715. Each of the off-the-shelf applications costs an additional $795. The
Company intends to focus its efforts with respect to its Talkie interactive
voice response software programs on the market for industry-specific and
customized applications in which it generally realizes higher profit margins. As
the Company targets a given industry, it expects to hire sales personnel
familiar with that industry and to attend trade shows to market its product. In
addition, the Company intends to expand sales of its interactive voice response
system into Europe and South America.
The Company typically sells four to five of its Talkie-Globe systems per
month to entrepreneurs who wish to provide a telephone business with low
overhead and fixed costs and to small foreign telephone companies. Users of
Talkie-Globe purchase international calling time from long-distance telephone
companies such as MCI Communications Corp. and resell such time at a mark-up.
The typical Talkie-Globe system consists of three personal computers,
proprietary software and a voice card and costs approximately $25,000.
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The Company realized gross revenues of $537,655 during 1996, and $480,538
during the six months ending on June 30, 1997, from the sale of its Talkie
interactive voice response software programs and of Talkie-Globe (excluding
intercompany sales), which constituted approximately 15.7% and 19.4% of the
Company's gross revenues for such year and period, respectively. The Company's
profit margin on sales of its Talkie interactive voice response software
programs was approximately 9.8% for 1996 and approximately 32.6% for the six
months ending on June 30, 1997.
The Company advertises its Talkie interactive voice response software
programs and Talkie-Globe in telephone and telecommunications industry trade
publications. In addition, Info Systems attends telephone and telecommunications
industry trade shows, which has resulted in reviews of these products in trade
publications.
The Company is not currently allocating resources to market its Business
Control Software, but performs software service contracts and provides annual
program updates to the program's users.
Research and Development
The Company's wholly-owned subsidiary Computer Business Sciences (Israel)
engages in research and development (i) to improve its existing
telecommunications software, and to adapt the software to changing personal
computer environments, (ii) to expand the software to new uses and (iii) to
develop new software, products and applications. Computer Business Sciences
(Israel) is headed by Dr. Zvi Barak, who was responsible for the development of
the Talkie technology and related Talkie products and of the business control
software.
The Company spent no money on research and development in 1995 with
respect to its Computer Telephony and Telecommunications division and estimates
that it spent approximately $332,000 on research and development in 1996 with
respect to such division. The Company estimates that approximately one-half of
such amount has been borne directly or indirectly by customers of such division.
Intellectual Property
The Company has registered the name "Talkie" as a trade-mark in Canada.
The Company has filed applications with the United States Patent and Trademark
Office to register the names "Talkie" and "Talkie-Globe" and "BCS Software" as
trademarks in the United States. As an additional method of protecting its
proprietary technology, the Company requires that all of the Talkie Power Web
Line Machines that it sells remain at the Company's offices in Kew Gardens, New
York and that all installation, service and maintenance of the machines be
performed solely by the Company. The Company also relies on trade secret
protection, confidentiality agreements and other laws to protect its technology,
but believes that these rights may not necessarily prevent third parties from
developing or using similar or related technology to compete against the
Computer Telephony and Telecommunications division's products.
Competition
The Company knows of no person or company that offers a product that is a
feature-for-feature competitor to the Talkie Power Web Line Machine. While other
companies manufacture and sell traditional telephone switching equipment, such
equipment is expensive to purchase and maintain as compared to the Talkie Power
Web Line Machine. Traditional switching equipment therefore is not a viable
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alternative for the typical purchasers of the Talkie Power Web Line Machine, who
are generally smaller telephone companies wishing to enter the international
telephone time resale market and who cannot afford the high cost of purchasing,
installing and maintaining traditional telephone switching equipment. Moreover,
the proprietary nature of the Talkie Power Web Line Machine's software program
provides the Company a significant head start over a potential competitor who
wishes to develop a competing product.
Associates competes with other providers of international telephone
service. The market for international telephone service is highly competitive.
In additional to the major service providers such as AT&T, MCI and Sprint, there
are numerous smaller service providers as well as resellers, who do not own and
operate equipment but purchase telephone time from service providers at a
discount and resell that time to the public. The Company believes that a primary
competitive factor in the industry is pricing. Because Associates uses the
Talkie Power Web Line Machine, which is less costly to purchase and maintain
than traditional switching equipment, Associates is able to offer telephone
calling time at lower rates than competitors whose rate structure must account
for the higher cost of such traditional switching equipment. In addition,
because the Talkie Power Web Line Machine is able to process both data as well
as voice, Associates is able to offer Internet access, which relatively few of
its competitors offer. However Associates and the other master agents may face
increasing competition as a result of deregulation in foreign countries, which
could result in competition from other service providers with large, established
customer bases and close ties to governmental authorities in their home
countries and decreased prices for direct-dialed international calls. Master
agents' customers may no longer be willing to use the master agents' services,
which would adversely affect the Company's ability to sell the Talkie Power Web
Line Machine and also reduce the Company's income from its participation in
Associates.
The Company's Talkie interactive voice response software programs compete
with products sold by approximately two dozen entities in North America,
including AT&T, Northern Telecom and others. However, in the more limited market
for industry-specific and custom interactive voice response applications, the
Company knows of only one direct competitor. The Company's Talkie-Globe system
competes with telephone call-back products sold by approximately 6 other
entities. Based upon 1996 sales, the Company believes that Talkie-Globe is the
market leader in the telephone call-back industry.
As a result of its reliance on the Company's proprietary software rather
than hardware components to operate, the purchase price and maintenance costs of
the Company's Talkie interactive voice response software programs and
Talkie-Globe are believed to be generally lower than those of competing
products. In addition, because software is easier to alter than hardware
components, the Company is able to customize its products or modify its products
to incorporate changing technology more quickly and at a lower cost than its
competitors.
Notwithstanding the Company's competitive advantages however, many of the
producers of products competitive with the Company's, and companies wishing to
enter the market in which the Company's products compete, have well established
reputations, customer relationships and marketing and distribution networks.
Many also have greater financial, technical, manufacturing, management and
research and development resources than those of the Company, may be more
successful than the Company in manufacturing and marketing their products and
may be able to use their greater resources and to leverage existing
relationships to obtain a competitive advantage over the Company.
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Leasing Division
In October 1996, the Company acquired all of the issued and outstanding
shares of stock of Major Fleet & Leasing Corp. ("Major Fleet"). Major Fleet has
historically provided lease financing solely for motor vehicles. The Company
intends to expand the operations of Major Fleet to provide lease financing to
purchasers of the Talkie Power Web Line Machine. The sellers of the Major Fleet
shares, Bruce Bendell and Harold Bendell, have retained the right to recapture
these shares under certain circumstances. See "Description of
Securities--Preferred Stock."
Major Fleet typically arranges for sale or lease to its customers of new
or used vehicles of all makes and models. Major Fleet will purchase the desired
vehicle from an automobile dealer and either resell it to its customer for a
markup over its cost, or lease the vehicle to the customer and provide the
related lease financing. If a customer of Major Fleet wants to purchase or lease
a new vehicle that is available from one of Major Auto's dealerships, in almost
all cases, Major Fleet will acquire the vehicle from Major Auto and then resell
or lease it to its customer. Major Fleet estimates that it acquires
approximately 50% of the vehicles it sells and leases from Major Auto.
In most instances, Major Fleet will broker vehicle finance contracts for,
or assign its leases to, third parties instead of directly financing vehicle
sales or leases. This minimizes the credit risk to which Major Auto is exposed.
In these instances, Major Fleet typically receives a finance fee or commission
from the third party who provides the financing. In certain instances, Major
Fleet directly finances the lease of a vehicle. When Major Fleet provides lease
financing, it bears the credit risk that its customers will default in the
payment of the lease installments. In order to minimize its risk of loss, Major
Fleet carefully evaluates the credit of its lease customers. It also requires
that its lease customers have adequate collision and liability insurance on the
leased vehicle and that Major Fleet be named as loss payee and additional
insured on the customer's collision and liability insurance policies. Major
Fleet does not finance the purchase of the vehicles, so if a customer desires
purchase financing, the customer will need to obtain financing from a third
party, however, as discussed above, Major Fleet will broker financing contracts.
Plastics and Utility Products Division
The Company, through its subsidiary Premo-Plast, Inc. ("Premo-Plast"),
presently the only company in its Plastics and Utility Products division, is
currently conducting research and development with respect to two products
lines: (i) a line of spa and bath fixtures for use in whirlpool baths, spas,
tubs and swimming pools and (ii) an armored conduit system for use by utility
companies.
Spa Fixtures
Premo-Plast has been engaged in research and development related to a line
of fixtures to be placed through the walls of water containers such as spa tubs.
To date, the Company has focused its research on fixtures such as the jets used
to introduce water mixed with air bubbles into a whirlpool bath, spa or tub and
has designed and developed prototypes of such fixtures.
The construction of a whirlpool bath, spa or tub is typically a large
thin-walled shell (most often fiberglass-coated plastic), through which protrude
a number of fixtures such as air and water jets. Inserting these fixtures
requires two workers. First, the "inside" worker drills a pilot hole where the
fixture is to be inserted. Then, the "outside" worker drills a much larger hole
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to clear the mounting thread on the fixture, and at the same time smoothes an
area on the rough outside wall of the spa around the hole in order to allow a
tight seal to the washer that will surround the hole when the fixture is
installed. Next, the inside worker places a sealing washer on the shaft of the
fixture and inserts the shaft through the drilled hole. The outside worker
places a second washer on the outside end of the fixture and applies silicone
sealant (or, in some cases, applies silicone sealant without a second washer),
and adds a retaining nut to secure the assembly. The inside worker must steady
the fixture from the inside of the spa, while the outside worker tightens the
nut from the outside. The degree of tightness is critical, as too much
tightening will squeeze out the silicone sealant, and too little will result in
a weak seal. Either condition will cause a leak. Once the nut is tightened, the
fixture must set in place, undisturbed, for several hours to permit the silicone
to harden and form a water-tight seal.
The Company has acquired the rights to a proprietary plumbing fixture
installation method and has designed and developed a line of fixtures that
enable installation in a whirlpool bath, spa or tub in significantly less time
than is normally required to install such fixtures. One person, working from
inside the whirlpool bath, spa or tub, drills the pilot hole and final-size
hole. Next, a rubber grommet is placed in the hole. A grommet resembles a small
donut with flanges around the inside and outside; the flanges on the grommet are
placed into contact with the drilled hole. Next, the worker presses the fixture
into the grommeted hole, which can be done from either the inside or the outside
of the whirlpool bath, spa or tub. The barrel of the fixture expands the sides
of the grommet against the sides of the hole, sealing the hole (by contrast to
the traditional fixture, the seal takes place at the sides, not the front and
back, so no sealant is required). The barrel is ribbed to prevent the fixture
from being pushed back inside the whirlpool bath, spa or tub. Because there are
relatively few steps involved in the Company's installation method, there is
less risk of error. In addition, because no silicone sealant is used, the
fixture does not need to set in place, which permits immediate use and minimizes
the risk of leaks.
The Company acquired the technology for the proprietary fixture
installation method in December 1996 through its acquisition from John Pinciaro
of all of his right, title and interest therein and a United States patent
pending related thereto. The Company and Mr. Pinciaro will participate jointly
in exploitation of the fixture installation method. The Company will form a new
subsidiary, whose shares will be owned 80% by the Company's existing subsidiary
Premo-Plast and 20% by Mr. Pinciaro.
Status of Development of Spa Fixtures
Since its acquisition of the technology relating to the fixture
installation method, the Company has further developed that technology and has
designed and produced working prototypes of the various fixtures for use in
connection with such method. The Company is currently testing the prototype
fixtures and installation method and expects to finalize its design drawings and
to begin ordering the equipment necessary to manufacture the component parts of
the fixtures by the end of the third quarter or early in the fourth quarter of
1997. The Company's management expects that, given availability of the funding,
the Company will commence commercial sales of its spa and bath fixtures by the
second quarter of 1998.
Company's Strategy with respect to Spa and Bath
Fixture Technology
According to industry data, approximately 250,000 whirlpool baths and spas
are sold annually. Management of Premo-Plast estimates that each whirlpool bath
requires approximately 35-45 fixtures and that approximately 600,000 tubs are
sold annually and each tub requires approximately 4-6 fixtures.
The Company's strategy with respect to the fixture technology is to
establish its proprietary installation method and its fixtures as the industry
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standard for whirlpool baths, spas and tubs. The company has a three-fold plan
to implement this strategy upon its commencement of commercial production of the
fixtures. First, the Company intends to expand its workforce by hiring
employees, most of whom have already been identified and approached by the
Company, experienced in the areas of design, production and marketing.
Second, the Company intends initially to sell its fixtures and license the
right to use its installation method to several designated regional
manufacturers and producers of whirlpool baths, spas and tubs. All of these
manufacturers and producers were consulted by John Pinciaro, from whom the
Company acquired the rights to the proprietary fixture installation method and
presently an employee of Premo-Plast, prior to and during the period of
development of such method. All of these manufacturers and producers expressed
in writing their interest in the installation method and a desire to utilize
that method and the Company's fixtures once commercially available, although
none are required to do so. Among these producers is ThermoSpas, Inc., a company
wholly-owned and operated by Mr. Pinciaro.
Third, the Company intends to publicize its installation method and
fixtures generally to the whirlpool bath, spa and tub industry and to attend
major trade shows.
Armored Conduit
In November 1995, shortly after its formation, the Company acquired from
Progressive Polymerics, Inc. two United States patents and a Canadian patent
application covering an armored conduit product. The primary application for the
armored conduit is protection for underground electrical distribution lines. In
many major cities electric utility companies deliver service via lines that are
run through underground conduits. The underground conduit method of distribution
is becoming increasingly common in other cities as the preferred method for
delivering electric service to newly constructed subdivisions, replacing
above-ground lines mounted on wood or metal poles.
Originally, underground conduit was made from hollow creosoted wood or
transite pipe made from a mixture of asbestos and concrete. Currently, conduit
is typically made from either (i) PVC duct encased in concrete, (ii) cement or
concrete tubing or (iii) fiberglass tubing. Each of these types of conduit has
distinct disadvantages. PVC duct becomes brittle and inflexible in cold weather,
and melts and bonds to the electric wire if there is excess heat from an
overload condition. Cement or concrete cracks easily during transportation and
installation and, unless installed at the proper depth, as a result of
above-ground vibrations and stresses. If there is a problem with a portion of a
conduit system (whether PVC duct, cement, concrete or fiberglass) once
installed, the entire system must be removed and replaced.
The product covered by the Company's armored conduit patents is assembled
underground from pre-fabricated pieces that are typically two to four feet in
length. Each piece consists of a pre-formed plastic shell that is filled with
pourable cement. Each pre-formed shell has a rectangular cross-section, with a
linear ribbed exterior and tubular interior. Each end of the pre-formed shell
has an extension that can be coupled to the next section in end-to-end fashion.
Potentially, the design of the armored conduit offers several advantages
over other types of conduit. First, because the armored conduit system is
assembled from pre-fabricated pieces, if there is a problem with a single piece,
only that piece, rather than the entire conduit system, needs to be replaced.
The problem piece will be replaced with a replacement piece that has a top and
bottom half. The bottom half of the replacement piece will first be put in place
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and coupled to the pieces on either side. The wires will then be placed in the
bottom half of the interior tube. The top half of the replacement piece will
then cover the wires and be coupled to the pieces on either side. Second, the
linear ribs on the exterior of the pre-formed shells increase the structural
strength of the shells and permit them to be interlocked when stacked for
storage or shipment, thereby reducing the risk of damage. Third, the outer
plastic shell of the armored conduit system protects it from water, chemicals
and other elements to which underground conduit systems are exposed. As a result
of all of these advantages, the armored conduit system can be expected to be
more durable than existing types of conduit.
The Company has been engaged in limited research and development
activities relating to the armored conduit, and expects, given the availability
of funding, to pursue further research and development.
Research and Development
Research and development with respect to the armored conduit technology
and the spa and bath fixture technology is conducted by the Company through its
wholly-owned subsidiary Premo-Plast.
The Company spent no money on research and development in 1995 with
respect to its Plastics and Utility Products division and estimates that it
spent approximately $3,650 on research and development in 1996 with respect to
such division. Such division currently has no customers.
Intellectual Property
The Company owns two United States patents, issued in June 1993 and May
1994, respectively, relating to the armored conduit technology and also owns a
Canadian patent application relating to such technology. In addition, the
Company has filed an application in July 1996 for a United States patent
relating to the spa and bath fixtures and related installation method. The
Company is presently pursuing such application with the United States Patent and
Trademark Office. The Company has also filed an application relating to the spa
and bath fixtures and related installation method under the Patent Cooperation
Treaty designating Australia, Canada, China, Japan and the European Patent
Office (up to 18 countries) as recipient countries. Under such treaty, the
Company will have the option to individually file separate applications in the
designated countries at an appropriate future date In addition, the Company
relies on confidentiality agreements and other laws to protect its technology.
The Company believes that it may be possible for third parties to develop
technology that provides the same features as the Company's plastic products
without infringing the Company's rights or making use of its proprietary
technology.
Competition
If the Company's armored conduit is developed into a commercially viable
product, it will compete with PVC duct encased in concrete, cement or concrete
tubing and metal tubing, all of which are established methods. The Company's spa
and bath fixtures will compete with existing types of such fixture. Because the
Company's fixtures and installation method permit single-person assembly rather
than the two-person assembly required by existing products and installation
methods, the Company believes that use of its fixtures will result in
significantly reduced assembly time and costs.
Many of the producers and distributors of products competitive with the
Company's spa and bath fixtures and armored conduit may have well established
reputations, customer relationships and marketing and distribution networks.
They may also have greater financial, technical, manufacturing, management and
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research and development resources than those of the Company. While the Company
believes that its spa and bath fixtures and installation method and its armored
conduit will have significant advantages over existing products, the Company's
competitors may be more successful than the Company in manufacturing and
marketing their products and may be able to leverage existing relationships to
obtain a competitive advantage over the Company.
Planned Acquistion
The Company and its wholly-owned subsidiary Major Acquisition Corp. have
entered into a merger agreement with Major Auto and its sole stockholder, Bruce
Bendell. Bruce Bendell owns all of the issued and outstanding shares of common
stock of Major Chevrolet, Inc. ("Major Chevrolet") and Major Subaru, Inc.
("Major Subaru") and 50% of the issued and outstanding shares of common stock of
Major Dodge, Inc. ("Major Dodge") and Major Chrysler, Plymouth, Jeep Eagle, Inc.
("Major Chrysler, Plymouth, Jeep Eagle"), which, collectively, operate five
franchised automobile dealerships. Pursuant to such merger agreement, Bruce
Bendell will contribute to Major Auto all of his shares of common stock of Major
Chevrolet, Major Subaru, Major Dodge and Major Chrysler, Plymouth, Jeep Eagle,
and Major Acquisition Corp. will then acquire from Bruce Bendell all of the
issued and outstanding shares of common stock of Major Auto in exchange for
shares of a new class of the Company's preferred stock. Harold Bendell, Bruce
Bendell's brother, owns the remaining 50% of the issued and outstanding shares
of common stock of Major Dodge and Major Chrysler, Plymouth, Jeep Eagle. Major
Acquisition Corp. will purchase Harold Bendell's shares for $4 million in cash
under a stock purchase agreement. The preferred stock to be issued to Bruce
Bendell will be called the "1997-MAJOR Series of Convertible Preferred Stock."
It will have voting rights and will be convertible into the Company's Common
Stock. The number of shares of Common Stock into which the new class will be
convertible is the greater of (i) 1.8 million shares and (ii) that number of
shares that have a market value of $6,000,000. The market value per share for
this purpose will be the mean between the closing bid and ask prices for the
Common Stock over the 20 trading days immediately prior to the date of issuance
of the preferred stock. The foregoing acquisitions from Major Auto and Harold
Bendell are collectively referred to herein as the "Major Auto Acquisition."
The merger agreement allocates the value of the consideration payable to
Bruce Bendell as follows: (i) 61% to Major Chevrolet; (ii) 5.8% to Major Subaru;
(iii) 16.6% to Major Dodge; and (iv) 16.6% to Major Chrysler, Plymouth, Jeep
Eagle. The stock purchase agreement allocates the value of the consideration
payable to Harold Bendell 50% to each of Major Dodge and Major Chrysler,
Plymouth, Jeep Eagle.
The closing of the Major Auto Acquisition is presently scheduled for
November 29, 1997. The parties have the right to agree to an earlier date. A
condition to the closing is that all manufacturers' approvals have been
obtained. If this condition remains unsatisfied on the scheduled closing date,
the merger agreement and the stock purchase agreement provide three
alternatives: (i) the Company can elect not to close, (ii) the parties may agree
to extend the closing date to provide additional time to obtain such approvals
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or (iii) the Company may elect to consummate the Major Auto Acquisition with
Major Auto owning, and Harold Bendell selling, only those dealerships with
respect to which the manufacturers' approvals have been obtained. In the latter
case, the number of shares issuable to Bruce Bendell and the monetary amount
payable to Harold Bendell will be reduced in accordance with the value
allocations described above, but the parties are obligated to use their best
efforts during the 90-day period following the closing to obtain the missing
approvals so that the non-included dealership subsidiaries can be transferred to
the Company at a later time.
Unless the context otherwise all requires, references herein to the
business of Major Auto shall be deemed to include reference to the businesses of
Major Chevrolet, Major Subaru, Major Dodge and Major Chrysler, Plymouth, Jeep
Eagle.
Automotive Sales Division - General
Major Auto, which the Company proposes to acquire, is one of the
largest-volume automobile retailers in New York City. Major Auto owns and
operates the following five franchised automobile dealerships in the New York
metropolitan area: (i) Chevrolet; (ii) Chrysler and Plymouth; (iii) Dodge; (iv)
Jeep and Eagle; and (v) Subaru. Major Auto also distributes General Motors
vehicles in Russia. Through its dealerships, Major Auto sells new and used
automobiles, provides related financing, sells replacement parts and provides
vehicle repair service and maintenance.
Major Auto's President, Bruce Bendell, has approximately 25 years
experience in the automobile industry. He began selling and leasing used
vehicles in 1972 and has owned and managed franchised automobile dealerships
since he acquired Major Auto's Chevrolet dealership in 1985. Under Mr. Bendell's
leadership, Major Auto has expanded from a single-franchise dealership having
approximately $10 million in revenues and 25 employees in 1985 to a
five-franchise dealership group having approximately $144 million in revenues
and 170 employees in 1996.
Industry Background
Automobile manufacturers distribute their new vehicles through franchised
dealerships. According to industry data from the National Association of
Automobile Dealers ("NADA data"), in 1996, total dollar sales, consisting of the
sale of all new and used vehicles and service and parts, of all franchised
new-car dealerships increased 8% to a record high of $491 billion. Franchised
dealerships located in the New York State had an average total dollar sales of
$17.2 million.
According to NADA data, on average, new vehicle sales constitute 58.1% of
a franchised dealerships' total sales. Unit sales of new vehicles rose 3% in
1996 to a total of 15.1 million units sold. At an average retail selling price
of $21,750 per vehicle, new vehicle sales totaled approximately $328 billion in
1996. From 1992 to 1996 sales revenue from the sale of new vehicles increased
approximately 48.4%. The annual net profit of the typical United States
franchised dealer's new vehicle department is estimated to be $37,626.
According to NADA data, on average, used vehicle sales constitute 29.5% of
a franchised dealerships' total sales. In 1996 franchised new vehicle dealers
sold 11.8 million retail used vehicles. At an average selling price of $11,600
per vehicle, used vehicle sales totaled in approximately $170 billion in 1996.
From 1992 to 1996 sales revenue from the retail sale of used vehicles increased
approximately 77.2% and the combined sales revenue from the retail and wholesale
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sale of used vehicles increased approximately 71.6%. The annual net profit of
the typical United States franchised dealer's used vehicle department is
estimated be $101,889.
The NADA data just cited shows that for all United States dealerships, the
net profit from sales of used vehicles is approximately three times the net
profit from the sales of new vehicles.
The following table sets forth information regarding vehicle sales by
franchised new vehicle dealerships for the periods indicated:
UNITED STATES FRANCHISED DEALER'S VEHICLES SALES
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Units in millions; dollars in billions)
New vehicle unit sales 12.9 13.9 15.1 14.8 15.1
New vehicle sales revenue (1) $221.0 $253.0 $290.0 $303.0 $328.0
Used vehicle unit sales -- retail 9.3 9.9 10.9 11.4 11.9
Used vehicle retail sales revenue $77.3 $90.4 $111.0 $126.0 $137.0
Used vehicle unit sales -- wholesale 5.8 6.4 6.8 7.0 7.2
Used vehicle wholesale sales revenue$22.0 $24.0 $27.7 $30.3 $33.4
(1) Sales revenue figures were generated by multiplying the total unit sales by
the average retail selling price of the vehicle for the given year.
Source: National Association of Auto Dealers Data 1997
In addition to revenues from the sale of new and used vehicles, automotive
dealerships derive revenues from repair and warranty work, sale of replacement
parts, financing and credit insurance and the sale of extended warranty
coverage. According to NADA data, revenues resulting from service and parts
sales increased approximately 8% in 1996 for franchised dealerships, a portion
of which is accounted for by the increase in the amount of used vehicle
reconditioning. Revenue from parts and services constitutes, on average,
approximately 12.4% of a franchised dealerships total sales and generates an
annual net profit of $158,900.
Automotive dealerships' profits vary widely and depend in part upon the
effective management of inventory, marketing, quality control and responsiveness
to customers. According to NADA data, in 1996, total franchised dealership gross
profits were, on average, $2.7 million with an average net profit of $323,801.
To reduce the costs of owning a new vehicle automobile manufacturers in
recent years have offered favorable short-term lease terms. This has attracted
consumers to short-term leases and has resulted in consumers returning to the
new vehicle market sooner than if they had purchased a new vehicle with
longer-term financing. In addition, this has provided new car dealerships with a
continuing source of off-lease vehicles and has also enabled dealerships' parts
and service departments to provide repair service under factory warranty for the
lease term.
The automotive dealership industry has been consolidating in recent years.
Until the 1960s, automotive dealerships were typically owned and operated by a
single individual who controlled a single franchise. However, because of
competitive and economic pressures in the 1970s and 1980s, particularly the oil
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embargo of 1973 and the subsequent loss of market share experienced by United
States automobile manufacturers to imported vehicles, many automotive
dealerships were forced to close or to sell to better-capitalized dealer groups.
Continued competitive and economic pressure faced by automotive dealers and an
easing of restrictions imposed by automobile manufacturers on multiple-dealer
ownership have led to further consolidation. According to NADA data, the number
of franchised dealerships has declined from 36,336 in 1960 to 22,700 at the
beginning of 1997.
Major Auto believes that franchised automobile dealerships will continue
to consolidate because the capital required to operate dealerships continues to
increase, many dealership owners are approaching retirement age and certain
automobile manufacturers want to consolidate their franchised dealerships to
strengthen their brand identity. For example, General Motors Corporation is
implementing a strategy to reduce its franchised dealerships by 1,500 from 8,400
by the year 2000. Major Auto believes that dealership groups that have
significant equity capital and experience in acquiring and running dealerships
will have an opportunity to acquire additional franchised dealerships.
Operating Strategy
Major Auto's operating strategy is to increase customer satisfaction and
loyalty and to increase operating efficiencies. Key elements of Major Auto's
operating strategy are as follows:
Use of Technology. Major Auto believes that it has achieved a competitive
advantage through the use of technology including the Company's telephone
technology. Major Auto was one of the first dealership groups to provide its
customers with a 1-800 telephone number and price quotations via facsimile.
During the past several years, Major Auto has sold approximately 25-50 vehicles
per month from leads provided by electronic media, such as Bloomberg (since
1994) and the Internet (since 1995). Major Auto presently enables its customers
to obtain credit approvals over the telephone via its proprietary
Talkie-AutoCom, a customized application of the Company's "Talkie" telephone
interactive voice response system, that operates 24 hours per day, seven days
per week and in nine different languages. Major Auto is presently expanding its
use of Talkie-AutoCom to permit customers to obtain answers to the most
frequently asked questions, obtain price quotes, place orders, schedule and
confirm service appointments, obtain directions to the dealership and request
faxes of product and price information. Major Auto is also intending to expand
its use of Talkie AutoCom to call its customers automatically to notify them of
required maintenance, sales and promotions and to solicit customer satisfaction
information. In addition, Major Auto intends to explore new ways to use
technology to provide better customer service. Major Auto has developed and is
in the process of beta-testing an Internet-based marketing system called
MajorAuction.Com to provide electronically, visual and textual information
regarding vehicles sold by Major Auto and enable customers to (i) purchase a new
or used vehicle on-line, (ii) participate in a real-time auction for a specific
vehicle, and (iii) arrange for the related financing. See "Computer Telephony
and Telecommunications Division--Talkie."
Leverage the Sale of International Calling Time. Major Auto will offer
customers pre-paid international telephone calling time in connection with the
purchase or lease of its automobiles. To accomplish this, Major Auto will
utilize the Company's proprietary Talkie technology, which is able to provide
users with international calling time at sharply discounted rates. Because Major
Auto will purchase telephone time from the Company or one its master agents at
below-market rates, the cost to Major Auto of implementing this program will be
minimal compared with the savings to be realized by its customers. Major Auto's
primary market, the New York metropolitan area, is home to many diverse ethnic
groups who have family and friends whom they call frequently in their native
countries. By offering pre-paid international telephone calling time with the
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purchase or lease of a vehicle, Major Auto believes that it can add value to its
customers and thereby increase customer satisfaction and loyalty. See "Computer
Telephony and Telecommunications Division--Talkie."
Focus on Used Vehicle Sales. A key element of Major Auto's operating
strategy is to focus on the sale of used vehicles. In 1996, approximately 20
million used cars were sold by dealers, double the number of such sales in 1980.
Sales of used vehicles are generally more profitable than sales of new vehicles.
The New York metropolitan area is one of the largest markets for used car sales
in the United States and Major Auto sells more used cars in the New York
metropolitan area than any other automobile dealership or dealership group.
Major Auto strives to attract customers and enhance buyer satisfaction by
offering multiple financing and leasing options and competitive warranty
products on every used vehicle it sells. Major Auto believes that a well-managed
used vehicle operation affords it an opportunity to (i) generate additional
customer traffic from a wide variety of prospective buyers, (ii) increase new
and used vehicle sales by aggressively pursuing customer trade-ins, (iii)
generate incremental revenues from customers financially unable or unwilling to
purchase a new vehicle and (iv) increase ancillary product sales to improve
overall profitability. To maintain a broad selection of high-quality used
vehicles and to meet local demand preferences, Major Auto acquires used vehicles
from trade-ins and a variety of sources nationwide, including direct purchases
from individuals and fleets, and manufacturers' and independent auctions. Major
Auto believes that the price at which it acquires used vehicles is the most
significant factor contributing to the profitability of its used vehicle
operations. Major Auto believes that, because of the large volume of used
vehicles that it sells each month and the over 25 years of experience in the
used vehicle business of its President, Bruce Bendell, it is able to identify
quality used vehicles, assess their value and purchase them for a favorable
price.
Emphasize Sales of Higher Margin Products and Services. Major Auto
generates substantial incremental revenue and achieves increased profitability
through the sale of certain ancillary products and services such as financing,
extended service contracts and vehicle maintenance. Major Auto provides its
employees with special training and compensates them, in part, with commissions
based on their sales of such products and services. Major Auto believes that
these ancillary products and services enhance the value of purchased or leased
vehicles and increase customer satisfaction.
Provide a Broad Range of Products and Services. Major Auto offers a broad
range of products and services, including a wide range of new and used cars and
light trucks, vehicle financing, replacement parts and service. At its four
locations, Major Auto offers, collectively, seven makes of new vehicles,
including Chevrolet, Chrysler, Plymouth, Dodge, Jeep, Eagle and Subaru. In
addition, Major Auto sells a wide variety of used vehicles at a wide range of
prices. Major Auto believes that offering numerous makes and models of vehicles,
both new and used, appeals to a wide variety of customers, minimizes dependence
on any one automobile manufacture and reduces its exposure to supply problems
and product cycles.
Operate Multiple Dealerships in Target Market. Major Auto intends to
become the leading automotive dealer in its target market by operating multiple
dealerships in that market. To accomplish this, Major Auto intends to acquire
new franchises in its existing market and to expand its existing franchises to
new markets. This enables Major Auto to achieve economies of scale in
advertising, inventory management, management information systems and corporate
overhead.
Target Sales to Ethnic Groups. Because the New York metropolitan area,
Major Auto's primary market, is ethnically diverse, Major Auto targets its
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selling efforts to a broad range of ethnic groups. In addition to offering
pre-paid international telephone calling time, Major Auto employs a
multi-lingual sales force and intends to expand its electronic media to
accommodate multiple languages.
Employ Professional Management Techniques. Major Auto employs professional
management techniques in all aspects of its operations, including information
technology, employee training, profit-based compensation and cash management.
Each of Major Auto's four dealership locations, its centralized used vehicle
operation, and its two service and parts operations is managed by a trained and
experienced general manager who is primarily responsible for decisions relating
to inventory, advertising, pricing and personnel. Major Auto compensates its
general managers based, in part, on the profitability of the operations they
control rather than on sales volume. Major Auto's senior management meets weekly
with its general managers and utilizes computer-based management information
systems to monitor each dealership's sales, profitability and inventory on a
daily basis and to identify areas requiring improvement. Major Auto believes
that the application of its professional management techniques provides it with
a competitive advantage over other dealerships and dealership groups and enables
it to increase its profitability.
Growth Strategy
Major Auto intends to expand its business by acquiring additional
dealerships and improving their performance and profitability by implementing
its operating strategy. As part of its growth strategy, Major Auto intends to
focus its efforts on dealerships or dealer groups that, among other criteria,
possess either the sole franchise of a major automobile manufacturer or a
significant share of new vehicle sales in each targeted market and that it
believes are underperforming. In evaluating potential acquisition candidates,
Major Auto will also consider the dealership's or dealer group's profitability,
customer base, reputation with customers, strength of management and location
(e.g., along a major thoroughfare or interstate highway), and the possibility
that Major Auto will be able to acquire additional franchises in that market to
achieve larger market share. Major Auto believes that the most attractive
acquisition candidates can be found in the New York metropolitan area, but Major
Auto may consider acquisitions in other markets. Major Auto's financing of such
acquisitions may involve spending cash, incurring debt or issuing equity
securities, which could have a dilutive effect on the then outstanding capital
stock of the Company.
Upon completing an acquisition, Major Auto intends to implement its
operating strategy, which includes selling more new and used vehicles,
increasing finance revenues, enhancing employee training, lowering purchasing
costs for used car inventories, supplies and outside vendor expenses. Major Auto
also intends to install its management information system in acquired
dealerships as soon as possible after the acquisition, which will allow Major
Auto's senior management to carefully monitor each aspect of the dealership's
operations and performance. Whenever possible, Major Auto intends to implement
its strategies and operation procedures prior to the closing of an acquisition
to enable it to accelerate the implementation of its operating strategy after
closing. See "Operating Strategy."
Major Auto believes that its management team has considerable experience
in evaluating potential acquisition candidates, determining whether a particular
dealership can be successfully integrated into Major Auto's existing operations
and implementing its operating strategy to improve their performance and
profitability following the acquisition. For example, Bruce Bendell, Major
Auto's President, acquired a Nissan dealership in Oyster Bay, New York in
January 1997. The Nissan dealership is not owned or operated by Major Auto, but
by Mr. Bendell individually. Upon Mr. Bendell's acquisition of the Nissan
dealership, it was selling 90 new and 20 used vehicles per month and was not
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generating any profits from such sales. Under Mr. Bendell's leadership, the
dealership has expanded its sales to over 200 new and used vehicles per month.
Major Auto also believes that an increasing number of acquisition opportunities
will become available to it. After the consummation of the Major Auto
Acquisition, the Company and Mr. Bendell intend to engage in good faith
negotiations towards the Company's acquisition of Oyster Bay Nissan. There can
be no assurance that the Company and Mr. Bendell will agree on acceptable terms.
Dealership Operations
Major Auto owns and operates five automobile dealerships at four locations
in Long Island City, New York. Major Auto conducts its parts and service
business and its used vehicle business from three additional locations in Long
Island City. Major Auto offers the following seven makes of new vehicles:
Chevrolet, Chrysler, Plymouth, Dodge, Jeep, Eagle and Subaru. Each location is
run by a separate general manager who is responsible for overseeing all aspects
of the business conducted at that location. Each of the parts and service
locations has two general managers, one for parts and one for service. Each
general manager meets with Major Auto's senior management, including Bruce and
Harold Bendell, on a weekly basis.
Following the acquisition of Major Auto by the Company, Bruce and Harold
Bendell will continue to be responsible for senior-level management of the
dealerships. The Bendell brothers and the Company expect that this prospective
continuity of senior management will facilitate obtaining the manufacturers'
consents to the transfer of the dealerships to the Company. The Bendell
brothers' management control will be accomplished through (i) their ownership of
100 shares of the Company's 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred
Stock which carries voting rights allowing them to elect a majority of the Board
of Directors of Major Auto, and through (ii) a related management agreement. See
"Description of Securities--Preferred Stock--1997A-MAJOR AUTOMOTIVE GROUP Series
of Preferred Stock" and "Certain Relationships and Related Transactions" below.
Should either of the Bendell brothers cease managing the dealerships, the
management agreement provides that ownership of his 1997A-MAJOR AUTOMOTIVE GROUP
Series of Preferred Stock shares and his management rights under the management
agreement will be automatically transferred to the other, and should both
brothers cease managing the dealerships for any reason, the shares and
management rights will be automatically transferred to a successor manager
designated in a successor addendum to each dealership agreement or, failing such
designation, to a successor manager designated by the Company (subject to
approval by the applicable manufacturers).
New Vehicle Sales. Major Auto sells the complete product line of cars,
sport utility vehicles, minivans and light trucks manufactured by Chevrolet,
Chrysler, Plymouth, Dodge, Jeep, Eagle and Subaru. In 1996, Major Auto's
dealerships sold 5,062 new vehicles generating total sales of approximately
$109,100,000, which constituted approximately 76% of Major Auto's total
revenues. Major Auto's gross profit margin on new vehicle sales in 1996 was
approximately 7.3% as compared with the industry average for 1996 of 6.4%. The
relative percentages of Major Auto's new vehicle sales among makes of vehicles
in 1996 was as follows:
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1996 Percentage of
Manufacturer New Vehicle Sales
Chevrolet 51%
Chrysler, Plymouth, Jeep and Eagle 19%
Dodge 25%
Subaru 5%
The following table sets forth, for the periods shown, information with
respect to Major Auto's new vehicle sales:
NEW VEHICLE SALES
(dollars in thousands)
1994 1995 1996
---- ---- ----
Unit sales................ 5,185 4,375 5,062
Sales revenue............. $96,300 $90,000 $109,000
Gross Profit.............. $ 7,200 $7,200 $ 8,000
Gross Profit Margin....... 7.5% 8.0% 7.3%
Major Auto purchases substantially all of its new vehicle inventory
directly from the respective manufacturers who allocate new vehicles to
dealerships based upon the amount of vehicles sold by the dealership and the
dealership's market area. As required by law, Major Auto posts the
manufacturer's suggested retail price on all new vehicles, but the final sales
price of a new vehicle is typically determined by negotiation between the
dealership and the purchaser.
In addition to its dealership operations, Major Auto has a distributorship
agreement with General Motors Corporation ("General Motors") pursuant to which
Major Auto distributes in Russia new vehicles manufactured by General Motors.
Major Auto has realized revenues of approximately $300,000, $2,890,000 and
$9,400,000 during its 1994, 1995 and 1996 fiscal years, respectively, from its
distribution of General Motors vehicles in Russia. Major Auto's gross profits
from such sales were approximately $17,000, $178,000 and $572,000, for its 1994,
1995 and 1996 fiscal years, respectively. Under its distributorship arrangement,
Major Auto accepts orders from General Motors' automobile dealers in Russia for
both standard and custom General Motors vehicles. Major Auto generally receives
a deposit on the purchase price of the vehicle from the Russian dealer and
releases the vehicle to the dealer upon full payment of the balance of the
wholesale purchase price plus a percentage of the dealer's profit on the sale.
Major Auto intends to expand its distributorship operation in the future to
include the sale of used vehicles.
Approximately 30% of Major Auto's unit sales of new vehicles are fleet
sales, which are generally sales to commercial customers that register ten or
more vehicles in a given year, and include taxi cab companies, police
departments and small businesses. Major Auto believes that its fleet sales, and
its service of fleet vehicles, protect it from some of the fluctuations in the
retail automobile buying market, provide a source of off-fleet vehicles for its
used vehicle operations and enhance its reputation and customer satisfaction.
Fleet sales are generally awarded to a dealership on the basis of a blind
competitive bidding process.
Used Vehicle Sales. Major Auto offers a wide variety of makes and models
of used vehicles for sale. In 1996, Major Auto sold 2,231 used vehicles
generating total sales of approximately $22,840,000, which constituted
approximately 16% of Major Auto's total revenues. Major Auto's gross profit
margin on used vehicle sales in 1996 was approximately 14.4% as compared with
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the industry average for 1996 of 11%. Major Auto is the largest seller of used
vehicles (based on unit sales and sales revenue) in the New York metropolitan
area.
Major Auto has consolidated its used vehicle operations for its various
dealerships at a single site. Major Auto acquires the used vehicles it sells
through customer trade-ins, at "closed" auctions which may be attended by only
new vehicle dealers and which offer off-lease, rental and fleet vehicles, and at
"open" auctions which offer repossessed vehicles and vehicles being sold by
other dealers.
Major Auto believes that the market for used vehicles is driven by the
escalating purchase price of new vehicles and the increase in the quality and
selection of used vehicles primarily due to an increase in the number of popular
cars coming off short-term leases. The following table sets forth, for the
periods shown, information with respect to Major Auto's used vehicle sales:
USED VEHICLE SALES
(dollars in thousands)
1994 1995 1996
---- ---- ----
Unit sales................ 2,050 2,145 2,231
Sales revenue............. $12,670 $17,520 $22,840
Gross Profit.............. $2,330 $2,730 $3,300
Gross Profit Margin....... 18.4% 15.6% 14.4%
Parts and Service. Major Auto provides parts and service primarily for the
makes of new vehicles that it sells, but also services other makes of vehicles.
In 1996, Major Auto's parts and service operations generated total revenues of
approximately $12,150,000, which constituted approximately 8% of Major Auto's
total revenues at a gross profit margin of approximately 26.9%.
The increased use of electronics and computers in vehicles has made it
difficult for independent repair shops to retain the expertise to perform major
or technical repairs. In addition, because motor vehicles are increasingly more
complex and there are longer warranty periods, Major Auto believes that repair
work will increasingly be performed at dealerships, which have the sophisticated
equipment and skilled personnel necessary to perform the repairs.
Major Auto considers its parts and service department to be an integral
part of its customer service efforts and a valuable opportunity to strengthen
customer relations and deepen customer loyalty. Major Auto attempts to notify
owners of vehicles purchased at its dealerships when their vehicles are due for
periodic service, thereby encouraging preventative maintenance rather than
post-breakdown repairs.
Major Auto's parts and service business provides a stable, recurring
revenue stream to its dealerships. In addition, Major Auto believes that, to a
limited extent, these revenues are countercyclical to new vehicle sales, since
vehicle owners may repair their existing vehicles rather than purchasing new
vehicles. Major Auto believes that this helps mitigate the effects of a downturn
in the new-vehicle sales cycle.
Major Auto does not operate a body shop, but instead contracts with third
parties for body repair work.
The following table sets forth, for the periods shown, information with
respect to Major Auto's sales of parts and services:
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SALES OF PARTS AND SERVICES
(dollars in thousands)
1994 1995 1996
---- ---- ----
Sales revenue............. $10,990 $11,070 $12,150
Gross Profit.............. $3,400 $3,450 $3,270
Gross Profit Margin....... 30.9% 31.2% 26.9%
Vehicle Financing. Major Auto provides a wide variety of financing and
leasing alternatives for its customers. Major Auto believes that its customers'
ability to obtain financing at its dealerships significantly enhances Major
Auto's ability to sell new and used vehicles. Major Auto believes that its
ability to provide its customers with a variety of financing options provides it
with a competitive advantage over many of its competitors, particularly smaller
competitors that do not have sufficient sales volumes to attract the diversity
of financing sources available to Major Auto.
In most instances, Major Auto assigns its vehicle finance contracts and
leases to third parties, instead of directly financing vehicle sales or leases,
which minimizes the credit risk to which Major Auto is exposed. Major Auto
typically receives a finance fee or commission from the third party who provides
the financing. In certain limited instances in which Major Auto determines that
its credit risk is manageable, estimated by Major Auto to be approximately 5% of
its vehicles sales and leases, Major Auto directly finances the purchase or
lease of a vehicle. In such instances, Major Auto will bear the credit risk that
the customer will default, but will have the right to repossess the vehicle upon
default. Major Auto maintains relationships with a wide variety of financing
sources, including commercial banks, automobile finance companies, other
financial institutions and the Company's subsidiary Major Fleet. Major Fleet
purchases less than 10% of Major Auto's leases, and none of Major Auto's finance
contracts.
Sales and Marketing
Major Auto believes that marketing and advertising are significant to its
operations. As is typical in its industry, Major Auto receives a subsidy for a
portion of its expenses from the automobile manufacturers with whom Major Auto
has franchise agreements. The automobile manufacturers also assist Major Auto to
develop its own advertising by providing it with market research.
Major Auto's marketing effort is conducted over most forms of media
including television, newspaper, direct mail, billboards and the Internet. Major
Auto's advertising seeks to promote its image as a reputable dealer offering
quality products at affordable prices and with attractive financing options.
Each of Major Auto's dealerships periodically offer price discounts or other
promotions to attract additional customers. The individual dealerships'
promotions are coordinated by Major Auto and, because Major Auto owns and
operates several dealerships in the New York City market, it realizes cost
savings through volume discounts and other media concessions.
Major Auto's operations have been enhanced by its ability to achieve
economies of scale with respect to its marketing and advertising. Nationwide,
the average cost of marketing and advertising per new vehicle sold in 1996 was
approximately $335. Notwithstanding that advertising costs in the New York
metropolitan area are generally higher than the national average, Major Auto's
cost of marketing and advertising per vehicle sold have consistently been less
than the national average. These lower costs result from the fact that Major
Auto (i) has favorable contracts with four major area daily newspapers, (ii)
advertises in lower-cost niche markets (such as local ethnic markets, employee
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purchase programs, and discount buying services) and (iii) utilizes telephonic
marketing and electronic marketing via services such as the Internet and
Bloomberg.
Relationships with Manufacturers
Each of Major Auto's dealerships operates under a separate franchise or
dealer agreement which governs the relationship between the dealership and the
relevant manufacturer. In general, each dealer agreement specifies the location
of the dealership for the sale of vehicles and for the performance of certain
approved services in the specified market area. The designation of such areas,
the allocation of such areas and the allocation of new vehicles among
dealerships is discretionary with the relevant manufacturer. Dealer agreements
do not generally provide a dealer with an exclusive franchise in the designated
market area. A dealer agreement generally requires that a dealer meet specified
standards regarding showrooms, the facilities and equipment for servicing
vehicles, the maintenance of inventories, the maintenance of minimum net working
capital, personnel training and other aspects of the dealer's business. The
dealer agreement also gives the relevant manufacturer the right to approve the
dealer's general manager and any material change in management or ownership of
the dealership. The dealer agreement provides the relevant manufacturer with the
right to terminate the dealer agreement under certain circumstances, such as (i)
a change in control of the dealership without the consent of the relevant
manufacturer, (ii) the impairment of the financial condition or reputation of
the dealership, (iii) the death, removal or withdrawal of the dealership's
general manager, (iii) the conviction of the dealership or the dealership's
general manager of certain crimes, (iv) the dealer's failure to adequately
operate the dealership or to maintain wholesale financing arrangements, (v) the
bankruptcy or insolvency of the dealership or (vi) the dealer's or dealership's
material breach of other provisions of the dealer agreement. Many of the
dealership agreements require the consent of the relevant manufacturer to the
dealer's acquisition of additional dealerships. In addition Major Auto's
dealership agreement with General Motors, with respect to its Chevrolet
dealership, gives General Motors a right of first refusal to purchase such
dealership, which means that whenever Major Auto proposes to sell its Chevrolet
dealership, it must first offer General Motors the opportunity to purchase that
dealership.
New York law, and many other states' laws, limit manufacturers' control
over dealerships. In addition to various other restrictions imposed upon
manufacturers, New York law provides that notwithstanding the terms of the
dealer agreement with the relevant manufacturer, the manufacturer may not (i)
except in certain limited instances, terminate or refuse to renew a dealership
agreement except for due cause and with prior written notice, (ii) attempt to
prevent a change in the dealer's capital structure or the means by which the
dealer finances dealership operations or (iii) unreasonably withhold its consent
to a dealer's transfer of its interest in the dealership or fail to give notice
to the dealer detailing its reasons for not consenting.
Major Auto has solicited the consents of the relevant manufacturers to the
Major Auto Acquisition and the change of control of the respective dealerships
to result therefrom. To date, Major Auto has received the consent of Subaru
Distributors Corp., with respect to the Subaru dealership, and is awaiting the
consents of General Motors, with respect to the Chevrolet dealership, and
Chrysler Corporation, with respect to the Chrysler, Plymouth, Dodge, Jeep and
Eagle dealerships. Because General Motors did not respond to Major Auto's
request to transfer its Chevrolet dealership to the Company within the 60-day
period required by New York law, Major Auto instituted an action in the United
States District Court for the Southern District of New York to compel General
Motors to consent to such transfer. The court has granted General Motors'
request for additional information regarding the proposed transfer. General
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Motors has indicated in its request for such information its intention to reach
a prompt decision and has not indicated any intention to withhold its consent,
but there can be no assurance that General Motors will not withhold its consent.
Major Auto and the Company believe that they have supplied all of the requested
information and are now awaiting a decision from General Motors. See "Legal
Proceedings."
Competition
The market for new and used vehicle sales in the New York metropolitan
area is one of the most competitive in the nation. In the sale of new vehicles,
Major Auto competes with other new automobile dealers that operate in the New
York metropolitan area. Some competing dealerships offer some of the same makes
as Major Auto's dealerships and other competing dealerships offer other
manufacturer's vehicles. Some competing new vehicle dealers are local,
single-franchise dealerships, while others are multi-franchise dealership
groups. In the sale of used vehicles, Major Auto competes with other used
vehicle dealerships and with new vehicle dealerships which also sell used cars
that operate in the New York metropolitan area. In addition, Major Auto competes
with used car "superstores" that have inventories that are larger and more
varied than Major Auto's.
Major Auto believes that the principal competitive factors in vehicle
sales are the marketing campaigns conducted by automobile manufacturers, the
ability of dealerships to offer a wide selection of popular vehicles, pricing
(including manufacturers' rebates and other special offers), the location of
dealerships, the quality of customer service, warranties and customer preference
for particular makes of vehicles. Major Auto believes that its dealerships are
competitive in all of these areas.
In addition, Major Auto, due to the size and number of automobile
dealerships it owns and operates, is larger than the independent operators with
which it competes. Major Auto's size has historically permitted it to attract
experienced and professional sales and service personnel and has provided it the
resources to compete effectively. However, as Major Auto enters other markets,
it may face competitors that are larger and that have access to greater
resources.
Governmental Regulation
Automobile dealers and manufacturers are subject to various Federal and
state laws established to protect consumers, including the so-called "Lemon
Laws" which require a dealer or manufacturer to replace a new vehicle or accept
it for a full refund within a specified period of time, generally one year,
after the initial purchase if the vehicle does not conform to the manufacturer's
express warranties and the dealer or manufacturer, after a reasonable number of
attempts, is unable to correct or repair the defect. Federal laws require that
certain written disclosures be provided on new vehicles, including mileage and
pricing information. In addition, Major Auto's financing activities are subject
to certain statutes governing credit reporting and debt collection.
The imported automobiles purchased by Major Auto are subject to United
States custom duties and, in the ordinary course of its business, Major Auto may
from time to time be subject to claims for duties, penalties, liquidated damages
or other charges. Currently, United States customs duties are generally assessed
at 2.5% of the customs value of the automobiles imported, as classified pursuant
to the Harmonized Tariff Schedule of the United States.
As with automobile dealerships generally, and parts and service operations
in particular, Major Auto's business involves the use, handling and contracting
for recycling or disposal of hazardous or toxic substances or wastes, including
environmentally sensitive materials such as motor oil, waste motor oil and
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filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner,
batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels.
Accordingly, Major Auto is subject to Federal, state and local environmental
laws governing health, environmental quality, and remediation of contamination
at facilities it operates or to which it sends hazardous or toxic substances or
wastes for treatment, recycling or disposal. Major Auto believes that it is in
material compliance with all environmental laws and that such compliance will
not have a material adverse effect on its business, financial condition or
results of operations.
Item 2. Management's Discussion And Analysis
The following discussion of the operations, financial condition, liquidity
and capital resources of the Company and of Major Auto should be read in
conjunction with the Company's audited Consolidated Financial Statements and
related notes thereto, and with the Major Auto's audited Combined Financial
Statements and related notes thereto.
Overview
The Company
The Company is a holding company whose primary purpose is the
consolidation of the retail automotive industry and the acquisition and
development of synergistic technological businesses to enhance its ability to
sell automotive and related products. Through its planned acquisition of Major
Auto, the Company will become one of the largest-volume retailers in New York
City of new and used vehicles.
The Company was incorporated in November, 1995. Its first full year of
operations was 1996. This was a year of growth which resulted from its
acquisition of several companies and from their subsequent activities.
Presently, the Company has three divisions: (i) Computer Telephony and
Telecommunications; (ii) Leasing; and (iii) Plastics and Utility Products. The
proposed Major Auto Acquisition will add a fourth, Automotive Sales.
Through its Computer Telephony and Telecommunications division, the
Company provides a broad range of telecommunications services. Included in its
telecommunications product lines are (i) its proprietary software which enables
consumers to place long-distance telephone calls at discounted rates and (ii)
its variety of sophisticated interactive voice response applications. This
division also developed, manufactures, markets and sells a proprietary computer
software system that provides multi-lingual accounting and business management
applications.
The Company's Plastics and Utility Products division currently consists of
a development-stage company which was acquired in 1996. Its proprietary products
include a line of spa and bath fixtures for use in whirlpool baths, spas, tubs
and swimming pools and a light-weight, structurally strong, prefabricated
conduit for underground electrical cables. As this division's products are still
under development, no commercial sales have as yet been made.
The operations of the Company's Leasing division consist of providing
leases and other financing. Such activities are directed primarily toward the
automotive vehicle market and are to be expanded to the purchasers of the
Company's telecommunications hardware products.
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Major Auto
Major Auto is one of the largest-volume retailers in New York City of new
and used vehicles. It has the following five dealerships located in Queens, New
York: (i) Chevrolet; (ii) Chrysler and Plymouth; (iii) Dodge; (iv) Jeep and
Eagle; and (v) Subaru. Major Chevrolet was founded in 1957, and its President,
Bruce Bendell and brother, Harold Bendell, took control in 1985. Thereafter they
acquired additional dealerships and began operating Major Chevrolet and its
affiliates as the Major Automotive Group.
Major Auto offers a broad range of products and services through its
dealerships. In addition to the sale of new and used cars and light trucks,
Major Auto provides vehicle financing, insurance, replacement parts and service
at each of its dealerships.
Major Auto's management's philosophy is to increase customer traffic by
offering new and used vehicles and a variety of complementary products at each
of its locations. It believes that offering numerous vehicle brands appeals to a
variety of customers, minimizes its dependence on any one manufacturer and
reduces its exposure to supply problems and product cycles.
In addition, Major Auto has historically been a technological innovator in
its approach to selling cars. It has always been quick to understand and
implement new technology in order to enhance its relationships with customers.
Major Auto was one of the first dealerships to offer its customers a toll-free
number to call and to provide price quotes by facsimile. Similarly, it has been
a pioneer in using the World Wide Web to sell cars. Currently, Major Auto has
been using the Company's interactive voice response system (Talkie AutoCom) to
automatically allow customers to obtain and request information via the
telephone. Talkie AutoCom is currently being programmed for directions,
automated sales, product and order information and it will also be utilized to
maintain a list of parts on back order, and to schedule and confirm maintenance
appointments.
Major Auto has focused its efforts on increasing its market share in the
New York metropolitan area by: (i) generating customer loyalty by catering to
their specific needs for automotive products or services and (ii) increasing
vehicle sales volume by providing competitive sales prices. This has resulted in
significant volume increases in 1996.
Results of Operations -- Fiscal Year Ended December 31, 1996 and
Fiscal Year Ended December 31, 1995
The Company
Revenues. Inasmuch as 1996 was the first full year of operations for the
Company, all revenue increases resulted from the commencement of previously
planned activities and from companies acquired during that year. Revenues from
operating divisions are as follows:
Computer Telephony and Telecommunications $ 3,175,528
Leasing $ 258,947
Included in the Computer Telephony and Telecommunications division's sales
were $2,637,873 from the sale of hardware and $537,635 from the sale of
software.
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Cost of sales. Cost of sales, aggregating $965,792 for the year ended
December 31, 1996 includes the direct costs of materials, labor and overhead
included in the Company's products sold through its Computer Telephony and
Telecommunications division.
Gross profit. The year 1996 was the first full year of operations for the
Company's Computer Telephony and Telecommunications division. Gross profit for
that division for the year ended December 31, 1996 aggregated $2,209,736 or
70.0% of sales. The Company anticipates that, over time, annual sales will
increase and greater operating efficiencies will be achieved through experience,
training and economies of scale. Management believes that as a result, gross
profit for the Company's Computer Telephone and Telecommunications division will
increase in terms of both dollars and percentage of sales.
Selling, general and administrative expense. Selling, general and
administrative expenses, which amounted to $1,126,901 in 1996 ($2,042 in 1995),
include payroll and related expense attributable to senior management (although
Mr. Bendell, Chairman, and Mr. Cohen, Chief Executive Officer, President and
Treasurer of Company waived compensation from the Company in 1996), finance,
systems, sales, marketing and office administration, personnel, facilities costs
and general office expenses pertaining to these functions, as well as outside
professional fees. The increase in such expenses between 1996 and 1995, which
were $933,487 for the Computer Telephony and Telecommunications division and
$191,372 for the Leasing division are attributable to the commencement of
planned activities for the former and the acquisition in October 1996 of the
latter.
Interest expense. The increase in interest expense of $19,757 to $24,132 in
1996 from $4,375 in 1995 relates primarily to the debt used to finance the
vehicles and equipment leased by the Company's Leasing division which was
acquired in October 1996 and, to a lesser extent, to interest on debt due from
the acquisition of the Company's Computer Telephony and Telecommunications
division in April 1996.
Loss on joint venture. In March 1996, the Company's Computer Telephony and
Telecommunications division formed a joint venture (the "Nissko Joint Venture")
named Nissko Telecom, L.P., a limited partnership. The general partner of Nissko
Telecom, L.P. is one of the Company's master agents. The Company has a 45%
interest in the Nissko Joint Venture, whose purpose is to market and sell the
available telephone time generated by the Company's Talkie Power Web Line
Machines purchased by this master agent. Because 1996 was the start-up year, the
Nissko Joint Venture incurred expenses disproportionate to its revenue
generation and suffered from start-up inefficiencies. This resulted in a loss to
the Company of $32,410. Management of the Company expects that, with the initial
costs and start-up issues behind them, the Nissko Joint Venture will become
profitable for the Company.
Major Auto
Revenues. Combined total sales for all of the Major Auto dealerships in
1996 increased $26.0 million to $144 million or 22.0% from its 1995 sales of
$118 million. Total sales include new and used car sales, sales of parts and
accessories, automotive repairs and fees from finance and insurance sales.
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During 1996 Major Auto added its Subaru dealership to its combined
financial statements which accounted for approximately $5.6 million or 21.5% of
the total sales increase. The balance of the sales increase came from same store
sales which increased by approximately $20.4 million or 17.3%. The same store
sales increases for (i) Chevrolet, (ii) Dodge and (iii) Chrysler, Plymouth, Jeep
and Eagle ("CPJ/E") were $10.6 million, $4.1 million and $5.8 million,
respectively, representing 52%, 20% and 28%, respectively, of the total same
store sales increase. Individually, the same store sales increases represented
an approximate 15%, 20% and 23% increase over prior years sales for Chevrolet,
Dodge and CPJ/E, respectively.
Cost of Sales. Cost of sales includes the dealers' cost for new vehicles
(on the LIFO basis) and used vehicles (on the specific identification basis).
Cost of sales also includes the costs of parts and materials used in repairs, as
well as the related direct labor and direct overhead costs. Major Auto's cost of
sales and profitability are also affected by the allocations of new vehicles
which its dealerships receive from automakers. When Major Auto does not receive
allocations of new vehicles adequate to meet customer demand, it purchases
additional vehicles from other dealers at a premium to the manufacturers'
invoice, reducing the gross margin realized on the sales of such vehicles. In
addition, Major Auto follows a disciplined approach in selling vehicles to other
dealers and wholesalers when the vehicles have been in the Major Auto inventory
longer than the guidelines set by Major Auto. Such sales are frequently at or
below cost and, therefore, affect Major Auto's overall gross margin on vehicle
sales.
The cost of sales for all of the Major Auto dealerships, aggregating $129.4
million, increased by $24.6 million, or 24%, in 1996 over the comparable 1995
costs of $104.7 million. The combining of the Subaru dealership in 1996
accounted for $5.2 million or 21% of the increase. The balance of the increase
in cost of sales, $19.4 million, came from previously combined stores. The same
store cost of sales increase for Chevrolet, Dodge and CPJ/E were approximately
$10.1 million, $3.8 million and $5.5 million, representing 52%, 20% and 28% of
the total same store cost of sales increase, respectively. Individually, the
same store cost of sales increases were 16%, 21% and 25% for Chevrolet, Dodge
and CPJ/E, respectively.
Gross profit. The resulting combined gross profit for all dealerships of
$14.7 million shows an increase of approximately $1.4 million, or 10.5%, in 1996
over the comparable 1995 amount of $13.3 million. Excluding the almost $385,000
gross profit of the Subaru dealership, the combined same store gross profit
increased by approximately $1.008 million. The same store gross profit increases
generated by Chevrolet, Dodge and CPJ/E were approximately $502,000, $240,000
and $266,000, respectively, representing 50%, 24% and 26% of the same store
total increase. Individually, the same store gross profit increases were
approximately 6%, 11% and 11% for Chevrolet, Dodge and CPJ/E, respectively.
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<PAGE>
Gross profit as a percentage of sales for the combined group in 1996 was
10.21%, which represents a decrease of 1.07% from the combined gross profit
percentage of 11.28% in 1995. Excluding Subaru's gross profit, the same store
gross profit percentage for 1996 was 10.34%. On an individual dealership basis,
gross profits (and gross profit as a percentage of sales) for the Chevrolet,
Dodge and CPJ/E dealerships were $9.03 million (10.84%), $2.49 million (10.11%)
and $2.80 million (9.16%). These amounts represent increases of gross profit
amounts for the individual dealerships as shown in the preceding paragraph, but
decreases in gross profit percentages of .88%, .84% and 1.07% for the Chevrolet,
Dodge and CPJ/E operations, respectively.
According to the National Automobile Dealers Association, in 1996, the
average dealership's gross profit as a percentage of sales was 12.9%. The
lower-than-average margins shown by Major Auto in 1996 is reflective of three
primary factors: (i) the costs of doing business in New York City, especially
labor costs and operating expenses, are higher than most other places in the
country; (ii) New York City is among the most competitive areas; and (iii) Major
Auto's policy has been to lower sales prices to increase market share and to
convert as many vehicle purchases to leases in order to secure future profits on
renewals and used car purchases.
Operating expenses. Operating expenses consist of all selling, general and
administrative expenses incurred in operating automotive dealerships. This
encompasses all executive, sales and administrative salaries and commissions as
well as advertising, facilities costs and outside professional fees. The
executive compensation includes incentives and discretionary bonus paid to the
owners, significant portions of which were paid in lieu of S Corporation
distributions to enable stockholders to meet their income tax obligations.
Operating expenses increased by $1.7 million or 15.7% in 1996 to $12.7
million from the 1995 amount of $11.0 million. Of this increase, approximately
$400,000, representing about 23% of the increase, related to the inclusion of
the Subaru dealership in 1996. On a same store basis, operating expenses
increased by $1.3 million in 1996 to $12.3 million or 12.0%. As a percentage of
revenue, on a same store basis, operating costs declined from 9.3% to 8.6%. The
decrease of operating costs as a percentage of revenue between 1995 and 1996 is
reflective of management's efforts to maintain appropriate overhead levels while
increasing market share by emphasizing greater sales volume at lower prices.
Interest expense. Interest expense relates primarily to amounts paid on
floor plan borrowings, i.e., the monies borrowed to finance new car inventories.
Interest expense declined by almost $225,000 or 11.8% to approximately $1.68
million in 1996 from $1.90 million in 1995. This reduction is primarily
attributable to management's policy of reducing inventory levels, thereby
minimizing the need for financing such assets.
Income before income taxes. The decline in income before income taxes from
$517,000 in 1995 to almost $422,000 in 1996, a decrease of $95,000 or 18.5%, is
attributable to Major Auto's efforts to build market share while temporarily
sacrificing profit margins. Management carefully monitors profit margins as well
as market factors, industry developments, general economic conditions and
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interest rates. It believes that it has the ability to control Major Auto's rate
of growth and move profit margins to appropriate levels to adjust to changing
conditions. As such, management is confident that Major Auto's margins can be
restored to satisfactory levels.
A new centralized computer system for all dealerships was installed in
December 1996. This is expected to result in increased earnings before income
taxes by giving all managers access to and control of inventories and documents
and to eliminate duplicate labor costs.
As Major Auto grows through acquisitions and internally, it is anticipated
that economies and efficiencies of scale, the ability to order in economically
advantageous quantities, and leverage with suppliers through volume purchases
will result in reduced expenses. Additionally, executive compensation levels, as
discussed above (see "Operating expenses"), are expected to decrease as a result
of Major Auto's acquisition by the Company.
Income taxes. Major Auto has elected to be taxed as an S Corporation under
provisions of the Internal Revenue Code and New York State Franchise Tax Law.
The stockholders are required to report Major Auto's taxable income or loss on
their personal tax returns. Accordingly, such taxes are not reflected in Major
Auto's financial statements. The taxes included in the financial statements
relate to New York State and New York City. The former imposes a tax on the
difference between the state corporate rates and the state's individual rates
and the latter does not recognize S Corporation status.
Results of Operations -- Six-Month Period Ended June 30, 1997 and
Six-Month Period Ended June 30, 1996
The Company
Revenues. Revenue for the six-month period in 1997 increased by $1,851,560
to $2,477,656. Revenue for the comparable period in 1996 was $626,096. The
sources for such increase were:
Computer Telephony and Telecommunications $1,361,932
Leasing $ 489,628
The 1997 amounts reflect a full six months of operations for both
divisions, whereas in 1996 the Telecommunications division only began operations
during the second quarter and the Leasing division was not acquired until the
beginning of the fourth quarter.
Cost of sales. Cost of sales for the six months ended June 30, 1997, all of
which relates to the Computer Telephony and Telecommunications division, was
$426,779 compared with $249,183 in the 1996 period. This is an increase of
$177,596 or 71.3% and is reflective of six full months of operations in 1997
compared with operations which commenced in the second quarter of 1996.
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Gross profit. Gross profit for the Telecommunications division in the 1997
period was $1,561,249 which represented an increase of $1,184,336 over the prior
comparable period's gross profit of $376,913. Additionally, gross profit as a
percentage of the related revenue increased to 78.5% in the 1997 period over the
60.2% gross profit percentage in the comparable 1996 period. Both the dollar
increase and the gross profit percentage of revenues increases are reflective of
the significantly larger volume of sales and the concomitant reduction of costs
as a percentage of sales based on savings from economies of scale, volume
discounts and efficiencies.
Selling, general and administrative expense. Selling, general and
administrative expenses increased a total of $638,005 to $1,131,708 in 1997 from
$493,703 in 1996. Of this increase $273,429 relates to the Computer Telephony
and Telecommunications division and $364,576 is from the Leasing division. The
telecommunications increase represents a 55.4% increase to $493,703 incurred in
the first half in 1996 compared with $767,132 incurred in the first half on
1997. This increase is reflective of a full level of normal activity in 1997
compared with the start-up activities in 1996. The increase in selling, general
and administrative expense for the Leasing division in 1997 is the result of a
full six months of activity in this division which was not acquired until the
fourth quarter of 1996.
Interest expense. Interest expense was $73,724 for the six months ended
June 30, 1997 compared with $17,350 for the comparable period in 1996. The
increase of $56,374 relates primarily to the debt used to finance the vehicles
and equipment leased by the Company's leasing division during the current
period. There was no comparable amount in the prior period.
Income on joint venture. Income from the Nissko Joint Venture was $52,055
for the six months ended June 30, 1997. In the comparable prior period
operations of this joint venture had not yet commenced.
Major Auto
Revenues. Combined total sales for all of the Major Auto dealerships in the
six months ended June 30, 1997 increased $1.8 million to $72.0 million or 2.6%
from their comparable 1996 sales of $70.2 million.
During the 1997 period, Major Auto included its Subaru dealership in its
combined financial statements which accounted for approximately $4.0 million of
the total net sales increase. The same store sales resulted in a net decrease of
$2.2 million, with Chevrolet and Dodge decreasing by $2.6 million and $65,000,
respectively, partially offset by an increase from CPJ/E of $562,000.
Cost of sales. The cost of sales for all of the Major Auto dealerships, in
the period ended June 30, 1997, aggregating $63.8 million, increased $1.7
million, or 2.7%, over the comparable 1996 costs of $62.1 million. The combining
of the Subaru dealership in the 1997 period accounted for $3.7 million of the
net increase. The same store cost of sales increase (decrease) for Chevrolet,
Dodge and CPJ/E were approximately ($3.1 million), $166,000 and $868,000,
respectively.
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Gross profit. The resulting combined gross profit for all dealerships of
$8.2 million increased approximately $130,000, or 1.6%, in the 1997 period over
the comparable 1996 amount of $8.1 million. The inclusion of the $286,000 gross
profit of the Subaru dealership more than offset the same store gross profit
decrease of ($156,000). The same store gross profit increases (decreases)
generated by Chevrolet, Dodge and CPJ/E were approximately $495,000, ($231,000)
and ($421,000), respectively.
Gross profit as a percentage of sales for the combined group in the 1997
period was 11.44%, which represents a decrease of .11% from the combined gross
profit percentage of 11.55% in the comparable 1996 period. Excluding Subaru's
gross profit, the same store gross profit percentage for the six months ended
June 30, 1997 was 11.69%. On an individual dealership basis, gross profits (and
gross profit as a percentage of sales) for the Chevrolet, Dodge and CPJ/E
dealerships were $5.15 million (12.68%), $1.53 million (12.63%) and $1.28
million (8.34%). These amounts represent increases or (decreases) of gross
profit amounts for the individual dealerships as shown in the preceding
paragraph and increases (decreases) in gross profit as a percentage of sales of
1.90%, (1.82%) and (3.08%) for the Chevrolet, Dodge and CPJ/E operations,
respectively.
Operating expenses. Operating expenses increased by $568,000 or 9.0% in the
six months ended June 30,1997 to $6.9 million from the comparable 1996 amount of
$6.3 million. Of this increase, approximately $228,000, representing
approximately 40.1% of the increase, related to the inclusion of the Subaru
dealership in the 1997 period. On a same store basis, operating expenses
increased by a net $341,000 in the 1997 period to $6.7 million or 5.4%. As a
percentage of revenue, on a same store basis, operating costs increased from
9.0% to 9.8%.
Interest expense. Interest expense declined approximately a net $366,000 or
30.0% to approximately $855,000 for the six months ended June 30, 1997 from
$1.21 million in the comparable 1996 period. On a same store basis, the decline
in interest expense was approximately $389,000, or 32%, from the comparable
period the prior year.
Income before income taxes. The decrease in income before income taxes from
$630,000 in the six months ended June 30, 1996 to almost $567,000 in the 1997
period, represents a net decrease of ($63,000) or (10.0%). Excluding Subaru,
income before income taxes declined by ($128,000) or (20.3%) from the comparable
period in the prior year.
Liquidity and Capital Resources -- December 31, 1996
The Company
After its initial investor financing during the first quarter of 1996, the
Company's primary source of liquidity was its cash flow from operations. Net
cash provided by operating activities in 1996 was $137,442 on net income of
$675,967 (net of non-cash charges of $725,433), offset by changes in working
capital of $1,263,958. Such changes in working capital are principally
attributable to (i) increases, by the Leasing division, in net financing leases
of $1,612,675 and (ii) increases, by the Computer Telephony and
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<PAGE>
Telecommunications division, in inventories, amounting to $1,173,082. These
increases were offset, in part, by the increase in amounts due to affiliates of
$1,184,177.
Net cash used in investing activities in 1996 was $815,962 and related,
primarily, to the acquisition of the Company's Computer Telephony and
Telecommunications division.
Cash flow generated from financing activities in 1996 aggregated
$1,213,679. The net proceeds from the issuance of common stock and the exercise
of warrants accounted for $984,000 of this amount.
The Company, through its Leasing division, has arrangements with various
banks and automotive lenders to finance leased vehicles and equipment.
The Company believes that the funds generated from operations, together
with existing cash, available credit from banks and other lenders and the net
proceeds of this offering will be sufficient to finance its current operations,
planned expansion and internal growth for at least the next 24 months.
Major Auto
Major Auto's primary source of cash flow is from its operations. Cash from
operating activities in 1996 was $10.6 million compared with a net usage of cash
in operations of ($14.9 million) the prior year. This turnaround in cash
provided by operating activities is primarily attributable to the significant
reduction in inventories from the excessively high level of $31.6 million in
1995 to $25.3 million in 1996 and, to a lesser extent, to the reduction in trade
receivables of approximately $3 million and the increase in customer deposits of
approximately $1.1 million.
Cash flow from investing activities in 1996 was approximately $769,000 and
related primarily to the decrease in the amount of lease and rental vehicles.
Financing activities used approximately $11.7 million in 1996. This was
primarily the result of the reduction of floor plan notes by $11.4 million which
is directly attributable to the decrease in inventory levels.
Major Auto's working capital deficit as of December 31, 1996 was
approximately ($2.9 million) compared with approximately ($3.8 million) at the
end of 1995.
Major Auto's significant need for funding is for the acquisition of
inventory. Chrysler Credit Corp. has historically provided such funding and is
expected to continue as the primary source for all of the makes and models of
vehicles sold by Major Auto.
Major Auto believes that the cash generated from operations, together with
existing cash and the availability of floor planning and other credit
availability from its current lenders will be sufficient to fund its expected
short-term and long-term cash requirements. The shareholders of Major Auto have
entered into a merger agreement providing for Major to be acquired by the
Company.
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<PAGE>
Liquidity and Capital Resources -- June 30, 1997
The Company
The Company's primary source of liquidity for the six months ended June
30, 1997 was net cash flows of $510,973 from its financing activities. This
amount was comprised of proceeds from issuance of Common Stock and deposits for
exercise of warrants aggregating $695,750, offset by net long-term debt
reductions of $184,777.
Net cash provided by operating activities during this period was $932 on
net income of $508,738 (net of non-cash charges of $306,992), reduced by a net
decrease in working capital of $814,798. Such net decrease in working capital is
primarily attributable to (i) decrease in amounts due to affiliates of
$1,258,906 and (ii) increases in accounts receivable of $626,363, which were
primarily attributable to the Computer Telephony and Telecommunications division
as a result of increased sales by that division. Such increases were offset by
decreases in inventories amounting to $941,571, which were primarily
attributable to the Leasing division. These inventories consist of cars and
trucks which have come off lease and are being held for sale. The decrease
represents sales of such vehicles.
Net cash used in investing activities for the six months ended June 30,
1997 was $413,663 for the purchase of property and equipment, primarily cars and
trucks purchased for lease by the Leasing division.
The foregoing activities, i.e., financing, operating and investing,
resulted in a net cash increase of $98,242 for the six months ended June 30,
1997.
Major Auto
In the six months ended June 30, 1997, Major Auto's use of cash in its
operating activities was $6.4 million compared with a net increase of cash from
operations of $8.3 million for the comparable period in prior year. This
turnaround in cash provided by operating activities is primarily attributable to
the significant increase in inventories in the 1997 period.
Cash flow from investing activities in the six-month 1997 period was
approximately $2.5 million compared with a net usage of $1.3 million in the
comparable 1996 period. This resulted primarily from the increase in lease and
rental vehicles.
Financing activities generated approximately $5.1 million in cash in the
six months period ended June 30, 1997. This was primarily the result of the
increase in the amounts due on floor plan notes, $5.3 million of which is
directly attributable to the increase in inventory levels.
Major Auto's working capital deficit at June 30, 1997 was approximately
($10,000) compared with a working capital deficiency of almost ($5.4 million) at
June 30, 1996.
Employees
As of September 15, 1997 the Company and its subsidiaries had 29
employees, 28 of whom are full-time employees (205 employees, 202 of whom are
full-time, after giving pro forma effect to the Major Auto Acquisition). The
breakdown of employees among the Company and its subsidiaries, respectively is
as follows:
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<PAGE>
Name of Entity Number of Employees
Fidelity Holdings, Inc...... 2
Computer Business Sciences.. 16
Computer Business Sciences (Israel) 1
Reynard..................... 0
Info Systems................ 4
Major Fleet................. 4
Premo-Plast................. 2
Major Auto..................
Sales.................. 66
Service................ 55
Parts.................. 15
Administration......... 40
Item 3. Description Of Property
Neither the Company nor any of its subsidiaries owns any real estate or
plants. All of the operations of the Company and its subsidiaries are conducted
from locations leased from unaffiliated third parties.
The Company leases approximately 6,800 square feet on two floors in Kew
Gardens, New York. The lease for the floor that the Company currently uses for
executive offices and to house the Talkie Power Web Line Machines consists of
approximately 2,800 square feet and expires on March 31, 2001, but the Company
has the option to extend the lease for one additional five-year term. The
current annual rent under such lease is $69,448.50, but will be increased by
3.5% on a compounded and cumulative basis each lease year. If the Company elects
to extend such lease, the base rent for the extension period will be the greater
of the base rent on March 31, 2001 at the termination of the original lease
period or the then fair market rental of the premises.
The lease for the other floor in Kew Gardens, New York consists of
approximately 4,000 square feet and is occupied pursuant to the terms of a
sublease between Major Fleet, as lessee, and an unrelated third party, as
lessor. The lease expires on January 14, 2000 and contains no renewal
provisions. The current annual rent under such lease is $73,992. Pursuant to an
informal arrangement, (i) Computer Business Sciences pays such rent on behalf of
Major Fleet, (ii) a portion of the leased space is used by Computer Business
Sciences for additional office space and (iii) a portion of the leased space is
used by Associates to operate the customer service division of its reselling
operations.
The Company believes that its current facilities are suitable and adequate
for its current needs, but expects to require additional facilities to
accommodate its anticipated expansion.
Computer Business Sciences (Israel) leases from an unrelated third party
approximately 1,517 square feet of office space in Raanana, Israel. The lease
expires on September 1, 1999, but Computer Business Sciences (Israel) has an
option to renew the lease for an additional two-year period. The current annual
rent under such lease is $22,620 and will increase by 6% on July 1, 1999.
Info Systems leases from an unrelated third party approximately 1,415
square feet of office space in Downsview, North York, Canada. The lease expires
on October 31, 1998, but Info Systems has an option to renew the lease for an
additional two-year period. The current annual rent under such lease is $19,810
and is not subject to escalation.
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<PAGE>
Major Subaru subleases from an unrelated third party approximately 2,500
square feet of office and automobile showroom space in Woodside, New York. This
lease expires on January 31, 1998 and contains no renewal provisions. The
current annual rent under such lease is $69,457.56. Pursuant to an informal
arrangement between Major Subaru and Major Fleet, Major Fleet occupies the space
and pays the rental payments. Major Auto anticipates that it will renew such
lease before its expiration on generally similar terms.
In addition, upon the consummation of the Major Auto Acquisition, the
Company will have an interest in the following leases, under which Major Auto
presently pays aggregate annual rental payments of $620,000:
Major Chrysler, Plymouth, Jeep Eagle leases from an unrelated third party
approximately 17,400 square feet of office and automobile showroom and storage
space in Long Island City, New York. This lease expires on October 31, 2001, but
Major Chrysler, Plymouth, Jeep Eagle has the option to extend the lease for one
additional ten-year term.
Major Dodge leases from Bruce Bendell and Harold Bendell approximately
12,000 square feet of office and automobile showroom space in Long Island City,
New York. The lease expires on December 31, 1997 and contains no renewal
provisions. Major Auto anticipates that it will renew such lease before its
expiration on generally similar terms.
Major Auto leases from an unrelated third party approximately 2,000 square
feet of lot space in Astoria, New York adjacent to the main Major Dodge
showroom. This lease expired on June 30, 1997 at which time the annual rent was
$30,300. Major Auto is currently renegotiating such lease and remains in
possession of the premises under an oral month-to-month lease.
Major Chrysler, Plymouth, Jeep Eagle, Major Dodge and Major Subaru lease
from Bendell Realty L.L.C., a company wholly owned by Bruce Bendell and Harold
Bendell, approximately 40,000 square feet in Long Island City, New York which is
used as a service facility. The lease expires on December 31, 1997 and contains
no renewal provisions. Major Auto anticipates that it will renew such lease
before its expiration on generally similar terms.
Major Chevrolet leases from an unrelated third party two adjacent
automobile dealership facilities in Long Island City, New York, comprising
approximately 250,000 square feet. This lease expires on February 1, 2004, but
Major Chevrolet has the option to extend the lease for up to three additional
five-year terms.
Item 4. Security Ownership Of Certain Beneficial Owners And Management
The following tables sets forth information with respect to the beneficial
ownership of each class of the Company's securities as of September 23, 1997,
respectively, by (i) each director of the Company, (ii) each executive officer
of the Company, (iii) all directors and executive officers of the Company as a
group and (iv) each person known to the Company to own more than 5% of any class
of it securities:
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PRINCIPAL SHAREHOLDERS(1)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
1996-Major Series of 1997-Major Series of Automotive Group
Convertible Preferred Convertible Preferred Series of Preferred
Common Stock Stock(2) Stock Stock
Name and Address(3) Number Percent Number Percent Number Percent Number Percent
Bruce Bendell 2,850,010(4) 42.8% 125,000(5) 50% -- -- -- --
Doron Cohen 2,500,000(6) 39.3% -- -- -- -- -- --
Glenn H. Bank 1,400 * -- -- -- -- -- --
Yossi Koren 505,035(7) 7.4% -- -- -- -- -- --
Zvi Barak 250,000(8) 3.9% -- -- -- -- -- --
All directors and
executive
officers as a group 6,106,445(9) 85.3% -- -- -- -- -- --
Avraham Nissanian 507,079(10) 7.4% -- -- -- -- --
Chmuel Livian 503,508(11) 7.3% -- -- -- -- -- --
Harold Bendell 350,000(12) 5.2% 125,000(13) 50% -- -- -- --
</TABLE>
* Represents less than 1% of the outstanding shares of Common
Stock.
(1) Based on 6,354,700 shares of Common Stock outstanding on September 23, 1997.
(2) Based on 250,000 shares of the 1996-MAJOR Series of Convertible Preferred
Stock outstanding on September 23, 1997.
(3) The address for each beneficial owner is c/o Fidelity Holdings, Inc., 80-02
Kew Gardens Rd., Suite 5000, Kew
Gardens, NY 11415.
(4) Includes (i) 10 shares of Common Stock owned by Bruce Bendell's wife and the
following shares of Common Stock which Bruce Bendell has the right to
acquire within 60 days: (a) 250,000 shares of Common Stock, the minimum
number of shares of Common Stock into which the 125,000 shares of the
1996-MAJOR Series of Convertible Preferred Stock beneficially owned by Bruce
Bendell are convertible and (b) 50,000 shares of Common Stock which Bruce
Bendell has the right to acquire upon the exercise of warrants. Does not
reflect a proxy giving Mr. Bendell the sole right to vote an additional
500,000 shares of Common Stock issued pursuant to the MOU for a period of
two years. See "Description of Business--Computer Telephony and
Telecommunications Division--Talkie--Restructuring of Nissko Arrangements."
Does not reflect Mr. Cohen's agreement to give Bruce Bendell a proxy to vote
750,000 of Mr. Cohen's shares during the two-year period commencing on
October 14, 1997.
(5) All of such shares of the 1996-MAJOR Series of Convertible Preferred Stock
are held in an asset protection trust created under the law of Gibraltar.
Bruce Bendell is the principal beneficiary of such trust.
(6) Does not reflect Mr. Cohen's agreement to give Bruce Bendell a proxy to vote
750,000 of Mr. Cohen's shares during the two-year period commencing on
October 14, 1997.
(7) Includes (i) 1,350 shares of Common Stock owned by members of Mr. Koren's
immediate family, (ii) 3,508 shares of Common Stock representing one-third
of the 10,526 shares of Common Stock owned by Nissko Jewelry Trading, Inc.,
a company 33-1/3% owned by Mr. Koren, and (iii) 500,000 shares of Common
Stock representing one-third of the 1.5 million shares of Common Stock that
the Nissko Principals have the right to acquire within 60 days upon the
exercise of the Class A Warrants. Upon execution of the MOU, a deposit that
had previously been paid on behalf of Mr. Koren towards the full exercise
price of the Class A Warrants was converted to a partial exercise of the
Class A Warrants whereupon the Company issued 173,583 shares of Common Stock
to Mr. Koren. In addition, the MOU provides that upon execution of the
definitive documentation, Mr. Koren will receive (i) 257,500 shares of the
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Company's Common Stock, transfer of which will be restricted for two years
as described under "Description of Business--Computer Telephony and
Telecommunications Division--Talkie--Restructuring of Nissko Arrangements,"
and (ii) warrants to acquire up to 68,917 shares of Common Stock which will
be exercisable within 60 days. Such warrants represent a portion of the
unexercised balance of the Class A Warrants. See "Description of
Business--Computer Telephony and Telecommunications
Division--Talkie--Restructuring of Nissko Arrangements."
(8) Includes 125,000 shares of Common Stock owned by Mr. Barak's wife.
(9) Includes (i) 126,360 shares of Common Stock owned by immediate family
members of directors and executive officers as a group, (ii) 3,508 shares of
Common Stock representing one-third of the 10,526 shares of Common Stock
owned by Nissko Jewelry Trading, Inc., a company 33-1/3% owned by Mr. Koren,
and (iii) 800,000 shares of Common Stock that the directors and executive
officers as a group have the right to acquire within 60 days.
(10)Includes (i) 3,360 shares of Common Stock owned by members of Mr.
Nissanian's immediate family, (ii) 3,508 shares of Common Stock representing
one-third of the 10,526 shares of Common Stock owned by Nissko Jewelry
Trading, Inc., a company 33-1/3% owned by Mr. Nissanian, and (iii) 500,000
shares of Common Stock representing one-third of the 1.5 million shares of
Common Stock that the Nissko Principals have the right to acquire within 60
days upon the exercise of the Class A Warrants. Upon execution of the MOU, a
deposit that had previously been paid on behalf of Mr. Nissanian towards the
full exercise price of the Class A Warrants was converted to a partial
exercise of the Class A Warrants whereupon the Company issued 173,583 shares
of Common Stock to Mr. Nissanian. In addition, the MOU provides that upon
execution of the definitive documentation, Mr. Nissanian will receive (i)
257,500 shares of the Company's Common Stock, transfer of which will be
restricted for two years as described under "Description of
Business--Computer Telephony and Telecommunications
Division--Talkie--Restructuring of Nissko Arrangements," and (ii) warrants
to acquire up to 68,917 shares of Common Stock which will be exercisable
within 60 days. Such warrants represent a portion of the unexercised balance
of the Class A Warrants. See "Description of Business--Computer Telephony
and Telecommunications Division--Talkie--Restructuring of Nissko
Arrangements."
(11)Includes (i) 3,508 shares of Common Stock representing one-third of the
10,526 shares of Common Stock owned by Nissko Jewelry Trading, Inc., a
company 33-1/3% owned by Mr. Livian, and (ii) 500,000 shares of Common Stock
representing one-third of the 1.5 million shares of Common Stock that the
Nissko Principals have the right to acquire within 60 days upon the exercise
of the Class A Warrants. Upon execution of the MOU, a deposit that had
previously been paid on behalf of Mr. Livian towards the full exercise price
of the Class A Warrants was converted to a partial exercise of the Class A
Warrants whereupon the Company issued 173,584 shares of Common Stock to Mr.
Livian. In addition, the MOU provides that upon execution of the definitive
documentation, Mr. Livian will receive (i) 257,500 shares of the Company's
Common Stock, transfer of which will be restricted for two years as
described under "Description of Business--Computer Telephony and
Telecommunications Division--Talkie--Restructuring of Nissko Arrangements,"
and (ii) warrants to acquire up to 68,917 shares of Common Stock which will
be exercisable within 60 days. Such warrants represent a portion of the
unexercised balance of the Class A Warrants. See "Description of
Business--Computer Telephony and Telecommunications
Division--Talkie--Restructuring of Nissko Arrangements."
(12)Includes the following shares of Common Stock which Harold Bendell has the
right to acquire within 60 days: (i) 250,000 shares of Common Stock, the
minimum number of shares of Common Stock into which the 125,000 shares of
the 1996-MAJOR Series of Convertible Preferred Stock beneficially owned by
Harold Bendell are convertible and (ii) 50,000 shares of Common Stock which
Harold Bendell has the right to acquire upon the exercise of warrants.
(13)All of such shares of the 1996-MAJOR Series of Convertible Preferred Stock
are held in an asset protection trust created under the law of Gibraltar.
Harold Bendell is the principal beneficiary of such trust.
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Item 5. Directors, Executive Officers, Promoters And Control
Persons
The directors and executive officers of the Company are listed on the
following table. There are no other promoters or control persons:
Name Age Position, Term in Office
Bruce Bendell 43 Chairman of the Board,
President, Chief
Executive Officer,
Treasurer and a
Director
Doron Cohen 41 Director
Glenn H. Bank 46 Secretary
Yossi Koren 47 Director
The following is a brief description of the professional experience and
background of the directors and executive officers of the Company:
Bruce Bendell. Mr. Bendell has served as the Company's Chairman of the
Board since its incorporation in November 1995. Mr. Bendell has served as the
President and a director of Major Chevrolet and its affiliates since December
1985.
Doron Cohen. Mr. Cohen has served as the President, Chief Executive
Officer, Treasurer and a director of the Company since its incorporation in
November 1995. From 1991-1995, Mr. Cohen served as President and Chief Executive
Officer of Holtman Enterprises, a construction and interior design company.
Glenn H. Bank. Mr. Bank has served as the Secretary of the Company since
June 1997. Mr. Bank has been a practicing attorney since 1979. Mr. Bank is a
solo practitioner with an office in New York City.
Yossi Koren. Mr. Koren has served as a director of the Company since April
1996. Mr. Koren founded Nissko Jewelry Trading, Inc., a jewelry manufacturer
based in New York City, in 1983 and has served as its Chief Executive Officer
since that time.
The following persons, although not executive officers of the Company, are
regarded by management as key personnel:
Zvi Barak. Mr. Barak has served as the Director of Research and Development
of the Company's Computer Telephony and Telecommunications division since April,
1996. From 1992 to August 1996, Mr. Barak served as President of Info Systems.
Moise Benedid. Mr. Benedid has served as the President of the Company's
Canadian subsidiary Info Systems since August 1996. From November 1994 through
July 1996, Mr. Benedid served as Vice President in charge of marketing and
technical support for TelePower International, Inc., where he was responsible
for the sale in Canada of franchises based on the "Talkie" technology. From
December 1992 to November 1994, Mr. Benedid served as President of Powerpoint
Microsystems, Inc., and from August 1989 to December 1992, he served as
President of Computer Junction, a Toronto-based computer retail store.
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Michael S. Lukin. Mr. Lukin has served as the President of the Company's
subsidiary Computer Business Sciences (Israel) since October 1996. From January
1996 to October 1996, Mr. Lukin served as a securities broker for Weiner,
Abrahms and from 1990 to January 1996 he served as a securities broker for Kern
Suslow Securities.
John Pinciaro. Mr. Pinciaro serves as Vice-President of the Company's
subsidiary Premo-Plast since January 1, 1997 and will serve as the President of
the subsidiary of the Company to be formed to exploit the Company's spa fixture
technology. Mr. Pinciaro has served as the Chief Executive Officer of
ThermoSpas, Inc., a manufacturer and distributor of spas, since it inception in
1983.
Ronald K. Premo. Mr. Premo has served as the President of the Company's
subsidiary Premo-Plast since January 1997. In 1993, Mr. Premo founded and has
since operated R.K. Premo & Associates, a manufacturer's representative agency
for the plastics industry. From 1987 to 1993, Mr. Premo was a Manufacturer's
Representative for R.W. Mitscher, Inc.
Paul Vesel. Mr. Vesel has served as the Executive Vice President for Sales
& Marketing of the Company's subsidiary Computer Business Sciences since
November 1996. From May 1995 to November 1996, Mr. Vesel was employed by MTC
Netsource, a telecommunications company, where he was responsible for product
development and from 1993 to 1995, he served as Director of European Sales and
Marketing for ATC Distributing. From November to 1993, Mr. Vesel was a Managing
Partner of Focus International, an international trade and marketing consulting
company.
Item 6. Executive Compensation
Summary Compensation Table
The following table sets forth information for each of the Company's
fiscal years ended December 31, 1996 and 1995 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the fiscal
year ended December 31, 1996 and (ii) each other executive officer of the
Company whose total annual salary and bonus equaled or exceeded $100,000 in the
fiscal year ended December 31, 1996:
Annual Compensation
All Other
Name and Principal Position Year Salary($) Bonus($) Other($) Compensation($)
Doron Cohen 1996 200,000(1) -0- -0- -0-
President, Chief
Executive Officer and 1995 -0- -0- -0- -0-
Treasurer (since
November 7, 1995)
Bruce Bendell 1996 158,640(2) -0- -0- 162,500(3)
Chairman (since
November 7, 1995) 1995 -0- -0- -0- -0-
Zvi Barak 1996 105,000 -0- 23,000(4) -0-
Director of Research
and Development 1995 -0- -0- -0- -0-
(since April 18, 1996)
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(1) Mr. Cohen waived his salary from the Company for the fiscal year ended
December 31, 1996. This salary will not accrue. Mr. Cohen was paid a salary in
1996 of $50,000 from Computer Business Sciences.
(2) Mr. Bendell waived his consultant's fee from the Company for the fiscal
year ended December 31, 1996. This fee will not accrue. Mr. Bendell received
$8,640 as a management fee from Major Fleet for management services performed
during the fourth quarter of 1996
(3) Represents warrants to acquire 50,000 shares of Common Stock issued to
Mr. Bendell on October 2, 1996 as a signing bonus under a management agreement
with the Company to manage the operations of Major Fleet. These warrants are
valued based upon the difference between the exercise price of $1.25 per share
and the closing bid price on the Nasdaq-OTC Electronic Bulletin Board of $4.50
per share on the date of issuance.
(4) Includes $5,000 for life and disability insurance premiums and $18,000
annual automobile allowance.
Option Grants Table
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended December 31, 1996 to each of the
executive officer of the Company named in the Summary Compensation Table above:
Percent of Total
Number of Securities Options Granted
Underlying Options to Employees Exercise Price
Name Granted (#) in Fiscal Year Per Share Expiration Date
- ---- ----------- ----------- -------------- --------------
Doron Cohen -0- 0% N/A N/A
Bruce Bendell 50,000(1) 100% $1.25 (2)
Zvi Barak -0- 0% N/A N/A
(1) Represents warrants to acquire 50,000 shares of Common Stock issued to Mr.
Bendell on October 2, 1996 as a signing bonus under a management agreement
with the Company to manage the operations of Major Fleet.
(2) 6 months after the effective date of a registration statement registering
the shares of common stock underlying the warrant.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended December 31, 1996 by each of the
executive officers named in the Summary Compensation Table above and the value
of unexercised options held by such persons as of December 31, 1996:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Shares
Acquired on
Name Exercise (#) Value Realized Exercisable Unexercisable Exercisable Unexercisable
Doron Cohen N/A N/A N/A N/A N/A N/A
Bruce Bendell -0- -0- 50,000 -0- 162,500(1) N/A
Zvi Barak N/A N/A N/A N/A N/A N/A
</TABLE>
(1) Calculated based on the excess of the closing bid price of the Common Stock
on the Nasdaq-OTC Electronic Bulletin Board on December 31, 1996 over the
exercise price per share of Common Stock.
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Compensation of Directors
Directors of the Company are not compensated for their services. The
Company reimburses directors for their expenses of attending meetings of the
Board of Directors.
As of November 7, 1995, the Company's date of incorporation, the Company
entered into a Consulting Agreement with Bruce Bendell, its Chairman, pursuant
to which he serves as a business, management and financial consultant to the
Company for a period ending on December 31, 1998, subject to successive one-year
extensions at the option of the Company. Mr. Bendell receives an annual
consulting fee as determined by the Company's Board of Directors from time to
time, but not less than $150,000. The consulting fee is subject to a yearly
cost-of-living adjustment and may also be retroactively increased based upon the
Company's profits per outstanding share of Common Stock for the applicable year.
The available percentage increase in consulting fee as a result of profits
ranges from 5% for break-even results to 150% for profits exceeding $1.00 per
share. Mr. Bendell is also entitled to a bonus in such amounts and at such times
as determined by the Company's Board of Directors. In addition, the agreement
provides that Mr. Bendell is entitled to various fringe benefits and is entitled
to participate in any incentive, stock option, deferred compensation or pension
plans established by the Company's Board of Directors. Mr. Bendell has agreed
not to disclose confidential information relating to the Company and has agreed
not to compete with, or solicit employees or customers of, the Company during
specified periods following the breach or termination of his agreement to serve
as a consultant to the Company.
Employment Contracts and Termination of
Employment, and Change in Control Arrangements
Doron Cohen. As of November 7, 1995, the Company's date of incorporation,
the Company entered into an Employment Agreement with Doron Cohen, pursuant to
which he serves as the Company's President, Chief Executive Officer and
Treasurer for a period ending on December 31, 1998, subject to successive
one-year extensions at the option of the Company. Mr. Cohen receives an annual
base salary as determined by the Company's Board of Directors from time to time,
but not less than $150,000. The annual salary is subject to a yearly
cost-of-living adjustment and may also be retroactively increased based upon the
Company's profits per outstanding share of Common Stock for the applicable year.
The available percentage increase in salary as a result of profits ranges from
5% for break-even results to 150% for profits exceeding $1.00 per share. Mr.
Cohen is also entitled to a bonus in such amounts and at such times as
determined by the Company's Board of Directors. In addition, the agreement
provides that Mr. Cohen is entitled to various fringe benefits under the
agreement and is entitled to participate in any incentive, stock option,
deferred compensation or pension plans established by the Company's Board of
Directors. Mr. Cohen has agreed not to disclose confidential information
relating to the Company and has agreed not to compete with, or solicit employees
or customers of, the Company during specified periods following discontinuance
of his employment for any reason other than a termination for cause.
Zvi Barak. As of April 18, 1996, the Company entered into an Employment
Agreement with Zvi Barak, pursuant to which he serves as the Company's Director
of Research & Development for a period ending on April 30, 2001, subject to a
one-year extension at the option of the Company. Mr. Barak receives an annual
base salary as determined by the Company's Board of Directors from time to time,
but not less than $150,000. The annual salary is subject to a yearly
cost-of-living adjustment and may also be retroactively increased based upon the
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Company's profits per outstanding share of Common Stock for the applicable year.
The available percentage increase in salary as a result of profits ranges from
5% for break-even results to 150% for profits exceeding $1.00 per share. Mr.
Barak is also entitled to a bonus in such amounts and at such times as
determined by the Company's Board of Directors and to an annual royalty
incentive in an amount equal to 2% of gross revenues received from sales of new
products developed under his direction. In addition, the agreement provides that
Mr. Barak is entitled to various fringe benefits under the agreement, including
an annual allowance of $5,000 for disability insurance and $18,000 for the
purchase or lease of an automobile, and is entitled to participate in any
incentive, stock option, deferred compensation or pension plans established by
the Company's Board of Directors. Pursuant to the agreement, the Company agreed
to establish a research and development facility in Israel and, in the event
that Mr. Barak elects to establish residence outside of Israel, the Company has
agreed to establish another research and development facility in the location
where Mr. Barak establishes his residence. The Company spent approximately
$25,000 to open the research and development facility in Israel and spends
approximately $27,600 per month to operate such facility. Mr. Barak is obligated
to pay the expenses of relocating himself to Israel and to any subsequent
residence. Mr. Barak has agreed not to disclose confidential information
relating to the Company's business and has agreed not to compete with, or
solicit employees or customers of, the Company during specified periods if he
resigns, is terminated for cause or if his employment agreement expires without
being renewed.
Indemnification of Directors and Officers
Under the Nevada General Corporation Law, as amended, a director, officer,
employee or agent of a Nevada corporation may be entitled to indemnification by
the corporation under certain circumstances against expenses, judgments, fines
and amounts paid in settlement of claims brought against them by a third person
or by or in right of the corporation.
The Company is obligated under its Articles of Incorporation to indemnify
any of its present or former directors who served at the Company's request as a
director, officer or member of another organization against expenses, judgments,
fines and amounts paid in settlement of claims brought against them by a third
person or by or in right of the corporation if such director acted in good faith
or in a manner such director reasonably believed to be in, or not opposed to,
the best interests of the Company and, with respect to any criminal action or
proceeding, if such director had no reason to believe his or her conduct was
unlawful. However with respect to any action by or in the right of the Company,
the Articles of Incorporation prohibit indemnification in respect of any claim,
issue or matter as to which such director is adjudged liable for negligence or
misconduct in the performance is his or her duties to the Company, unless
otherwise ordered by the relevant court. The Company's Articles of Incorporation
also permit it to indemnify other persons except against gross negligence or
willful misconduct.
The Company is obligated under its bylaws to indemnify its directors,
officers and other persons who have acted as representatives of the Company at
its request to the fullest extent permitted by applicable law as in effect from
time to time, except for costs, expenses or payments in relation to any matter
as to which such officer, director or representative is finally adjudged
derelict in the performance of his or her duties, unless the Company has
received an opinion from independent counsel that such person was not so
derelict.
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In addition, pursuant to indemnification agreements that the Company has
entered into with each of its directors, the Company is obligated to indemnify
its directors to the fullest extent permitted by applicable corporate law and
its Articles of Incorporation. The indemnification agreements also provide that,
upon the request of a director and provided that director undertakes to repay
amounts that turn out not to be reimbursable, that director is entitled to
reimbursement of litigation expenses in advance of the final disposition of the
legal proceeding.
The Company's indemnification obligations are broad enough to permit
indemnification with respect to liabilities arising under the Securities Act.
Insofar as the Company may otherwise be permitted to indemnify its directors,
officers and controlling persons against liabilities arising under the
Securities Act or otherwise, the Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The Nevada General Corporation Law, as amended, also permits a corporation
to limit the personal liability of its officers and directors for monetary
damages resulting from a breach of their fiduciary duty to the corporation and
its stockholders. The Company's Articles of Incorporation limit director
liability to the maximum extent permitted by The Nevada General Corporation Law,
which presently permits limitation of director liability except (i) for a
director's acts or omissions that involve intentional misconduct, fraud or a
knowing violation of law and (ii) for a director's willful or grossly negligent
violation of a Nevada statutory provision that imposes personal liability on
directors for improper distributions to stockholders. As a result of the
inclusion in the Company's Articles of Incorporation of this provision, the
Company's stockholders may be unable to recover monetary damages against
directors as a result of their breach of their fiduciary duty to the Company and
its stockholders. This provision does not, however, affect the availability of
equitable remedies, such as injunctions or rescission based upon a breach of
fiduciary duty by a director.
The Company does not maintain any liability insurance for the benefit of
its officers or directors and has no present plans to obtain such insurance.
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Item 7. Certain Relationships And Related Transactions
See "Executive Compensation--Employment Contracts and Termination of
Employment, and Change in Control Arrangements" for a description of (i) the
Employment Agreement between the Company and Doron Cohen, its President, Chief
Executive Officer and Treasurer and one of its directors, and (ii) the
Employment Agreement between the Company and Zvi Barak, its Director of Research
and Development.
See "Executive Compensation--Compensation of Directors" for a description
of the Consulting Agreement between the Company and Bruce Bendell, its Chairman.
See "Executive Compensation--Indemnification of Directors and Officers"
for a description of indemnification agreements between the Company and each of
its directors.
In October 1996, the Company acquired from Bruce Bendell, the Company's
Chairman, and his brother Harold Bendell all of the issued and outstanding stock
of Major Fleet. In exchange for their shares of the common stock of Major Fleet,
each of the Bendells received (i) 125,000 shares of the Company's 1996-MAJOR
Series of Convertible Preferred Stock and (ii) as a result of Major Fleet's
financial performance prior to the closing of the exchange, 50,000 shares of the
Company's Common Stock. See "Description of Securities--Preferred Stock."
In connection with the Company's acquisition of Major Fleet, the Bendells
and the Company entered into a management agreement pursuant to which the
Bendells have the exclusive right and obligation to manage the motor vehicle
leasing activities of Major Fleet. The management agreement is for a term ending
on December 31, 2001. In connection with the management agreement, the Company
issued to each of the Bendells warrants to purchase 50,000 shares of the
Company's Common Stock for $1.25 per share. The management agreement also
provides that the Bendells will receive a management fee annually in an amount
equal to the balance remaining after deducting from the annual gross revenues of
the motor vehicle leasing activities of Major Fleet the following: (i) Major
Fleet's costs of financing and operating its vehicle leasing activities, (ii) a
corporate management fee in an amount equal to 15% of Major Fleet's net income
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to cover overhead costs of the Company allocable to Major Fleet and (iii) income
derived from the leases to which Major Fleet was a party on the date of closing
of the Company's acquisition of Major Fleet.
Following the planned acquisition of Major Auto by the Company, Bruce and
Harold Bendell will continue to be responsible for senior-level management of
the dealerships. The Bendell brothers and the Company expect that this
continuity of senior management will facilitate obtaining the manufacturers'
consents to the transfer of the dealerships to the Company. The Bendell
brothers' management control will be accomplished through (i) their ownership of
100 shares of the Company's 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred
Stock which carries voting rights allowing them to elect a majority of the Board
of Directors of Major Auto, and through (ii) a related management agreement,
discussed immediately below. See "Description of Securities--Preferred
Stock--1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock" below.
To further facilitate obtaining the required manufacturers' consents, the
Bendells and the Company have entered into a management agreement pursuant to
which the Bendells will have the exclusive right and obligation to manage the
automobile dealerships acquired by the Company in connection with the Major Auto
Acquisition and any additional automobile dealerships that the Company may
acquire in the future. The management agreement is for a term ending on December
31, 2002 and may not be earlier terminated unilaterally by the Company. If the
Company continues to own automobile dealerships at the end of the term, the
management agreement may be unilaterally extended by the Bendell brothers in
order to maintain the level of management control that will avoid the need to
seek further manufacturer consents. Should either of the Bendell brothers cease
managing the dealerships, the management agreement provides that ownership of
his 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock shares and his
management rights under the management agreement will be automatically
transferred to the other, and should both brothers cease managing the
dealerships for any reason, the shares and management rights will be
automatically transferred to a successor manager designated in a successor
addendum to each dealership agreement or, failing such designation, to a
successor manager designated by the Company (subject to approval by the
applicable manufacturers). As noted in the prior paragraph, Bruce and Harold
Bendell will retain the right to elect a majority of the directors of Major Auto
(and possibly other affiliates in the future) in order to facilitate obtaining
the required manufacturers' consents. Should the Boards of Directors of Major
Auto and the Company disagree as to a particular course of action, Major Auto
would nonetheless be able to take the action in question, except that the
management agreement prohibits certain actions without the prior approval by the
Company's Board of Directors. Those actions are (i) disposing of any of the
Major Auto dealerships, (ii) acquiring new dealerships, and (iii) the Company
incurring liability for Major Auto indebtedness.
As compensation for their performance under the management agreement, the
management agreement provides that the Bendells are entitled to receive
initially the same compensation that they theretofore received from the
dealerships to be acquired as part of the Major Auto Acquisition. As
compensation from such dealerships in 1996, Bruce Bendell received a salary of
$104,000 and a bonus of $300,000, and Harold Bendell received a salary of
$104,000 and a bonus of $180,000. Such compensation will be increased in a
manner to be negotiated upon expansion of the operations of those dealerships or
the Company's acquisition of new dealerships. The compensation that Bruce
Bendell is entitled to receive under the management agreement is in addition to
any other compensation that he is entitled to receive as Chairman of the
Company. In connection with the execution of the Management Agreement in March
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1997, the Company is required to issue to the Bendells 100 shares of the
1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock.
See "Planned Acquisition" for a description of the proposed Major Auto
Acquisition.
In April 1996, the Company acquired from Zvi Barak, then a director of the
Company, and Sarah Barak, his wife, all of the issued and outstanding stock of
Info SysteMs. Mr. Barak resigned his directorship on July 7, 1997. Pursuant to
the agreement between the Company and the Baraks, the Company acquired all of
the issued and outstanding shares of common stock of Info SysteMs. In exchange,
the agreement provides that the Baraks will receive $750,000, $300,000 of which
consists of twenty monthly installment payments of $15,000 from the Company to
the Baraks. The monthly installment payments commenced in September 1996 and are
scheduled to continue through June 1998. In order to secure such installment
payments, the Company has granted a security interest to the Baraks in the stock
of Info Systems and the other assets owned by Info SysteMs. To date, the Company
has withheld $85,000 of such installment payments as collateral for the Baraks'
obligation to make certain indemnification payments to the Company. The Company
has agreed to pay the Baraks the $85,000 by July 1998. In addition to monetary
compensation, each of the Baraks were issued 125,000 shares of the Company's
Common Stock, which vest (i) in the case of Sarah Barak, 25,000 shares on
December 31, 1997, 50,000 shares on each of December 31, 1998 and 1999 and (ii)
in the case of Zvi Barak, 25,000 shares per year on the last day of February
commencing on February 28, 1997 and continuing through February 28, 2002.
In March 1996, the Company's subsidiary Computer Business Sciences formed a
joint venture with Nissko Telecom, L.P., of which Yossi Koren, a director of the
Company is a limited partner. Mr. Koren is also a shareholder in Nissko Telecom,
Ltd. Nissko Telecom, Ltd. is the general partner of Nissko Telecom, L.P. and
also one of the Company's master agents. The joint venture arrangement and the
master agent arrangement are described above under "Description of Business --
Computer Telephony and Telecommunications Division -- Talkie -- Arrangements
with Nissko."
The Company has entered into a Memorandum of Understanding (the "MOU")
with the Agent, the Nissko Principals, and with the remaining limited partner of
Nissko, Robert L. Rimberg. The MOU looks toward restructuring the Nissko
arrangements as described above under "Description of Business--Computer
Telephony and Telecommunications Division--Talkie--Restructuring of Nissko
Arrangements."
The Company has made a loan to its President and Chief Executive Officer,
Doron Cohen, in the principal amount of $140,000, bearing interest at 5.77% per
annum, uncompounded. The loan is evidenced by a promissory note dated December
31, 1996. The promissory note provides that the full principal amount of, and
all accrued interest on, the loan is due and payable in a single installment on
December 31, 1998.
Nissko Telecom Associates, the joint venture between Computer Business
Sciences and Nissko Telecom, L.P., of which Yossi Koren, one of the Company's
directors is a limited partner, occupies space free of charge at the Company's
principal office in Kew Gardens, New York, pursuant to an informal arrangement.
Bruce Bendell, and Major Chevrolet, Major Dodge and Major Chrysler
Plymouth Jeep Eagle, all of which are wholly-owned by Bruce Bendell and/or his
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brother Harold Bendell, have guaranteed the obligations of Major Fleet under a
$5,000,000 line of credit with Marine Midland Bank. In addition, Bruce Bendell
and Major Fleet have guaranteed the obligations of Major Auto's subsidiaries
under certain of their agreements with various financial institutions pursuant
to which such subsidiaries sell their vehicle finance contracts and leases.
Major Fleet has pledged its assets to such financial institutions to secure its
guarantee. In addition, such subsidiaries have cross-guaranteed and
cross-collateralized their respective agreements with such financial
institutions.
See "Description of Business--Automotive Sales Division--Dealership
Operations--Vehicle Financing" and "--Leasing Division" for a description of
certain transactions between Major Auto and Major Fleet.
Major Subaru subleases from an unrelated third party approximately 2,500
square feet of office and automobile showroom space in Woodside, New York. This
lease expires on January 31, 1998 and contains no renewal provisions. The
current annual rent under such lease is $69,457.56. Pursuant to an informal
arrangement between Major Subaru and Major Fleet, Major Fleet occupies the space
and pays the rental payments.
Major Dodge leases from Bruce Bendell and Harold Bendell approximately
12,000 square feet of office and automobile showroom space in Long Island City,
New York. The lease expires on December 31, 1997 and contains no renewal
provisions. The current annual rent under such lease is $108,000.
Major Chrysler, Plymouth, Jeep Eagle, Major Dodge and Major Subaru lease
from Bendell Realty L.L.C., a company wholly owned by Bruce Bendell and Harold
Bendell, approximately 40,000 square feet in Long Island City, New York which is
used as a service facility. The lease expires on December 31, 1997 and contains
no renewal provisions. The current annual rent under such lease is $120,000.
Major Fleet is a guarantor of a mortgage held by Chrysler Realty on the
property owned by Bendell Realty L.L.C., located in Long Island City which Major
Auto operates as a service center for Major Dodge, Major Subaru, and Major
Chrysler, Plymouth, Jeep Eagle. As of June 30, 1997 the outstanding mortgage
balance was $861.265.51.
The promoters of the Company are Bruce Bendell and Doron Cohen. In addition
to the other transactions with Mr. Bendell and Mr. Cohen described or referred
to above under the heading "Certain Relationships and Related Transactions,"
each of Mr. Bendell and Mr. Cohen received 2,500,000 shares of the Company's
Common Stock upon its incorporation in exchange for $25,000 or $.01 per share.
Item 8. Description Of Securities
General
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $.01 per share ("Common Stock"), and 2,000,000 shares
of Preferred Stock, par value $.01 per share ("Preferred Stock"). As of
September 23, 1997, 6,354,700 shares of Common Stock and 250,000 shares of
Preferred Stock were outstanding.
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Common Stock
Holders of Common Stock are entitled to one vote per share on each matter
submitted to the stockholders. Holders of Common Stock do not have cumulative
voting rights, which means that the holders of a majority of the Company's
Common Stock and voting Preferred Stock are able to elect all of the Company's
directors. Holders of Common Stock share equally in dividends and distributions
that may be declared by the Company's Board of Directors out of funds legally
available for that purpose after dividends and distributions have been paid in
full to the holders of any series of Preferred Stock that the Company's Board of
Directors has determined shall have a preference in the payment of dividends and
distributions. Upon liquidation or dissolution of the Company, holders of Common
Stock will share equally in the assets of the Company remaining after the
payment of the Company's debts and liabilities and of the liquidation preference
of, and accrued dividends on, any series of Preferred Stock. The Common Stock is
not convertible or redeemable and holders of Common Stock do not have
subscription rights or preemptive rights. The shares of Common Stock currently
outstanding are, and the shares to be issued in connection with this offering
will be, duly authorized, validly issued, fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of Preferred
Stock in one or more series. The Company's Board of Directors is authorized to
designate one or more series of Preferred Stock and to determine the number of
shares, price, preferences, rights and limitations of each series of Preferred
Stock, without any action by the Company's stockholders. The issuance of
Preferred Stock or the issuance of rights to acquire Preferred Stock, may have
the effect of delaying or preventing a change in control of the Company or an
unsolicited takeover bid.
1996-MAJOR Series of Convertible Preferred Stock
The Company's Board of Directors has designated 250,000 shares of
Preferred Stock as the 1996-MAJOR Series of Convertible Preferred Stock (the
"1996-Major Series"). All shares of the 1996-Major Series were issued equally to
Bruce Bendell (the Chairman of the Company's Board of Directors) and his brother
Harold Bendell in connection with the Company's acquisition from them of the
common stock of Major Fleet.
Commencing December 31, 1996, each share of the 1996-Major Series became
convertible into that number of shares of Common Stock having a value of $10.00.
For purposes of conversion, each share of Common Stock is valued at the lesser
of (a) $5.00 and (b) if available, the average of the bid and ask closing prices
for the twenty consecutive trading days ending on the day prior to conversion.
Therefore, each share of the 1996-Major Series will be convertible into at least
two shares of Common Stock. Accrued and unpaid dividends on the 1996-Major
Series may at the holder's option be used to purchase shares of Common Stock
valued the same way as in the case of conversion.
Shares of the 1996-Major Series have voting rights. Holders of shares of
the 1996-Major Series vote with the holders of Common Stock, rather than as a
separate class, and are entitled to two votes per share on each matter submitted
to the stockholders.
Holders of shares of the 1996-Major Series share in dividends and
distributions that may be declared by the Company's Board of Directors with
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respect to the Common Stock out of funds legally available for that purpose,
except that each share of the 1996-Major Series is entitled to twice the
dividend or distribution that is paid to the holders of Common Stock.
Upon liquidation or dissolution of the Company, holders of shares of the
1996-Major Series will receive $10.00 per share plus accrued and unpaid
dividends out of the assets of the Company remaining after the payment of (i)
the Company's debts and liabilities and (ii) the liquidation preference of, and
accrued and unpaid dividends on, any other series of Preferred Stock to which
the Company's Board of Directors assigns a higher preference than the 1996-Major
Series. In the event that such remaining assets are insufficient to pay the full
liquidation value of the 1996-Major Series, the 1997-Major Series (described
below) and the 1997A-Major Series (described below), the available assets will
be allocated among the holders of such series pro rata in accordance with their
respective liquidation values. The liquidation preference on all series of the
Company's Preferred Stock must be paid in full before the holders of Common
Stock are entitled to any distribution.
Since July 1, 1997, the holders of shares of the 1996-Major Series have
had the right to require the Company to redeem their shares for a redemption
price of $10.00. The Company has the unrestricted right beginning January 1,
2002 to redeem all or part of the shares of the 1996-Major Series for a
redemption price of $15.87 per share, plus accrued and unpaid dividends.
Holders of the shares of the 1996-Major Series have unlimited piggyback
registration rights with respect to the shares of Common Stock into which such
shares are convertible. These rights allow the holders to include their shares
of Common Stock in any registration of the Company's securities in a
registration statement under the Securities Act, subject to specified
limitations.
Holders of shares of the 1996-Major Series do not have subscription rights
or preemptive rights. The shares of the 1996-Major Series are duly authorized,
validly issued, fully paid and non-assessable.
1997-MAJOR Series of Convertible Preferred Stock
The Company's Board of Directors has designated 900,000 shares of
Preferred Stock as the 1997-MAJOR Series of Convertible Preferred Stock (the
"1997-Major Series"). None of the shares of the 1997-Major Series have been
issued, but all of such shares will be issued to Bruce Bendell (the Chairman of
the Company's Board of Directors) upon the consummation of the Major Auto
Acquisition.
The 900,000 shares of the 1997-Major Series are convertible into the
Company's Common Stock. The number of shares of Common Stock into which the
1997-Major Series is convertible will be based upon the market value of the
Common Stock on the date of issuance (the "1997-Major Issue Date") of the
1997-Major Series. If the market value of 1,800,000 shares of Common Stock on
the 1997-Major Issue Date is at least $6,000,000, then the 900,000 shares of the
1997-Major Series will be convertible into 1,800,000 shares of Common Stock. If
the market value of 1,800,000 shares of Common Stock on the 1997-Major Issue
Date is less than $6,000,000, then the 900,000 shares of the 1997-Major Series
will be convertible into that number of shares of Common Stock that have a
market value on the 1997-Major Issue Date of $6,000,000. The market value per
share of the Common Stock on the 1997-Major Issue Date will be the mean between
the closing bid and ask prices for the Common Stock over the 20 trading days
immediately prior to the 1997-Major Issue Date.
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Shares of the 1997-Major Series have voting rights. Holders of shares of
the 1997-Major Series vote with the holders of Common Stock, rather than as a
separate class, and are entitled to two votes per share on each matter submitted
to the stockholders.
Holders of shares of the 1997-Major Series share in dividends and
distributions that may be declared by the Company's Board of Directors with
respect to the Common Stock out of funds legally available for that purpose,
except that each share of the 1997-Major Series is entitled to twice the
dividend or distribution that is paid to the holders of Common Stock.
Upon liquidation or dissolution of the Company, holders of shares of the
1997-Major Series will receive $4.00 per share plus accrued and unpaid dividends
out of the assets of the Company remaining after the payment of (i) the
Company's debts and liabilities and (ii) the liquidation preference of, and
accrued and unpaid dividends on, any other series of Preferred Stock to which
the Company's Board of Directors assigns a higher preference than the 1997-Major
Series. In the event that such remaining assets are insufficient to pay the full
liquidation value of the 1996-Major Series, the 1997-Major Series and the
1997A-Major Series (described below), the available assets will be allocated
among the holders of such series pro rata in accordance with their respective
liquidation values. The liquidation preference on all series of the Company's
Preferred Stock must be paid in full before the holders of Common Stock are
entitled to any distribution.
The shares of the 1997-Major Series are not redeemable.
Holders of the shares of the 1997-Major Series will have unlimited
piggyback registration rights with respect to the shares of Common Stock into
which such shares are convertible. These rights allow the holders to include
their shares of Common Stock in any registration of the Company's securities in
a registration statement under the Securities Act, subject to specified
limitations.
Holders of shares of the 1997-Major Series do not have subscription rights
or preemptive rights. The shares of the 1997-Major Series are duly authorized,
validly issued, fully paid and non-assessable.
1997 A-MAJOR AUTOMOTIVE GROUP Series of Preferred
Stock
The Company's Board of Directors has designated 100 shares of Preferred
Stock as the 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock (the
"1997A-Major Series"). None of the shares of the 1997A-Major Series have been
issued, but 50 of such shares will be issued to each of Bruce Bendell (the
Chairman of the Company's Board of Directors) and his brother Harold Bendell
upon the consummation of the Major Auto Acquisition.
Shares of the 1997A-Major Series will have limited voting rights. Holders
of shares of the 1997A-Major Series will vote as a separate class to elect a
majority of the Board of Directors of Major Auto and any other subsidiaries and
affiliates of the Company that are engaged in the operation of motor vehicle
dealerships. Holders of the shares of the 1997A-Major Series will have no other
voting rights. The reason for these special rights is to facilitate obtaining
the manufacturers' consents to the transfer to the Company of the several
automobile dealerships contemplated by the Major Auto acquisition. For the same
reason, the ownership of the 1997A-Major Series shares is automatically
transferred to Bruce or Harold Bendell should the other cease managing the
dealerships for any reason, and to a successor manager should both cease doing
so.
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Holders of shares of the 1997A-Major Series will not be entitled to share
in any dividends or distributions that may be declared by the Company's Board of
Directors.
Upon liquidation or dissolution of the Company, holders of shares of the
1997A-Major Series will receive $1.00 per share out of the assets of the Company
remaining after the payment of (i) the Company's debts and liabilities and (ii)
the liquidation preference of, and accrued and unpaid dividends on, any other
series of Preferred Stock to which the Company's Board of Directors assigns a
higher preference than the 1997A-Major Series. In the event that such remaining
assets are insufficient to pay the full liquidation value of the 1996-Major
Series, the 1997-Major Series and the 1997A-Major Series, the available assets
will be allocated among the holders of such series pro rata in accordance with
their respective liquidation values. The liquidation preference on all series of
the Company's Preferred Stock must be paid in full before the holders of Common
Stock are entitled to any distribution.
The Company will have the right to redeem the shares of the 1997A-Major
Series under any of the following circumstances:
(i) It disposes of its Automotive Sales division and has no further
motor vehicle operations subject to the control of the holders of shares
of the 1997A-Major Series.
(ii) The management agreement between the Company and Bruce and
Harold Bendell, relating to their management of the Company's motor
vehicle dealerships, reaches its scheduled expiration on December 31, 2002
and the Bendell brothers do not decide to renew it, or it is earlier
terminated by mutual agreement of the parties.
(iii) The Company issues another series or class of security to
effect control over the Company's motor vehicle operations and the
redemption of the 1997A-Major Series is approved by the automobile
manufacturers with whom the Company has franchise agreements at the time
of such redemption.
Holders of shares of the 1997A-Major Series do not have subscription
rights or preemptive rights and are not convertible into any other securities.
When issued, the shares of the 1997A-Major Series will be duly authorized,
validly issued, fully paid and non-assessable.
Warrants
The Company has issued warrants to purchase an aggregate of 1,760,000
shares of Common Stock as follows:
In connection with the agreement of the Agent to purchase Talkie Power Web
Line Machines, on March 26, 1996, the Company issued to the Nissko Principals,
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including Yossi Koren, who subsequently became a director of the Company, (a)
Class A Warrants, exercisable through the date that is 60 days after the
effectiveness of any public offering of the Company's securities (including this
offering), to acquire 750,000 shares of Common Stock at an exercise price of
$1.25 per share and (b) Class B Warrants, exercisable through March 19, 1998, to
acquire 750,000 shares of Common Stock at an exercise price of $1.25 per share.
Certificates evidencing the Class A Warrants and the Class B Warrants have not
yet been issued.
In connection with the acquisition by the Company from Bruce Bendell and
Harold Bendell of all of the shares of Major Fleet, on October 2, 1996, the
Company issued to each of Bruce Bendell and Harold Bendell warrants to acquire
up to 250,000 shares of Common Stock at an exercise price of $1.25 per share.
Harold Bendell's warrants are sometimes referred to herein as the "Selling
Shareholders' Warrants." Such warrants are exercisable during the period from
January 1, 1997 until the date six months after the effectiveness of the
registration statement of which this Prospectus is a part.
In connection with the acquisition by the Company from Progressive
Polymerics International, Inc. of certain patents and other rights relating to
the armored conduit system, on October 15, 1996, the Company issued to
Progressive Polymerics International, Inc. warrants, exercisable through October
31, 1997, to acquire 160,000 shares of Common Stock at an exercise price of
$3.125 per share. In connection with the acquisition, the Company also issued to
Progressive Polymerics International, Inc. 160,000 shares of Common Stock,
80,000 shares of which the Company has an option to repurchase at any time
during the exercise period of the warrants. The Company also has the right to
extend by one year the repurchase period for such 80,000 shares of Common Stock.
In the event that the Company exercises its right to extend the repurchase
period for such shares, the exercise period for the warrants will be
automatically extended by one year.
All of the foregoing warrants have been issued pursuant to warrant
agreements that contain anti-dilutive provisions providing for adjustment of the
exercise price and the number and type of securities issuable upon exercise of
the warrants should any one or more of certain specified events occur.
Anti-Takeover Provisions
The Company's by-laws provide that directors may not be removed without
cause, which limits the ability of stockholders to effect a change in control of
the Company.
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Sections 78.378 through 78.3793 of the Nevada General Corporation Law may
affect attempts to acquire control of the Company. In general under those
sections, an entity that acquires "control shares" of an "issuing corporation"
may vote the control shares only if approved by the holders of a majority of the
voting power of the issuing corporation, excluding (i) the acquirer of the
control shares, (ii) officers of the issuing corporation and (iii) those
directors of the issuing corporation who are also employees of the issuing
corporation. An issuing corporation is a corporation that is organized in
Nevada, does business in Nevada, directly or through a subsidiary, and has at
least 200 stockholders, at least 100 of whom are Nevada residents. As of
September 23, 1997, fewer than 100 of the Company's stockholders were Nevada
residents. Control shares are shares that when added to shares already owned by
an entity, would give that entity voting power in the election of directors of
any of three thresholds: one-fifth, one-third and a majority. The effect of
these sections is to condition the acquisition of voting control of a
corporation on the approval of a majority of the pre-existing disinterested
stockholders. An issuing corporation may exclude itself from the coverage of
these sections by inserting a provision to that effect in its articles of
incorporation or by-laws on or before the tenth day after the relevant
acquisition is made.
Sections 78.411 through 78.444 of the Nevada General Corporation Law may
also affect attempts to acquire control of the Company. In general those
sections restrict "business combinations" (defined to include, among other
transactions, mergers, disposition of assets or shares and recapitalizations)
between a Nevada corporation having at least 200 stockholders and an "interested
stockholder" (defined as a stockholder who is the beneficial owner of 10% or
more of the voting power of the covered corporation's outstanding securities).
If occurring within three years from when a stockholder becomes an interested
stockholder, a business combination between that corporation and that interested
stockholder may be consummated only if either the business combination or the
purchase of shares that caused that stockholder to become an interested
stockholder has been approved by the Board of Directors of that corporation
prior to the date of such purchase. If occurring more than three years after
that stockholder becomes an interested stockholder, a business combination
between that corporation and that interested stockholder may be consummated only
if certain statutory requirements concerning the compensation to be received by
that corporation's stockholders are satisfied or if the business combination is
made in accordance with that corporation's articles of incorporation and either
(i) the business combination or the purchase of shares that caused that
stockholder to become an interested stockholder has been approved by that
corporation's Board of Directors prior to the date of such purchase or (ii) the
business combination has been approved by the vote of holders of stock
representing a majority of the voting power not beneficially owned by the
interested stockholder at a meeting called for that purpose not earlier than
three years after the date of the purchase of shares that caused that
stockholder to become an interested stockholder. A corporation may elect in its
original articles of incorporation not to be subject to these sections or the
stockholders representing a majority of the voting power not beneficially owned
by the interested stockholder may adopt an amendment to the corporation's
articles of incorporation to make that election, but the amendment will take
effect 18 months after the stockholder vote and will not apply to any
combination with an interested stockholder who was such on the effective date of
the amendment.
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The issuance to Bruce Bendell of the 1997-MAJOR Series of Convertible
Preferred Stock in connection with the Major Auto Acquisition would be a
"business combination" as defined under the Nevada Business Corporation Law, but
would not, however, be prohibited because the Company's Board of Directors
approved in advance the issuance to Mr. Bendell in November 1995 of the
2,500,000 share of Common Stock that caused him to become an "interested
stockholder."
Registration Rights
See "Preferred Stock--1996-MAJOR Series of Convertible Preferred Stock"
and "1997-MAJOR Series of Convertible Preferred Stock" for a description of
certain piggyback registration rights.
In consideration for certain consulting services, the Company has issued
to Ronald Shapss 50,000 shares of Common Stock and options, exercisable until
May, 2002, to acquire 50,000 shares of Common Stock for $4.50 per share. All of
such issued shares and all of the shares underlying such options have unlimited
piggyback registration rights. Mr. Shapss has waived such piggyback registration
rights in connection with this offering.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Olde Monmouth
Stock Transfer Co., Inc., situated at 77 Memorial Highway, Suite 101, Atlantic
Highlands, New Jersey 08401.
PART II.
Item 1. Market For Price of Common and Divididends on the Registrant's
Stockholder Matters
Market Information
On April 2, 1996, the Company's Common Stock was approved for trading on
the Nasdaq-OTC Electronic Bulletin Board. From the time of the listing through
September 30, 1997, the high bid price was $6.375 and the low bid price was
$3.50; quarter-end high and low bids were (as reported by Nasdaq Trading &
Market Services) which quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not reflect actual transactions:
Quarter Ended High Bid Low Bid
September 30, 1997 $4.375 $3.50
June 30, 1997 $5.50 $4.00
March 31, 1997 $6.375 $3.625
December 31, 1996 $4.875 $3.75
September 30, 1996 $4.75 $3.50
June 30, 1996 $5.00 $4.00
Shareholders
As of September 23, 1997, there were 355 holders of record of the
Company's Common Stock.
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Dividends
The Company has never declared dividends on any class of its securities
and has no present intention to declare any dividends on any class of its
securities in the future.
Options, Warrants and Securities Convertible into
Common Stock
As of September 23, 1997, the Company had outstanding warrants to purchase
an aggregate of 1,760,000 shares of Common Stock. See "Description of
Securities--Warrants." As of September 23, 1997, the Company had outstanding
options to acquire 50,000 shares of Common Stock. See "Description of
Securities--Registration Rights." The Company has issued 250,000 shares of the
1996-MAJOR Series of Convertible Preferred Stock, which are convertible into at
least 500,000 shares of Common Stock and, in connection with the consummation of
the Major Auto Acquisition, will issue 900,000 shares of the 1997-MAJOR Series
of Convertible Preferred Stock, which will be convertible into at least
1,800,000 shares of Common Stock. See "Description of Securities--Preferred
Stock."
Shares Eligible for Future Sale
Immediately following this offering, there will be an aggregate of
7,804,700 shares of Common Stock outstanding (7,977,200 shares if the
Underwriter's over-allotment option is exercised in full). A minimum of (i) an
additional 2,050,000 shares of Common Stock will be issuable in the event of the
conversion of the unconverted balance of the Company's 1996-MAJOR Series of
Convertible Preferred Stock and 1997-MAJOR Series of Convertible Preferred Stock
and (ii) 1,760,000 shares of Common Stock will be issuable upon the exercise of
the Company's outstanding options and warrants. Of these shares, the 1,450,000
shares of Common Stock (1,622,500 if the Underwriter's over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are held by an
"affiliate" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Affiliate"). The remaining 6,354,700 shares were or will be
sold by the Company in reliance on exemptions from the registration requirements
of the Securities Act and are "restricted" securities within the meaning of Rule
144 under the Securities Act (the "Restricted Shares").
The Company and its officers and directors have agreed not to sell, offer
to sell, issue, distribute or otherwise dispose of any of their Restricted
Shares for a period of one year from the date of this Prospectus (subject to
certain limited exceptions) without the prior written consent of the
Underwriter. Following such one-year period, such Restricted Shares will be
eligible for sale in the public market, subject to the conditions and
restrictions of Rule 144 and other applicable laws.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
shares for at least a one-year period (as computed under Rule 144) is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock and (ii)
the average weekly trading volume in the Company's Common Stock during the four
calendar weeks immediately preceding the date on which the notice of sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
provisions relating to the manner and notice of sale and the availability of
current public information about the Company. A person (or persons whose shares
are aggregated) who is not deemed an Affiliate of the Company at any time during
the 90 days immediately preceding a sale, and who has beneficially owned shares
for at least a two-year period (as computed under Rule 144), would be entitled
to sell such shares under Rule 144(k) without regard to the volume, manner of
sale, notice and public information restrictions of Rule 144 described above.
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Item 2. Legal Proceedings
On November 22, 1996, the Company and its wholly-owned subsidiaries
Computer Business Sciences and Info Systems filed an action in the New York
Supreme Court, Queens County against Michael Marom ("Marom") and M.M. Telecom,
Corp. ("MMT"). The Company and its subsidiaries are seeking damages of
$5,000,000 for breach of contract, libel, slander, disparagement, violation of
copyright laws, fraud and misrepresentation. The Company and its subsidiaries
allege in their complaint that Marom and MMT have violated the terms of a
License and Exclusivity Agreement pursuant to which MMT guaranteed the purchase
of a certain amount of Talkie-Globe Software products and was granted an
exclusive license to advertise the Talkie-Globe product, to train customers and
to provide technical support. On February 4, 1997, the defendants filed a
counterclaim against the Company and its subsidiaries seeking damages of
$50,000,000 for breach of contract and violation of the Lanham Act. The
defendants allege in their counterclaim that Computer Business Sciences
misappropriated and altered software developed by Marom in order to prevent
competition with the Company's Talkie-Globe. Both parties to the litigation have
filed responses to the counterclaiMs. The litigation is proceeding and the
parties are currently in the process of discovery.
On May 7, 1997, the Company and its wholly-owned subsidiary Computer
Business Sciences filed an action in the New York Supreme Court, New York
County, against Network America, Inc. ("Network"). The Company and its
subsidiary are seeking damages of $1,000,000 for breach of contract,
misrepresentation, fraud and tortious interference with the Company's business
and operations. The Company and its subsidiary allege in their complaint that
the information and representations provided to the Company by Network, on the
basis of which the Company entered into a Letter of Intent to acquire Network,
were intentionally fraudulent and misleading. On August 18, 1997, Network filed
an answer which denied the allegations and a counterclaim seeking damages of
$2,000,000 for the Company's alleged misappropriation of proprietary information
and violation of a Non-Competition Agreement entered into by the parties to the
litigation. The litigation is proceeding and the parties are currently in the
process of discovery.
On August 21, 1997, Major Chevrolet filed an action in the United States
District Court for the Southern District of New York against General Motors. The
lawsuit seeks an order compelling General Motors to consent to the proposed
transfer of the Major Chevrolet dealership to the Company. It was commenced
because General Motors did not respond to Major Auto's request to transfer its
Chevrolet dealership to the Company within the 60-day period required by New
York law. The court has granted General Motors' request for additional
information regarding the proposed transfer. General Motors has indicated in its
request for such information its intention to reach a prompt decision and has
not indicated any intention to withhold its consent, but there can be no
assurance that General Motors will not withhold its consent. Major Auto and the
Company believe that they have supplied all of the requested information and are
now awaiting a decision from General Motors.
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Item 3. Changes In And Disagreements With Accountants On
Accounting And Financial Disclosure
The Company's auditor for the fiscal year ended December 31, 1995 was
Nemiroff, Cosmas & Co., CPA's ("Nemiroff"). The Company's auditor for the fiscal
year ended December 31, 1996 was Peter C. Cosmas Co., CPA's ("Cosmas"). In
December 1996, Peter C. Cosmas, previously a principal in Nemiroff, left
Nemiroff and opened a separate practice. The Company has elected to retain
Cosmas as its auditor in lieu of Nemiroff. The auditor's reports on the
Company's financial statements for the past two fiscal years of the Company did
not contain any adverse opinion, or disclaimer of opinion, and was not modified
as to uncertainty, audit scope or accounting principles. The decision to change
auditors was not recommended or approved by the Company's Board of Directors or
any committee thereof, as no disagreement was involved. There have been no
disagreements with respect to accounting and financial disclosure.
Item 4. Indemnification of Directors and Officers.
Under Section 78.751 of the Nevada General Corporation Law, as amended, a
director, officer, employee or agent of a Nevada corporation may be entitled to
indemnification by the corporation under certain circumstances against expenses,
judgments, fines and amounts paid in settlement of claims brought against them
by a third person or by or in right of the corporation.
The Company is obligated under its Articles of Incorporation to indemnify
any of its present or former directors who served at the Company's request as a
director, officer or member of another organization against expenses, judgments,
fines and amounts paid in settlement of claims brought against them by a third
person or by or in right of the corporation if such director acted in good faith
or in a manner such director reasonably believed to be in, or not opposed to,
the best interests of the Company and, with respect to any criminal action or
proceeding, if such director had no reason to believe his or her conduct was
unlawful. However with respect to any action by or in the right of the Company,
the Articles of Incorporation prohibit indemnification in respect of any claim,
issue or matter as to which such director is adjudged liable for negligence or
misconduct in the performance of his or her duties to the Company, unless
otherwise ordered by the relevant court. The Company's Articles of Incorporation
also permit it to indemnify other persons except against gross negligence or
willful misconduct.
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The Company is obligated under its by-laws to indemnify its directors,
officer and other persons who have acted as a representatives of the Company at
its request to the fullest extent permitted by applicable law as in effect from
time to time, except for costs, expenses or payments in relation to any matter
as to which such officer, director or representative is finally adjudged
derelict in the performance of his or her duties, unless the Company has
received an opinion from independent counsel that such person was not so
derelict.
In addition, pursuant to indemnification agreements that the Company has
entered into with each of its directors, the Company has agreed to indemnify its
directors to the fullest extent permitted by applicable corporate law and its
Articles of Incorporation. The indemnification agreements also provide that,
upon the request of a director and provided that director undertakes to repay
amounts that turn out not to be reimbursable, that director is entitled to
reimbursement of litigation expenses in advance of the final disposition of the
legal proceeding.
The Nevada General Corporation Law, as amended, also permits a corporation
to limit the personal liability of its officers and directors for monetary
damages resulting from a breach of their fiduciary duty to the corporation and
its stockholders. The Company's Articles of Incorporation limit director
liability to the maximum extent permitted by The Nevada General Corporation Law,
which presently permits limitation of director liability except (i) for a
director's acts or omissions that involve intentional misconduct, fraud or a
knowing violation of law and (ii) for a director's willful or grossly negligent
violation of a Nevada statutory provision that imposes personal liability on
directors for improper distributions to stockholders. As a result of the
inclusion in the Company's Articles of Incorporation of this provision, the
Company's stockholders may be unable to recover monetary damages against
directors as a result of their breach of their fiduciary duty to the Company and
its stockholders. This provision does not, however, affect the availability of
equitable remedies, such as injunctions or rescission based upon a breach of
fiduciary duty by a director.
The Company anticipates entering into an underwriting agreement with
SouthWall Corp. in connection with a public offering of securities pursuant to a
registration statement filed with the Commission on Form SB-2. It is anticipated
that such agreement will include the Company's obligation to indemnify against
certain civil liabilities, including certain liabilities under the Securities
Act.
The Company does not maintain any liability insurance for the benefit of
its officers or directors and has no present plans to obtain such insurance.
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Item 5. Recent Sales of Unregistered Securities.
The following securities of the Company were sold by the Company during the
past three years without being registered under the Securities Act:
1. On November 7, 1995, upon its formation, the Company sold to each of
Bruce Bendell and Doron Cohen 2,500,000 shares of Common Stock at their par
value of $.01 per share. The aggregate gross proceeds to the Company from such
sales were $50,000. Such Common Stock was issued and sold in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act.
2. In February 1996, the Company completed the placement of 20,000 Units to
70 investors, at a price of $5.00 per Unit. Each Unit consisted of 2 shares of
Common Stock and 23 Common Stock Purchase Warrants. Each such warrant entitled
the holder thereof to purchase one share of Common Stock for $1.95. The gross
proceeds to the Company from such sales were $100,000. The warrants were
immediately exercisable and remained exercisable until June 30, 1996. The
warrants were transferable separately from the Common Stock. The Units were
issued and sold in reliance upon the exemption from registration contained in
Rule 504 of Regulation D under the Securities Act.
3. During 1996, the Company sold 460,000 shares of Common Stock upon the
exercise of 460,000 Common Stock Purchase Warrants (exercisable at $1.95 per
Common Stock Purchase Warrant). The gross proceeds to the Company from such
sales were $897,000. Such Common Stock was issued and sold in reliance upon the
exemption from registration contained in Rule 504 of Regulation D under the
Securities Act.
4. In March 1996, in connection with the agreement by Nissko Telecom, Ltd.
to purchase certain equipment manufactured by the Company, the Company issued to
three of the principals of Nissko Telecom, Ltd. an aggregate of 750,000 Class A
Warrants and 750,000 Class B Warrants. The Class A Warrants were immediately
exercisable and remain exercisable until 60 days after the effectiveness of this
registration statement. The Class B Warrants were immediately exercisable and
remain exercisable until March 19, 1998. Each Class A Warrant and each Class B
Warrant entitles the holder to purchase one share of Common Stock at an initial
exercise price of $1.25 per share, subject to adjustment. Such warrants were
issued in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act.
5. In April 1996, in connection with the acquisition by the Company from
Zvi Barak and Sarah Barak of all of the issued and outstanding stock of Info
Systems, and an employment agreement between the Company and Zvi Barak, the
Company issued to each of Sarah Barak and Zvi Barak 125,000 shares of Common
Stock, which vest (i) in the case of Sarah Barak, 25,000 shares on December 31,
1997 and 50,000 shares on each of December 31, 1998 and 1999 and (ii) in the
case of Zvi Barak, 25,000 shares per year on the last day of February commencing
on February 28, 1997 and continuing through February 28, 2002. Such Common Stock
was issued in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act and Regulation S under the Securities Act.
6. In October 1996, in connection with the acquisition (the "Major Fleet
Acquisition") by the Company from Bruce Bendell and Harold Bendell of all of the
issued and outstanding stock of Major Fleet & Leasing Corp., the Company issued
to the Bendells an aggregate of 250,000 shares of the 1996-MAJOR Series of
Convertible Preferred Stock. Each share of the 1996-MAJOR Series of Convertible
Preferred Stock is convertible into Common Stock having a value of $10.00
commencing December 31, 1996. For purposes of conversion, each share of Common
Stock is valued at the lesser of (a) $5.00 and (b) if available, the average of
the bid and ask closing prices for the twenty consecutive trading days ending on
the day prior to conversion. The holders of shares of the 1996-MAJOR Series of
Convertible Preferred Stock have the right to require the Company to repurchase
such shares for $10.00 per share commencing July 1, 1997 and the Company has the
right to redeem such shares for $15.87 per share commencing January 1, 2002. The
1996-MAJOR Series of Convertible Preferred Stock was issued in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act.
-62-
<PAGE>
7. In November 1996, as required by the acquisition agreement between the
Company, Bruce Bendell and Harold Bendell relating to the Major Fleet
Acquisition, the Company issued to the Bendells an aggregate of 100,000 shares
of Common Stock as a result of Major Fleet having attained a threshold level of
financial performance. Such Common Stock was issued in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act.
8. In October 1996, pursuant to a management agreement entered into between
the Company, Bruce Bendell and Harold Bendell in connection with the Major Fleet
Acquisition, the Company and the Bendells issued to the Bendells warrants to
acquire 100,000 shares of the Company's Common Stock for $1.25 per share. The
warrants became exercisable on January 1, 1997 and remain exercisable until six
months after the effectiveness of this registration statement. Each warrant
entitles the holder to purchase one share of Common Stock at an initial exercise
price of $1.25 per share, subject to adjustment. Such warrants were issued in
reliance upon the exemption from registration contained in Section 4(2) of the
Securities Act.
9. In October 1996, the Company issued to Progressive Polymerics, Inc.
80,000 Units pursuant to an amendment to a patent purchase agreement between the
Company and Progressive Polymerics, Inc. Each Unit consists of 2 shares of
Common Stock and 2 warrants. The warrants were immediately exercisable and
remain exercisable until October 31, 1998. Each warrant entitles the holder to
purchase one share of Common Stock at an initial exercise price of $3.125,
subject to adjustment. The Company has the option to repurchase 80,000 shares of
such Common Stock for $2.50 per share at any time during the exercise period of
the warrants. The Company also has the right to extend by one year the
repurchase period for such 80,000 shares of Common Stock. In the event that the
Company exercises the latter right, the exercise period for the warrants will be
automatically extended by one year.
The amendment to the Company's agreement with Progressive Polymerics, Inc.
was entered into in settlement of legal proceedings resulting from a dispute
between the parties arising out of the patent purchase agreement. The amendment
provided that the original $500,000 cash purchase price to paid by the Company
for the armored conduit patents would be replaced by the issuance of 80,000
Units and $100,000 cash. Such Common Stock and warrants were issued in reliance
upon the exemption from registration contained in Section 4(2) of the Securities
Act.
10. In October 1996, upon the completion of performance of certain
investment banking services rendered to the Company pursuant to an oral
agreement made by the Company in January 1996 with Richard R. Rozzi, the Company
issued 100,000 shares of Common Stock to Mr. Rozzi at their par value of $.01
per share. The gross proceeds to the Company from such sales were $1,000. Such
Common Stock was issued and sold in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act.
-63-
<PAGE>
11. In October 1996, upon the completion of performance of certain
marketing services rendered to the Company pursuant to an oral agreement made by
the Company in January 1996 with Rebecca Frommer, the Company issued 100,000
shares of Common Stock to Ms. Frommer at their par value of $.01 per share. The
gross proceeds to the Company from such sales were $1,000. Such Common Stock was
issued and sold in reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act.
12. In November 1996, in consideration for 1180513 (Ontario) Limited, the
then employer of Moise Benedid, to permit Mr. Benedid to become the President of
Info Systems, the Company issued to 1180513 (Ontario) Limited 20,000 shares of
Common Stock, 10,000 of which vested on July 31, 1997 and 10,000 of which vest
on July 31, 1998. Such Common Stock was issued in reliance upon the exemption
from registration contained in Section 4(2) of the Securities Act and Regulation
S under the Securities Act.
13. In November 1996, in connection with an Employment Agreement between
the Company's wholly-owned subsidiary Computer Business Sciences, Inc. and
Shlomo Nessim, the Company issued to Mr. Nessim 15,000 shares of Common Stock.
Such Common Stock was issued in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act. The shares issued to Mr. Nessim
were returned to the treasury of the Company upon the Company's termination of
the Employment Agreement.
14. In November 1996, in connection with an Employment Agreement between
Computer Business Sciences and Paul Vesel, the Company issued to Mr. Vesel
30,000 shares of Common Stock, 20,000 of which shares will vest upon the
completion of his first year of employment in November 1997 and 10,000 of which
shares will vest upon the completion of his second year of employment in
November 1998. Such Common Stock was issued in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act.
15. In December 1996, the Company issued at no cost to various employees in
recognition of their services in 1996 4,200 shares of Common Stock under a newly
adopted Employees Performance Recognition Plan. All such shares vest on January
1, 1998, subject to the continued employment of the respective employee, or upon
the earlier retirement, death or permanent disability of such employee. Such
Common Stock was issued in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act.
16. In January 1997, in connection with an informal consulting agreement
between the Company and Ronald Premo, the Company issued to Mr. Premo, 7,500
shares of Common Stock. Such Common Stock was issued in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act. In
March 1997, in connection with an Employment Agreement between the Company and
Ronald Premo, the Company issued to Mr. Premo, 30,000 shares of Common Stock,
10,000 of which shares will vest upon the completion of each of his first three
years of employment with the Company. Such Common Stock was issued in reliance
upon the exemption from registration contained in Section 4(2) of the Securities
Act.
17. In February 1997, in connection with the agreement of Ronald Shapss to
perform certain consulting services for the Company, the Company issued to Mr.
Shapss 50,000 shares of Common Stock for an aggregate purchase price of $500.
Such Common Stock was issued in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act.
Effective May 1997, pursuant to such agreement, the Company granted to Mr.
Shapss at no cost options to acquire up to 50,000 shares of Common Stock at an
exercise price of $4.50 per share, the fair market value of the Common Stock on
February 18, 1997, the date of such agreement. Such options are exercisable for
five years from the date of grant. Such options were issued in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act.
-64-
<PAGE>
INDEX TO FINANCIALS
Report of Doane Raymond F-1
Financial Statements of 786710 Ontario Limited F-2
Report of Marcus and Kliegman LLP F-13
Financial Statements of Major Fleet and F-14
Leasing Corp.
Report of Peter C. Cosmas Co. F-26
Financial Statements of Fidelity Holdings Inc. F-27
and Subsidiaries
Pro Forma Combining Financial Statements F-41
of Fidelity Holdings Inc. and its
subsiidiaries
Report of BDO Seidman, LLP F-47
Major Chevrolet and Affiliates Combined Financial F-48
Statements for the Years Ended December 31, 1996
and 1995 and the Six-Month Period Ended
June 30, 1997 and 1996 (Unaudited)
<PAGE>
Chartered Accountants
Canadian Member Firm of
Grant Thornton International
DOANE RAYMOND
AUDITOR'S REPORT
To the Directors of
786710 Ontario Limited
We have audited the balance sheet of 786710 Ontario Limited as at December 31,
1996 and the statements of operations and retained earnings and cash flow for
the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance 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 finacial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1996 and the
results of its operations and changes in its financial position for the year
then ended in accordance with accounting principles generally accepted in the
United States.
Doane Raymond
Chartered Accountants
Markham, Canada
January 22, 1997
Suite 400
7030 Woodbine Avenue
Markham
Ontario
L3R 6G2
Tel: (905) 475-1100
Fax: (905) 475-8906
-F-1-
<PAGE>
Chartered Accountants
Canadian Member Firm of
Grant Thornton International
DOANE RAYMOND
786710 Ontario Limited
(Operating as Info Systems)
Financial Statements
(Expressed in Canadian Dollars)
December 31, 1996
-F-2-
<PAGE>
786710 Ontario Limited
(Operating as Info Systems)
Statements of Operations and Retained Earnings
(Expressed in Canadian Dollars)
- -------------------------------------------------------------------
Five Months
Year Ended Ended
December 31, December 31,
1996 1995
Revenue
Computer software and programming $ 520,503 $248,193
Computer equipment 677,986 186,365
Other 20,227 5,447
--------- --------
1,218,716 440,005
--------- --------
Cost of sales
Computer equipment 478,238 153,719
Computer staff wages and benefits 221,193 96,197
Computer software and programming 6,585 3,171
Software consulting 21,286 1,461
--------- -------
727,302 254,548
--------- -------
Gross profit 491,414 185,457
--------- -------
Expenses
Automotive 11,283 4,453
Bad debts 694 266
Bank charges and interest 1,441 1,767
Depreciation 4,495 1,474
Management salaries 14,805 40,869
Management fees 219,035 183,333
Office and general 41,785 4,251
Professional fees 44,734 19,097
Promotion and trade shows 79,091 22,048
Rent 19,694 9,762
Research and development
(net of investment tax credits) 9,554 5,789
Shipping and handling 14,504 4,016
--------- -------
461,115 297,125
--------- -------
-F-3-
<PAGE>
Earnings (loss) before income taxes 30,299 (111,668)
--------- -------
Income taxes - current 8,874 -
- deferred - (22,451)
--------- -------
8,874 (22,451)
--------- -------
Net earnings (loss) $ 21,425 $(89,217)
========= =======
Retained earnings, beginning of year $ 13,887 $103,104
Net earnings (loss) 21,425 (89,217)
--------- -------
Retained earnings, end of year $ 35,312 $ 13,887
========= =======
- -------------------------------------------------------------------------
*See accompanying notes to the financial statements.
-F-4-
<PAGE>
786710 Ontario Limited
(Operating as Info Systems)
BALANCE SHEET
(Expressed in Canadian Dollars)
- -------------------------------------------------------------------
1996 1995
---- ----
Assets
Current
Cash and cash equivalents $ 93,401 $241,769
Receivables 177,476 44,040
Income taxes and investment tax credits
receivable - 89,442
Inventories 8,121 1,959
Prepaid expenses 1,875 2,427
------- -------
280,873 379,637
Capital assets (Note 2) 14,269 10,320
------- -------
$ 295,142 $ 389,957
======= =======
Liabilities
Current
Payables and accruals $ 118,513 $ 292,692
Deposits 700 13,210
Income taxes payable 6,000 -
Deferred revenue 92,391 70,156
Advances from parent company (Note 3) 42,214 -
------- -------
259,818 376,058
------- -------
Shareholder's Equity 12 12
Capital Stock (Note 4) 35,312 13,887
------- -------
Retained Earnings 35,324 13,899
------- -------
Commitments (Note 5) $295,142 $389,957
======= =======
- ---------------------------------------------------------
See accompanying notes to the financial statements
-F-5-
<PAGE>
786710 Ontario Limited
(Operating as Info Systems)
STATEMENT OF CASH FLOW
(Expressed in Canadian Dollars)
- -------------------------------------------------------------------
Five Months
Year Ended Ended
December 31, December 31,
1996 1995
------------ ------------
Operating activities
Net earnings (loss) $ 21,425 $(89,217)
Depreciation 4,495 1,474
Deferred income taxes - (22,451)
Gain from sale of fixed assets (639) -
Changes in operating assets
and liabilities
Receivables (133,436) (9,790)
Income taxes 95,442 -
Inventories (6,162) (1,330)
Prepaids 552 2,976
Payables and accruals (174,179) 201,497
Deposits (12,510) 8,714
Deferred revenue 22,235 (1,967)
------- -------
Net cash provided by (used in)
operating activities (182,777) 89,906
------- -------
Financing activities
Advances from parent company 42,214 -
------- -------
Investing activities
Proceed from sale of fixed assets 4,500 -
Purchase of equipment (12,305) -
------- -------
Net cash provided by (used in)
investing activities (7,805) -
------- -------
-F-6-
<PAGE>
Increase (decrease) in cash
and cash equivalents (148,368) 89,906
Cash and cash equivalents
Beginning of year 241,769 151,863
------- -------
End of year $ 93,401 $ 241,769
======= =======
- -------------------------------------------------------------------
See accompanying notes to the financial statements.
-F-7-
<PAGE>
786710 Ontario Limited
(Operating as Info Systems)
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
December 31, 1996
1. ACCOUNTING POLICIES
The Company's principal business is the development and sale of
computer software
REVENUE RECOGNITION
Revenue from sale of software program and hardware equipment is recognized upon
delivery of products. Revenue from service contract is amortized over the life
of the contract.
INVENTORIES
Inventories are valued at the lower of cost and net realizable value. Cost is
determined on a first-in, first-out basis.
DEPRECIATION
Rates and bases of depreciation applied to write-off the cost less estimated
salvage value of equipment over their estimated lives are as follows:
Furniture and fixtures 30%, declining balance
Automotive equipment 30%, declining balance
Computer equipment 30%, declining balance
RESEARCH AND DEVELOPMENT
Research and development costs, including the cost of software under
development, net of any investment tax credits, are charged to earnings in the
period in which they are incurred.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments with maturities of three
months or less at the time or purchase to be cash equivalents.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities in foreign currencies have been
-F-8-
<PAGE>
786710 Ontario Limited
(Operating as Info Systems)
NOTES TO THE FINANCIAL STATEMENTS, continued
(Expressed in Canadian Dollars)
December 31, 1996
translated into Canadian dollars at exchange rates in effect at the year end
dates; revenues and expenses at the exchange rates during the year. Exchange
gains or losses resulting from translation are reflected in the income
statement.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, trade receivables and accounts payable approximate
fair value due to the short term maturities of these instruments.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses dring the reporting period. Actual results could differ
from those estimates.
- --------------------------------------------------------------
2. CAPITAL ASSET
Accumulated 1996 1995
Net Net Book Book
Cost Depreciation Value Value
----------- ------------ ----- -----
Furniture & fixtures 14,060 10,473 3,587 5,124
Automotive equipment - - - 4,878
Computer equipment 12,914 2,232 10,682 318
------ ------ ------ -----
$26,974 $ 12,705 $ 14,269 $ 10,320
====== ====== ====== ======
- --------------------------------------------------------------------------------
3. ADVANCES FROM PARENT COMPANY
Advances from parent company have no set terms of repayment.
-F-9-
<PAGE>
786710 Ontario Limited
(Operating as Info Systems)
NOTES TO THE FINANCIAL STATEMENTS, Continued
(Expressed in Canadian Dollars)
December 31, 1996
4. CAPITAL STOCK
Authorized:
Unlimited number of non-voting, redeemable
non-cumulative, participating Class A preference shares
Unlimited number of non-voting, redeemable, non-cumulative,
non-participating Class B
preference shares
Unlimited number of non-voting, redeemable, non-cumulative Class C preference
shares, redeemable at $10,000 each
1996 1995
---- ----
Issued:
120 common shares $ 12 $ 12
======= =======
5. COMMITMENTS
Future minimum annual lease commitment to expiry date re:
1997 $19,810
6. RELATED PARTY TRANSACTIONS
(a) Management fees of $185,039 (1995-$183,333) was paid to a
company controlled by the former shareholder.
(b) Sales of $131,875 (1995 - $Nil) was made to the parent company.
(c) Receivables include $131,875 (1995 - $Nil) due from the parent
company.
-F-10-
<PAGE>
786710 Ontario Limited
(Operating as Info Systems)
NOTES TO THE FINANCIAL STATEMENTS, Continued
(Expressed in Canadian Dollars)
December 31, 1996
7. LOSSES
The Company has recorded deferred tax for the income tax benefits of net
operating loss carryforward for provincial purposes. This loss is available to
reduce taxable income in future years and will expire in the year 2000.
Due to the uncertainty in realizing such benefit, a valuation allowance of
$11,400 has been recorded which offsets the entire amount of the deferred tax
related to the net operating loss carryforward.
8. CONCENTRATION OF CREDIT RISK
The Company sells on credit terms to its customers located in Canada and the
United States. No single customer represented more than 10% of the Company's
sales in the reporting period.
9. CONTINGENCY
A legal claim of $200,000 has been filed against the Company and other parties
relating to a matter which arose in the ordinary course of business. In the
opinion of management, the likelihood of the lawsuit being successful and the
amount of loss, if any, is not determinable. Accordingly, no provision has been
made in these financial statements.
10. COMPARATIVE FIGURES
Comparative figures of the prior year have been restated in order to conform
with the financial statement format adopted in current year.
-F-11-
<PAGE>
MAJOR FLEET & LEASING CORP.
FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
For the Years Ended December 31, 1996 and 1995
Marcum & Kliegman LLP
Certified Public Accountants & Consultants
-F-12-
<PAGE>
Marcum & Kliegman LLP
Certified Public Accountants & Consultants
A Limited Liability Partnership
Consisting of Professional Corporations
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Major Fleet & Leasing Corp.
We have audited the accompanying balances sheets of Major Fleet & Leasing Corp.
as of December 31, 1996 and 1995, and the related statements of income, retained
earnings 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Major Fleet & Leasing Corp. as
of December 31, 1996 and 1995 and the results of its operations and is cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Marcum & Kliegman LLP
February 5, 1997
130 Crossways Park Drive
Woodbury, New York 11797-2027
Tel 516-390-1000 o Fax 516-390-1001
-F-13-
<PAGE>
MAJOR FLEET & LEASING CORP.
BALANCE SHEETS
December 31, 1996 and 1995
1996 1995
---- ----
ASSETS
CURRENT ASSETS
Cash and cash equivalents $77,806 $ 409,280
Net investment in direct
financing leases, current 1,390,598 426,473
Accounts receivable 1,903 82,335
Inventory 1,175,667 25,219
Prepaid expenses 8,335 8,143
Loans to employees 35,609 0
---------- ------
Total Current Assets 2,689,918 951,450
---------- -------
LEASED EQUIPMENT, net 238,658 292,769
---------- -------
NET INVESTMENT IN DIRECT
FINANCING LEASES,
net of current portion 1,059,287 511,728
--------- -------
PROPERTY AND EQUIPMENT, net 11,805 12,401
------- ------
OTHER ASSETS
Cash surrender value
of life insurance policies 165,746 198,654
Loans to officers 13,843 9,000
------- -------
Total Other Assets 179,589 207,654
------- -------
TOTAL ASSETS $4,179,257 $1,976,002
========== =========
The accompanying notes are an integral part of these financial statements.
-F-14-
<PAGE>
MAJOR FLEET & LEASING CORP.
BALANCE SHEETS
December 31, 1996 and 1995
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
---- ----
CURRENT LIABILITIES
Accounts payable $ 17,673 $ 2,698
Accrued expenses and taxes 20,158 31,904
Notes payable, related party 1,670,534 0
Current maturities of long-term debt 463,976 500,544
Lease deposits payable, current 43,365 45,507
Customer advances 18,613 52,075
Due to affiliates 1,404,079 136,833
---------- ---------
Total Current Liabilities 3,638,398 769,563
---------- ---------
OTHER LIABILITIES
Long-term debt,
less current maturities 307,882 417,269
Lease deposits payable, non current 28,776 37,931
Loans on life insurance policies 43,346 11,973
---------- --------
Total Other Liabilities 380,004 467,173
---------- --------
TOTAL LIABILITIES 4,018,402 1,236,736
---------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - no par value, 200
shares authorized, 20 shares
issued and outstanding 1,000 1,000
Retained earnings 159,855 738,266
---------- -------
TOTAL STOCKHOLDERS' EQUITY 160,855 739,266
---------- -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $4,179,257 $1,976,002
========== =========
The accompanying notes are an integral part of these financial statements.
-F-15-
<PAGE>
MAJOR FLEET & LEASING CORP.
STATEMENTS OF INCOME
For the Years Ended December 31, 1996 and 1995
1996 1995
-------- --------
REVENUE $951,261 $1,105,434
-------- ----------
SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES 504,057 506,906
-------- -------
INCOME FROM OPERATIONS BEFORE
DEPRECIATION 447,204 598,528
DEPRECIATION 177,533 223,848
-------- -------
INCOME FROM OPERATIONS 269,271 374,680
-------- -------
OTHER INCOME (EXPENSE)
Interest expense (79,594) (79,502)
Interest income 8,932 13,765
Other income 9,577 6,023
-------- ----------
TOTAL OTHER EXPENSE (61,085) (59,714)
-------- --------
INCOME BEFORE INCOME TAXES 208,586 314,966
INCOME TAXES 11,152 4,915
-------- -------
NET INCOME $197,434 $ 310,051
======== ==========
The accompanying notes are an integral part of these financial statements.
-F-16-
<PAGE>
MAJOR FLEET & LEASING CORP.
STATEMENTS OF RETAINED EARNINGS
For the Years Ended December 31, 1996 and 1995
1996 1995
------- -------
RETAINED EARNINGS - Beginning $738,266 $678,215
Add: Net income 197,434 310,051
Less: Distributions to stockholders 775,845 250,000
-------- --------
RETAINED EARNINGS - Ending $159,855 $738,266
======== ========
The accompanying notes are an integral part of these financial statements.
-F-17-
<PAGE>
MAJOR FLEET & LEASING CORP.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996 and 1995
1996 1995
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $197,434 $310,051
-------- --------
Adjustments to reconcile
net income to net cash provided
by operating activities:
Depreciation 177,533 223,848
Gain on sale of
leased equipment (169,079) (219,963)
Decrease (increase) in net
investment in direct
financing leases 158,850 (268,044)
Decrease (increase)
in accounts receivable 80,432 (79,807)
Decrease (increase)
in inventory 7,608 (20,588)
(Increase) decrease
in prepaid expenses (192) 6,437
Increase in loans to employees (35,609) 0
Decrease (increase) in cash
surrender value of life
insurance policies, net 64,281 (49,136)
Increase in loans to officer (4,843) 0
Increase (decrease) in
accounts payable 14,977 (2,388)
(Decrease) increase in
accrued expenses and taxes (11,746) 16,941
(Decrease) increase in
lease deposits payable (11,297) 25,235
(Decrease) increase
in customer advances (33,462) 42,423
Increase in due to affiliates, net 109,188 160,547
-------- -------
TOTAL ADJUSTMENTS 346,641 (164,495)
-------- --------
NET CASH PROVIDED
BY OPERATING ACTIVITIES 544,075 145,556
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of leased equipment (288,328) (933,702)
Purchase of other equipment (2,000) (10,132)
-F-18-
<PAGE>
MAJOR FLEET & LEASING CORP.
STATEMENTS OF CASH FLOWS, Continued
For the Years Ended December 31, 1996 and 1995
1996 1995
------- -------
Proceeds from trade
notes receivable 0 30,781
Proceeds from sale
of leased equipment 336,579 1,162,002
-------- ---------
NET CASH PROVIDED BY
INVESTMENT ACTIVITIES $ 46,251 $248,949
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $471,421 $701,077
Payments on long-term debt (617,376) (653,700)
Distributions to stockholders (775,845) (250,000)
--------- ---------
NET CASH USED IN
FINANCING ACTIVITIES 921,800 (202,623)
-------- --------
NET (DECREASE) INCREASE IN
CASH AND CASH EQUIVALENTS (331,474) 191,882
CASH AND CASH EQUIVALENTS - Beginning 409,280 217,398
-------- --------
CASH AND CASH EQUIVALENTS - Ending $ 77,806 $409,280
======== ========
The accompanying notes are an integral part of these financial statements.
-F-19-
<PAGE>
MAJOR FLEET & LEASING CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
Nature of Business
Major Fleet & Leasing Corp. (the "Company") is in the business of leasing
automobiles and trucks primarily in the New York City metropolitan area under
direct financing and operating leases expiring in various years through 2000.
Effective October 2, 1996, the Company became a wholly-owned subsidiary of
Fidelity Holdings, Inc. ("Fidelity"). Since the change in ownership, the Company
has expanded its operations to include the leasing of telephone equipment.
Revenue Recognition
The Company records income from direct financing leases based on a constant
periodic rate of return on the net investment in the lease. Income earned from
operating lease agreements is recorded evenly over the term of the lease.
Inventory
Inventory consists of automobiles and trucks held for sale or lease, and is
valued at the lower of cost (specific identification) or market.
Depreciation
Depreciation of leased equipment is calculated on the cost of the equipment,
less an estimated residual value, on the straight-line method over the term of
the lease. Depreciation of other property and equipment is provided by the
straight-line method over the estimated useful lives of the assets.
Property and Equipment
Property and equipment is stated at cost. Costs of major additions and
betterments are capitalized, and maintenance, repairs and minor renewals are
expensed as incurred. When property and equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation are eliminated from the
accounts and any resulting gain or loss is reflected in income.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Income Taxes
The Company, with the consent of its stockholders, had elected under the
Internal Revenue Code to be an "S" corporation. In lieu of corporation income
taxes, the stockholders of an "S" corporation are taxed on their proportionate
share of the
-F-20-
<PAGE>
MAJOR FLEET & LEASING CORP. NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies, continued
Income Taxes, continued
company's taxable income. Therefore, no provision or liability for federal
income tax has been included in the financial statements through
September 30, 1996.
Effective October 2, 1996, in conjunction with the change in the Company's
ownership, the "S" Corporation election was terminated and the Company is
currently taxed as a "C" Corporation. The Company will file a consolidated
Federal tax return with Fidelity.
Advertising
The Company expenses advertising costs as incurred.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain accounts in the prior year financial statements have been reclassified
for comparative purposes to conform with the presentation in the current year
financial statements. These reclassifications have no effect on previously
reported income.
NOTE 2 - Leased Equipment
Leased equipment is stated at cost and consists of the following at
December 31, 1996 and 1995:
1996 1995
-------- ---------
Automobiles and trucks $502,840 $685,584
Less accumulated depreciation 264,182 392,815
-------- --------
Leased Equipment, net $238,658 $292,769
======== ========
Depreciation expense related to leased equipment was $174,937 and $222,095 for
the years ended December 31, 1996 and 1995, respectively.
-F-21-
<PAGE>
MAJOR FLEET & LEASING CORP. NOTES TO FINANCIAL STATEMENTS
NOTE 3 - Net Investment in Direct Financing Leases
Components of the net investment in direct financing leases are as follows
at December 31, 1996 and 1995:
1996 1995
---------- ---------
Total minimum lease payments
to be received $2,705,711 $1,078,235
Estimated residual value
of leased property 200,315 197,340
Unearned income (456,141) (337,374)
---------- ----------
Net Investment $2,449,885 $ 938,201
========== ==========
Future minimum lease payments receivable at December 31, 1996 is as
follows:
Year Ending
December 31, Amount
------------ ------
1997 $1,512,465
1998 1,108,499
1999 77,493
2000 7,254
----------
Total $2,705,711
==========
NOTE 4 - Property and Equipment
Property and equipment at December 31, 1996 and 1995 is comprised of the
following:
-F-22-
<PAGE>
MAJOR FLEET & LEASING CORP. NOTES TO FINANCIAL STATEMENTS
Estimated 1996 1995 Useful Lives
-------------- ------- ------------
Furniture and fixtures $16,113 $17,555 5-7 years
Less: accumulated
depreciation 4,308 5,154
------- -------
Property and Equipment, net $11,805 $12,401
======= =======
Depreciation expense related to property and equipment for the years ended
December 31, 1996 and 1995 was $2,596 and $1,753, respectively.
NOTE 5 - Long-Term Debt
Various lenders advance funds to the Company in the form of notes payable
to finance leased vehicles. Interest on each note is charged depending on the
prime rate in effect at the time the vehicle is leased and remains constant over
the term of the lease. Applicable rates at December 31, 1996 ranged between 7%
and 9.5%. Equal monthly installments are paid over the term of the lease (which
can range from 12 to 60 months), together with a final balloon payment, if
applicable. These loans are collateralized by the vehicles. Maturities of
long-term debt at December 31, 1996 are as follows:
Year ending
December 31, Amount
----------- ------
1997 $463,976
1998 230,851
1999 70,437
2000 6,594
--------
Total $771,858
========
NOTE 6 - Notes Payable, Related Party
In December 1996 the Company purchased telephone equipment from an
affiliated entity for $1,670,534 (see Note 12) and incurred notes payable
totalling such amount. The notes are expected to be repaid in full in 1997 and,
accordingly, are shown as a current liability in the accompanying financial
statements. The notes are collateralized by the telephone equipment. Interest
rates on these notes have not yet been determined by management.
-F-23-
<PAGE>
MAJOR FLEET & LEASING CORP.NOTES TO FINANCIAL STATEMENTS
NOTE 7 - Related Party Transactions
The Company purchased a substantial portion of its leased vehicles and all of
its leased telephone equipment and new car inventory from affiliates (see Note
12).
Amounts due to affiliates represent the balances owed for the purchases of these
leased vehicles and new car inventory, as well as advances made/expenses
incurred in the ordinary course of business from various entities which are
wholly-owned by the Company's former stockholders. These amounts owed are in the
form of noninterest-bearing obligations with no specified maturity dates.
The Company conducts its business from a facility which is leased without a
formal lease agreement on a month to month basis from an entity which is
wholly-owned by the Company's former stockholders. Rent expense for 1996 and
1995 as $37,200 and $16,000, respectively.
NOTE 8 - Officers' Loans
The Company made loans to its officers which are noninterest-bearing and have no
definitive repayment terms.
NOTE 9 - Supplemental Disclosures Of Cash Flow Information
Cash paid during the years ended December 31, 1996 and 1995 for:
1996 1995
---- ----
Interest $ 79,693 $ 82,384
Income taxes $ 10,267 $597
Noncash Transactions:
During 1996 the Company purchased vehicles and telephone equipment and
incurred liabilities of $l,158,056 and $1,670,534, respectively.
-F-24-
<PAGE>
MAJOR FLEET & LEASING CORP.NOTES TO FINANCIAL STATEMENTS
NOTE 10 - Commitments and Contingencies
Sales of Customer Installment Contracts
The Company has sold customer installment contracts to some financing
institutions with no recourse and to others with full recourse. In the event of
default on recourse loans, the Company would pay the financing institution a
predetermined amount and would repossess and sell the vehicle. No accrual has
been made for possible losses since, in management's opinion, on an aggregate
basis, the Company could sell the repossessed automobiles for amounts in excess
of outstanding liabilities.
Guarantor of Third Party Obligations
Under the terms of a cross-guaranty, cross-default, crosscollateralization
agreement, the Company is the guarantor of debt incurred by affiliated
companies.
In addition, the Company is a guarantor on a mortgage of an entity which is
wholly-owned by the former stockholders of the Company. The outstanding balance
of the mortgage at December 31, 1996 is $877,212.
NOTE 11 - Major Customer
The Company derives a substantial portion of its lease income from one
customer. Lease income attributable to that customer was $288,322 (55%) and
$380,234 (40%) in 1996 and 1995, respectively.
NOTE 12 - Major Suppliers
The Company purchased a substantial portion of its leased vehicles from
three entities which are wholly-owned by the Company's former stockholders.
Purchases attributable to those entities were $198,108 (68%), $28,329 (10%) and
$49,742 (17%) in 1996 and $519,426 (56%), $95,685 (10%), and $95,775 (10%) in
1995, respectively. In 1996, the Company purchased $1,158,056 (100%) of its new
car inventory from an entity which is wholly-owned by its former stockholders.
Amounts due to these companies at December 31, 1996 and 1995 are included in due
to affiliates (see Note 7).
In addition, in 1996, the Company purchased $1,670,534 (100%) of its leased
telephone equipment from an entity wholly-owned by Fidelity. The balance owed to
this entity at December 31, 1996 is included in notes payable, related party
(see Note 6).
-F-25-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Fidelity Holdings, Inc.
We have audited the consolidated balance sheets of Fidelity Holdings,
Inc. and subsidiaries as of December 31, 1996 and 1995 and the related
consolidated statements of income (loss), stockholders equity, and cash flows
for the periods 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 did not examine the financial
statements of Major Fleet & Leasing Corp. and 786710 Ontario Limited, both
wholly-owned subsidiaries, which statements reflect total assets of $4,299,354.
as of December 31, 1996 and total revenue of $796,602. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Major Fleet & Leasing
Corp. and 786710 Ontario Limited is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit and the reports of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Fidelity Holdings, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the periods then ended in conformity with generally
accepted accounting principles.
PETER C. COSMAS
CO., CPA'S
New York, New York February 27, 1997
-F-26-
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1996 1995
---- ----
Current Assets:
Cash and cash equivalents $ 574,486 $39,063
Net Investment in direct financing
leases, current 1,390,598 -
Notes receivable - officer and
shareholder 142,659 -
Accounts receivable 179,837 -
Inventories 1,494,020 -
Other current assets 45,349 10,000
---------- -------
Total current assets 3,826,949 49,063
Net investment in direct financing leases,
Net of current portion 1,059,287 -
Property and equipment 1,023,523 -
Excess of costs over net assets acquired 1,475,269 -
Other intangible assets 1,653,474 500,000
Other assets 278,362 -
---------- -------
Total assets $9,316,864 $549,063
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 419,052 $ -
Accrued expenses 522,026 5,480
Current maturities of long-term debt 643,976 35,714
Accrued income taxes 4,378 -
Deferred revenue 67,409 -
Due to affiliates 1,404,079 -
---------- --------
Total current liabilities 3,060,920 41,194
Long-term debt, less current maturities 515,609 464,286
Deferred income taxes 424,000 -
Other 72,122 -
---------- --------
Total liabilities 4,072,651 505,480
Commitments
Stockholders' equity
Preferred stock, .01 par value;
2,000,000 shares authorized,
250,000 shares issued and outstanding
in 1996 and none in 1995 2,500 -
Common stock, .01 par value
50,000,000 shares authorized,
6,279,200 shares issued and
outstanding in 1996 and
5,000,000 in 1995 62,792 50,000
Additional paid in capital 4,509,108 -
Cumulative translation adjustment 264 (6,417)
Retained earnings (deficit) 669,549 -
---------- ----------
Total stockholders' equity 5,244,213 43,583
---------- ----------
Total liabilities and stockholders' $ 9,316,864 $549,063
=========== ===========
The accompanying notes are an integral part of theseconsolidated financial
statements.
-F-27-
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended Nov. 7, 1995,
Dec. 31, (Inception date) to
1996 Dec. 31, 1995
---- -----------------
Revenues:
Computer products and
telecommunications equipment $ 3,175,528 $-
Leasing income 258,947 -
------------ -----------
Total revenues 3,434,475 -
------------ -----------
Operating expenses:
Cost of products sold 965,792 -
Selling, general and
administrative expenses
Products 935,529 2,042
Leasing 191,372 -
Amortization of intangible assets 178,104 -
------------ ------------
2,270,797 2,042
------------ ------------
Operating income (loss) 1,163,678 (2,042)
------------ ------------
Other income (expense)
Interest expense (24,132) (4,375)
Interest income 9,830 -
Loss on joint venture (32,410) -
------------- ------------
Income (loss) before provision for
income taxes 1,115,966 6,417
Provision for income taxes 441,000 -
------------ ------------
Net income (loss) $ 675,966 $(6,417)
============ ============
Earning (loss) per share
Primary $ 0.12 $ (0.02)
Fully diluted 0.12 -
Weighted average common and common
equivalent shares outstanding:
Primary 5,522,862 5,000,000
Fully diluted 5,522,862 5,000,000
The accompanying notes are an integral part of these consolidated financial
statements.
-F-28-
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended Nov. 7, 1995,
Dec. 31, (Inception date) to
1996 Dec. 31, 1995
--------- -----------------
Cash flows from operating activities:
Net income (loss) $ 675,967 $(6,417)
Adjustments to reconcile net income
(loss) to net cash (used in) provided by
operating activities:
Amortization of intangible assets 178,104 --
Depreciation 123,329 --
Deferred income taxes 424,000 --
(Increase) decrease in asset
Net investment in direct financing
leases (1,612,675) --
Notes receivable (142,659) --
Accounts receivable (20,229) --
Inventories (1,173,082) --
Other assets (31,304) (10,000)
Increase (decrease) in liabilities:
Accounts payable 108,079 --
Accrued expenses 416,282 5,480
Accrued income taxes 4,378 --
Deferred revenue 3,075 --
Due to affiliates 1,184,177 --
---------- ------
Net Cash provided by operating activities: 137,442 (10,937)
---------- -------
Cash flows from investing activities:
Additions to property and equipment (77,326) --
Acquisition of 786710 Ontario Limited,
Net of Cash Acquired (738,636) --
----------- -------
Net Cash used in investing activities (815,962) --
----------- -------
Cash flows from financing activities:
Proceeds from long-term debt 400,000 --
Payments of long-term debt (170,321) --
Proceeds from issuance of common
stock and exercise of warrants
net of expenses 984,000 50,000
---------- ------
Net cash provided by financing activities 1,213,679 50,000
---------- ------
Effect of exchange rates on cash 264 --
---------- ------
Net increase in cash and cash equivalents 535,423 39,063
Cash and cash equivalents, beginning of
period 39,063 --
---------- ------
Cash and cash equivalents, end of period $574,486 $ 39,063
========== =======
Supplemental Disclosures of Cash Flow
Information:
Cash paid during the period for:
Interest $ 24,132 --
Income Taxes $ -- --
The accompanying notes are an integral part of these consolidated financial
statements.
-F-29-
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Additional Retained Currency Total
Preferred Stock Common Stock Paid-In Earnings Translation Stockholders'
Shares Amount Shares Amount Capital (Deficit) Adjustment Equity
--------- ------ ------ ------ ---------- ---------- ---------- ----------
Issuance of Common Stock -- $ -- $5,000,000 $50,000 $ -- $ -- $ -- $50,000
Net Loss (6,417) (6,417)
-------- ------- --------- -------- --------- --------- ---------- ----------
-- -- -- -- -- (6,417) -- (6,417)
Balance December 31,
1995 -- 5,000,000 50,000 -- (6,417) -- 43,583
Issuance of
Common Stock and
exercise of
warrants net of
expenses -- -- 990,000 9,900 979,000 988,900
Issuance of
Common Stock as
payment for
long-term debt -- -- 160,000 1,600 398,400 -- -- 400,000
Issuance of
Common Stock for
the acquisition
of 786710 Ontario Ltd -- -- 125,000 1,250 623,750 -- -- 625,000
Issuance of
Preferred stock
for theacquisition of
Major Fleet &
Leasing Corp 250,000 2,500 -- -- 2,497,500 -- -- 2,500,000
Net income -- -- -- -- -- 675,966 -- 675,966
Effect of stock
compensation
charge -- -- 4,200 42 10,458 -- -- 10,500
Translation adjustment -- -- -- -- -- -- 264 264
Balance
December 31, 1996
-------- ------- -------- ------ --------- -- -- ---------
250,000 $ 2,500 6,279,200 $62,792 $ 4,509,108 $669,549 $264 $ 5,244,213
======= ====== ========= ======= =========== ======== ==== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-F-30-
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Summary of Significant Accounting Policies:
a) Nature of the Business:
Fidelity Holdings, Inc. ( The Company) was incorporated under the laws of the
State of Nevada on November 7, 1995. The Company is structured as a holding
Company that has two divisions, a Computer Telephone and Telecommunication
Division and a Plastic and Utilities Division. The plastic and utilities
division is considered to be in its development stage. In addition through its
October 1, 1996 acquisition of Major Fleet & Leasing Corp. The Company is in the
business of leasing automobiles, trucks and telephone equipment under direct
financing and operating leases.
b) Principles of Consolidation:
The accompanying consolidated financial statements include the accounts of
Fidelity Holdings, Inc. and its wholly owned subsidiaries. All significant
intercompany accounts, transactions and profits have been eliminated.
c) Earnings per Share:
Earnings (loss) per share are based on the weighted average common and common
equivalent shares, outstanding each year. Common equivalent shares consist of
shares issuable upon the exercise of stock options and warrants, except where
anti-dilutive.
d) Cash Equivalents:
Cash equivalents consist of highly liquid investments, principally money market
accounts, with a maturity of three months or less at the time of purchase. Cash
equivalents are stated at cost which approximate market value.
e) Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or market.
Automobiles and trucks held for sale or lease are valued at the lower of cost
(specific identification) or market.
f) Property and Equipment:
Property and equipment are recorded at cost. Depreciation and amortization of
property and equipment are computed using the straight-line method over the
estimated useful lives of the assets, ranging from three to ten years.
Depreciation of leased equipment is calculated on the cost of the equipment,
less an estimated residual value, on the straight-line method over the term of
the lease. Maintenance and repairs are charged to operations as incurred. When
property and equipment are sold or otherwise disposed of, the asset cost and
accumulated depreciation are removed from the accounts, and the resulting gain
or loss, if any is included in the results of operations.
g) Revenue Recognition:
The Company recognizes revenue from the sale of telecommunications and computer
products at the date of product shipment. Any additional costs related to the
product sold are provided for at the time of the sale. The Company records
income from direct financing leases based on a constant periodic rate of return
on the net investment in the lease. Income earned from operating lease
agreements is recorded evenly over the term of the lease.
-F-31-
<PAGE>
h) Foreign Currency Translation:
The Company translates the assets and liabilities of its foreign subsidiaries at
the exchange rates in effect at year end. Revenues and expenses are translated
using exchange rates in effect during the year. Gains and losses from foreign
currency translation are credited or charged to cumulative translation
adjustment included in stockholders' equity in the accompanying consolidated
balance sheets.
i) Use of Estimates In Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of income and expenses during the reporting
periods. Operating results in the future could vary from the amounts derived
from management's estimates and assumptions.
j) Excess of Costs over Net Assets Acquired:
The excess of cost over fair value of net assets of businesses acquired is
amortized on a straight-line basis from five to fifteen years. Amortization
recorded in 1996 was $107,593.
k) Impairment of Long-Lived Assets
Effective January 1, 1996, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be disposed of. SFAS No. 121 requires the Company to
review the recoverability of the carrying amount of its long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
an asset might not be recoverable.
In the event that facts and circumstances indicate that the carrying amount of
long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the assets' carrying amount
to determine if a write-down to fair value is required. Fair value may be
determined by reference to discounted future cash flows over the remaining
useful life of the related asset. Such adoption did not have a material effect
on the Company's consolidated financial position or results of operations. l)
Fair Value Disclosures The carrying amounts reported in the Consolidated Balance
Sheets for cash and cash equivalents, notes and accounts receivable, accounts
payable, accrued expenses, and due to affiliates approximate fair value because
of the immediate or short-term maturity of these financial instruments.
The fair value of long-term debt, including the current portion, is estimated
based on current rates offered to the Company for debt of the same remaining
maturities.
m) Stock Options
The Company accounts for its stock options in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company adopted the
disclosure requirements of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation. Had the Company determined
Compensation Cost based on fair value at the grant date for stock options under
SFAS No. 123 the effect would have been immaterial.
2) Accounts Receivable:
The Company evaluates its accounts receivable on a customer by customer basis
and has determined that no allowance for doubtful accounts is necessary at
December 31, 1996.
-F-32-
<PAGE>
3) Notes receivable - officer shareholder:
Note in the principal amount of $140,000 plus accrued interest of $2,659.
Interest rate is 5 7/8 % per annum.
4) Net investment in Direct Financing Leases:
Components of the net investment in direct financing leases are as follows:
December 31,
--------------
1996 1995
---- ----
Total minimum lease payments to be received $2,705,711 $-0-
Estimated residual value of leased property 200,315 -0-
Unearned income (456,141) -0-
---------- ---
Net investment $2,449,885 $-0-
---------- ----
Future minimum lease payments receivable at December 31, 1996 is as follows:
Year Ending
December 31, Amount
----------- ------
1997 $1,512,465
1998 1,108,499
1999 77,493
2000 7,254
---------
Total $2,705,711
---------
5) Inventories:
Inventories consisted of the following:
December 31,
------------
1996 1995
---- ----
Telecommunication Parts $ 36,395 $-0-
Automobiles and trucks
held for sale or lease 1,457,625 -0-
---------- ----
$1,494,020 $-0-
---------- ----
6) Property and Equipment:
Property and equipment consisted of the following:
December 31,
------------
1996 1995
---- ----
Leasehold Improvements $ 22,096 $-0-
Furniture and fixtures 10,314 -0-
Computer equipment and software 804,639 -0-
Leased Equipment 309,803 -0-
---------- ----
1,146,852 -0-
Less accumulated depreciation
and amortization 123,329 -0-
---------- ----
$1,023,523 $-0-
---------- ----
-F-33-
<PAGE>
7) Income Taxes:
The Company accounts for income taxes using the asset and liability method
whereby deferred assets and liabilities are recorded for differences between the
book and tax carrying amounts of balance sheet items. Deferred liabilities or
assets at the end of each period are determined using the tax rate expected to
be in effect when the taxes are actually paid or recovered. The measurement of
deferred tax assets is reduced, if necessary, by a valuation allowance for any
tax benefits that are not expected to be realized. The effects of changes in tax
rates and laws on deferred tax assets and liabilities are reflected in net
income in the period in which such changes are enacted.
The provision for taxes on income is as follows:
Year-Ended December 31,
------------------------
1996 1995
---- ----
Federal:
Current $ 13,000 $-0-
Deferred 319,000 -0-
State:
Current 4,000 -0-
Deferred 105,000 -0-
-------- ----
Total $441,000 $-0-
-------- ----
The reconciliation between the amount computed by applying the federal statutory
rate to income (loss) before income taxes and the actual income tax expense were
as follows:
Year-Ended December 31,
------------------------
1996 1995
---- ----
Amount using the statutory Federal tax rate $380,000 $-0-
State income tax, net of federal tax benefit 69,000 -0-
Other, Net (8,000) -0-
--------- ----
Provision for taxes on income $441,000 $-0-
-------- ----
The tax effect of temporary differences resulted in deferred tax liabilities as
follows:
December 31,
------------
1996 1995
---- ----
Temporary Differences
Revenue and expenses of consolidated $ - $ -
subsidiary recognized on the cash basis for
tax purposes, resulting in a timing difference 399,427 -
Depreciation 17,310 -
Other 7,263 -
-------- -----
Total $424,000 $ -
-------- -----
8) Long-Term Debt:
Various lenders advance funds to the Company's leasing subsidiary in the form of
notes payable to finance leased vehicles. Interest on each note is charged
depending on the prime rate in effect at the time the vehicle is leased and
remains constant over the term of the lease. Applicable rates at December 31,
1996 ranged between 7% and 9.5%. Equal monthly installments are paid over the
term of the lease (which can range from 12 To 60 months), together with a final
balloon payment, if applicable. These loans are collateralized by the vehicles.
Maturities are as follows:
Year-Ended December 31,
1996 1995
---- ----
1997 $463,976 $ -0-
1998 230,851 -0-
1999 70,437 -0-
2000 6,594 -0-
-------- -----
Total $771,858 $ -0-
-------- -----
-F-34-
<PAGE>
In addition long-term debt includes $387,727 still due from the acquisition of
786710 Ontario Limited.
Maturities are as follows:
Year-Ended December 31,
-----------------------
1996 1995
---- ----
1997 $180,000 $ -0-
1998 207,727 -0-
-------- -----
Total $387,727 $ -0-
9) Business Combinations
a) Acquisition of 786710 Ontario Limited
On April 18, 1996, the Company acquired 786710 Ontario Limited, doing business
as "Info Systems". 786710 developed both the complex of telecommunications and
interactive voice response modules known as "Talkie", including "Talkie-Globe"
for international calling and the talkie power web line machine system and "BCS"
- - "Business Control Software", an integrated group of modules for accounting
functions capable of real time use in various languages and currencies.
Talkie is a trademarked name for an interrelated group of modules and
applications of telephonic and interactive voice processing software which
786710 had marketed for several years.
The transaction was accounted for under the purchase method of accounting and
the total cost for the acquisition was $1,413,977. The results of operations for
786710 are included in the Company's "Consolidated Statements of Operations"
from April 18, 1996, the date of acquisition.
The Company issued 125,000 of its shares valued at $625,000 for the acquisition.
These shares shall vest at the rate of 25,000 shares per year over a five year
period.
The Company independently reviewed their investment in this technology to ensure
proper valuation on the financial statements.
The cost of $1,413,977 was allocated as follows:
Fair value of net Assets acquired at April 18, 1996,
mainly computer software and equipment $ 729,603
Intangible asset-excess of costs over net assets
acquired 684,374
---------
Total $1,413,977
----------
The excess of costs over net assets acquired amounting to $684,374 is being
amortized over a five-year period.
b) Acquisition of Major Fleet & Leasing Corp.
On October 1, 1996 the Company acquired Major Fleet & Leasing Corp., organized
in 1985 and engaged in the leasing and financing of motor vehicles, primarily in
the New York City metropolitan area. Since becoming a wholly-owned subsidiary of
the Company, it has expanded its operations to include the leasing of telephone
equipment.
The transaction was accounted for under the purchase method of accounting and
the total cost for the acquisition was $2,500,000. The results of operations for
Major Fleet & Leasing Corp. are included in the Company's "Consolidated
Statements of Operations" from October 1, 1996, the date of acquisition.
The Company issued 250,000 shares of Convertible Preferred Stock (The 1996 Major
Series), convertible into 500,000 shares of the Company's Common Stock. In
addition, as a bonus for the attainment of certain goals prior to closing, the
Bendell's were issued 100,000 shares of Common Stock. In addition the Bendell's
were issued warrants for the purchase of 100,000 shares of the Company's Common
Stock at a price of $1.25 per share.
-F-35-
<PAGE>
The cost of $2,500,000 was allocated as follows:
Fair value of net assets acquired at October 1, 1996 $ 401,512
Licenses 1,200,000
Intangible asset-excess of costs over net assets acquired 898,488
----------
Total $2,500,000
----------
The excess of costs over net assets acquired amounting to $898,488 is being
amortized over a fifteen-year period.
Separate results for the periods prior to the acquisition were as follows:
Nine month Year ended
period ended December 31,
9/30/96 1995
-------------- ------------
Revenues $692,314 $1,105,434
Net income $158,383 $ 310,051
10) Other intangible Assets consist of :
Patents:
The Company has purchased two patents to be used in the manufacture of armored
conduit. The patents will be amortized over the remaining useful life of 14
years on the straight line basis. The Company has an agreement with the seller
of the patents to pay royalty payments. The payments will be calculated at the
greater of 5% of the manufactured cost of the armored conduit or 2% of the net
sales.
Licenses:
The $1,200,000 value attributed to the licenses acquired as part of the Major
Fleet & Leasing Corp. acquisition is being amortized on a straight-line basis
over a twelve to seventeen year period.
11) Commitments:
Compensation Agreements:
Mr. Bruce Bendell, Chairman of the Board of the Company, entered into a
Consulting Agreement effective January 1, 1996. The Consulting Agreement
provides for base annual compensation of $150,000 and provides for increases in
such base compensation and for performance-based and discretionary bonuses.
Mr. Doron Cohen, President and Treasurer of the Company, entered into an
Employment Agreement effective January 1, 1996. The Agreement provides for base
annual compensation of $150,000 and provides for increases in such base
compensation and for both performance-based and discretionary bonuses.
Both Mr. Bendell and Mr. Cohen waived their compensation for 1996: there is
no accrual. However, there was compensation paid to Mr. Cohen by the Company's
Telecommunication subsidiary in the amount of $50,000. Neither Mr. Bendell nor
Mr. Cohen has any stock options, stock appreciation rights ("SAR") or deferred
compensation.
Sales of Customer Installment Contracts:
The Company's leasing subsidiary has sold customer installment contracts to some
financing institutions with no recourse and to others with full recourse. In the
event of default on recourse loans, the Company would pay the financing
institution a predetermined amount and would repossess and sell the vehicle. No
accrual has been made for possible losses since, in management's opinion on an
aggregate basis, the Company could sell the repossessed automobiles for amounts
in excess of outstanding liabilities.
-F-36-
<PAGE>
Customer installment contracts sold with recourse are as follows:
a) GMAC - retail sales program $ 34,509
b) European American Bank 158,216
--------
Total $192,725
--------
The "pre-determined" amount that must be paid by the Company in the event of
default is as follows:
a) GMAC - retail sales program $ 9,026
b) European American Bank 59,072
-------
Total $68,098
-------
Guarantor of Third Party Obligations:
Under the terms of a cross-guarantee, cross-default, cross-collateralization
agreement, the Company's leasing subsidiary is the guarantor of debt incurred by
affiliated companies. In addition, the subsidiary is a guarantor on a mortgage
of an entity which is wholly owned by officer-shareholders of the Company. The
outstanding balance of the mortgage on December 31, 1996 is $877,212.
Legal Proceedings:
On November 22, 1996, the Company and two subsidiaries filed an action in the
New York Supreme Court in Queens County indexed at 25678-96 and captioned
"Fidelity Holdings, Inc., Computer Business Sciences, Inc. and 786710 (Ontario)
Limited, Plaintiffs, versus Michael Marom and M. M. Telecom, Corp. "claiming
damages of $5,000,000 for breach of contract, libel, slander, disparagement,
violation of copyright laws, fraud and misrepresentation. On February 4, 1997
the Defendants filed an amended Answer, and a Counterclaim seeking damages of
$50,000,000 for breach of contract and violation of the Lanham Act. The
Plaintiffs have filed an Answer to the Counterclaim. Discovery has not yet
commenced.
On September 18, 1996, the Company's subsidiary, 786710 (Ontario) Limited, the
Company as owner of 786710, and the Baraks as the original principals of 786710,
were sued in the Ontario Court (General Division) by Touch Tone Connections,
indexed at 96-CU-111059. Touch Tone Connections seeks damages of CN$200,000 in
connection with the installation, in 1995, of certain hardware and software
claimed to have been faulty and not meeting the sales representation. All of the
events occurred prior to the Company's acquisition of 786710 and the Baraks
indemnified the Company against any such action.
While it is not possible to determine the ultimate disposition of these
proceedings , the Company believes that the outcome of such proceedings will not
have a material adverse effect on the financial position or results of
operations of the Company.
12) Related Party Transactions:
Approximately 55% of the Company's revenues derived from the sale of computer
products and telecommunications equipment was to Nissko Telecom, a partner with
the Company on a joint venture in which the Company owns 45%. The Company will
receive 45% of the net revenues generated by the joint venture. The investment
in the Joint Venture is recorded under Equity Method of Accounting.
Amounts due affiliates are amounts owed by the Company's leasing subsidiary for
advances made in the ordinary course of business from various entities which are
wholly owned by the subsidiaries former Stockholders. The advances are in the
form of non-interest-bearing obligations with no specified maturity dates. The
subsidiary also, purchased a substantial portion of its leased vehicles from
affiliates.
13) Warrants:
In October 1996 the Company revised the Patent Purchase Agreement. Under the
amendment the purchase price was changed form $500,000 in cash to a combination
of $100,000 in cash and the balance in 80,000 unregistered units of the
Company's securities. Each unit consisted of 2 shares of Common Stock and 2
warrants, each warrant being for the purchase of 1 share of the Company's common
stock at an exercise price of $3.125 per share exercisable for one year.
-F-38-
<PAGE>
In March 1996, the Company issued to Nissko Telecom, Inc. and its investors,
warrants to purchase 1,500,000 shares of the Company's Common Stock at a price
of $1.25 per share. In addition the Company issued warrants for the purchase of
100,000 shares, in connection with the Management agreement entered into when
the Company acquired Major Fleet & Leasing Corp. The total number of warrants
outstanding are 1,760,000 at exercise prices of $1.25 to $3.125.
14) Preferred Stock:
Of the 2,000,000 shares of undesignated Preferred Stock authorized, to date the
Company has designated 250,000 shares as the 1996-Major Series. The shares of
the 1996-Major Series are voting, vote with the Common Stock and not as a
separate class, and each share has two votes per share reflecting the underlying
conversion rate. The shares of the Series are convertible, with each share
converting into two shares of Common Stock. In the event that a dividend is
declared on the Common Stock, a dividend of twice the per share dividend on the
Common Stock must be declared on the 1996-Major Series, again reflecting the
underlying conversion rate. The shares are redeemable after December 31, 2001 at
a price of $15.87 per share. The holders of the 1996-Major Series have a right
of rescission (put) in the event of the happening of certain events.
The specific events that would allow the right of rescission are:
a) Any determination by the Internal Revenue Service that the
stock-for-stock exchange does not qualify as a tax-free
reorganization.
b) Any breach by the Company of the Reorganization Agreement; or
c) Any failure by the Company to establish, fully fund, properly
maintain and apply, and/or safeguard the Sinking Fund; or
d) Any breach by the Company of the terms of 1996-Major Series of
convertible Preferred Stock or;
e) Admission by the Company of insolvency, adjudication of the
Company as insolvent, and/or an inability or failure of the
Company to pay its debts and liabilities in the normal course
of business; or
f) Any proceeding shall be commenced by or against the Company relating to
the Company under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, receivership, dissolution, or
liquidation law or statute of any jurisdiction, whether now or
hereafter in effect, and any such proceeding shall remain undismissed
for a period of ninety (90) days or the Company by any act indicates
its consent to, approval of, or acquiescence in, any such proceeding;
or
g) A receiver or trustee is appointed for the Company or for all or
a substantial part of the property of the Company and any such
receivership or trusteeship shall remain undischarged for a
period of sixty (60) days; or
h) Any change in any of the top three executives of the Company (Chairman
of the Board, President, CEO), provided that this basis for rescission
must be utilized within ninety (90) days of the change or it shall be
deemed waived.
There is a sinking fund to support both the possible rescission and the possible
redemption of the 1996-Major Series. The sinking fund is based upon the earnings
of Major Fleet & Leasing Corp. from the business and assets purchased by the
Company.
-F-39-
<PAGE>
15) Business Segments
The Company currently operates in two industry segments: Computer and
telephony products and leasing; It also has a plastics division currently in the
development stage.
The Company's operation by industry segment for the year ended
December 31, 1996 is as follows:
Industry
---------
Computer Leasing
Products Income Other Consolidated
------- ------- ----- ------------
Revenues $3,175,528 $ 258,94 - $3,434,475
---------- ------------ --------- -------------
Operating income 1,034,143 129,535 - 1,163,678
---------- ------------ --------- -------------
Interest expense - (24,132) - (24,132)
---------- ------------- --------- ------------
Interest income 2,920 6,910 9,830
------------
Loss on joint venture - (32,410) (32,410)
---------- ------------ --------- -----------
Income before income taxes $ 1,116,966
-------------
16) Subsequent Event:
The Company has entered into a letter of intent with Mr. Bruce Bendell, Chairman
of the Board to acquire for stock and cash certain automobile dealerships
subject to certain conditions.
-F-40-
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
AND MAJOR AUTOMOTIVE GROUP, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements are based
upon the financial statements of Fidelity Holdings, Inc. and Subsidiaries (the
"Company" or "Fidelity"), and Major Chevrolet, Inc. and Affiliates ("Major")
combined and adjusted to give effect to the merger. The Merger Agreement
provides that the Company and its wholly-owned subsidiary Major Acquisition
Corp. have entered into a merger agreement with Major Automotive Group, Inc.
("Major Auto") and its sole stockholder, Bruce Bendell. Bruce Bendell owns all
of the issued and outstanding shares of common stock of Major Chevrolet, Inc.
("Major Chevrolet") and Major Subaru, Inc. ("Major Subaru") and 50% of the
issued and outstanding shares of common stock of Major Dodge, Inc. ("Major
Dodge") and Major Chrysler, Plymouth, Jeep Eagle, Inc. ("Major Chrysler,
Plymouth, Jeep Eagle"), which, collectively, operate five franchised automobile
dealerships. Pursuant to such merger agreement, Bruce Bendell will contribute to
Major Auto all of his shares of common stock of Major Chevrolet, Major Subaru,
Major Dodge and Major Chrysler, Plymouth, Jeep Eagle, and Major Acquisition
Corp. will then acquire from Bruce Bendell all of the issued and outstanding
shares of common stock of Major Auto in exchange for shares of a new class of
the Company's preferred stock. Harold Bendell, Bruce Bendell's brother, owns the
remaining 50% of the issued and outstanding shares of common stock of Major
Dodge and Major Chrysler, Plymouth, Jeep Eagle. Major Acquisition Corp. will
purchase Harold Bendell's shares for $4 million in cash under a Stock Purchase
Agreement. The unaudited pro forma combined statement of operations for the six
months ended June 30, 1997 and unaudited pro forma combined balance sheet at
June 30, 1997 give effect to the merger as if it occurred at January 1, 1997.
The unaudited pro forma combined statement of operations for the year ended
December 31, 1996 gives effect to the merger and the Company's acquisition of
Major Fleet & Leasing Corp. and 786710 Ontario Ltd. as if they occurred at
January 1, 1996. The unaudited pro forma combined statement of operations for
the period ended December 31, 1996 is derived from the audited historical
financial statements of the Company and audited historical financial statements
of Major and should be read in conjunction with the Company's and Major's
audited historical financial statements included elsewhere herein. The pro forma
combined financial statements as of and for the six month period ended June 30,
1997 have been prepared on the same basis as the historical information derived
from the audited financial statements. In the opinion of the Company's and
Major's management, the unaudited financial statements of the Company and Major
referred to above include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the financial position and
results of operations for such periods. These pro forma statements of operations
are not necessarily indicative of future operations or what the Company's
operations would actually have been had the combinations occurred at the dates
indicated and, therefore, should not be construed as being representative of
future operating results.
-F-41-
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
Pro Forma Pro Forma
Fidelity Major Adjustments Combined
-------- ----- ----------- ----------
ASSETS
Current Assets:
Cash, cash equivalents and
short-term investments $672,728 $2,360,273 $5,775,000 (b) $ 4,808,001
(4,000,000)(a)
Net investment in direct
financing leases, current 1,458,490 1,458,490
Notes receivable - officer
and shareholder 140,000 140,000
Accounts receivable 806,200 7,287,280 8,093,480
Inventories 152,449 32,358,479 32,510,928
Other current assets 81,482 754,823 836,305
---------- ------------ ------------ ------------
Total current assets 3,311,349 42,760,855 1,775,000 47,847,204
Net investment indirect
financing leases,
net of current portion 857,324 857,324
Property and equipment, net 2,072,428 684,141 2,756,569
Leased and rental vehicles 992,657 992,657
Excess of costs over net
assets acquired 2,506,892 9,288,805(a) 11,640,884
Other intangible assets 470,187 470,187
Other assets 285,574 14,745 300,319
------------ ------------ ------------ ------------
Total assets $ 9,503,754 44,452,398 $10,908,992 $ 64,865,144
=========== =========== ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 579,413 $ 4,959,510 $ 5,538,923
Accrued expenses 60,387 1,208,915 1,269,302
Current maturities
of long-term debt 1,087,721 1,087,721
Accrued income taxes 343,000 166,000(d) 509,000
Deferred revenue 66,501 66,501
Deposits for exercise
of warrants 653,750 653,750
Due to affiliates 145,173 145,173
Floor plan liabilities 36,582,247 36,582,241
----------- ------------ ------------ -----------
Total current liabilities 2,935,945 42,750,672 166,000 45,852,617
Long-term debt, less
current maturities 387,087 387,087
Deferred income taxes 310,000 310,000
Loans payable to stockholders 515,012 515,012
Other 75,725 75,725
------------ ------------ ------------ ------------
Total liabilities 3,708,757 43,265,684 166,000 47,140,441
-F-42-
<PAGE>
Pro Forma Pro Forma
Fidelity Major Adjustments Combined
-------- ----- ----------- ----------
Stockholders' equity
Preferred stock, $.01
par value: 2,000,000
shares authorized
250,000 shares issued and
outstanding 2,500 2,500
Preferred stock - 1997 - 9,000(a) 9,000
MAJOR, $.01 par value:
Common stock - Major, net
50,000,000 shares
authorized 7,501,700 shares
issued and outstanding 63,517 11,500(b) 75,017
Common stock - Major, net 730,100 (730,100)(a)
Additional paid in capital 4,550,383 176,700 (176,700)(a) 16,304,883
5,991,000 (a)
5,763,500 (b)
Cumulative translation
adjustment 310 310
Retained earnings 1,178,287 279,914 195,605(a) 1,332,993
166,000(d)
Total stockholders' equity 5,794,997 1,186,714 10,742,992 17,724,703
---------- ----------- ----------- -----------
Total liabilities and
stockholders' equity $9,503,754 $44,452,398 $10,908,992 $64,865,144
========== =========== =========== ===========
-F-43-
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997
Pro Forma Pro Forma
Fidelity Major Adjustments Combined
-------- ----- ----------- ----------
Revenues:
Computer products and
telecommunications
equipment $1,988,028 $ 1,988,028
Automobile dealers $72,040,008 72,040,008
Leasing income 489,628 489,628
--------- ---------- -----------
Total revenues 2,477,656 72,040,008 74,517,664
--------- ---------- -----------
Other income (expenses)
Cost of products sold 426,779 63,797,520 64,224,299
Selling, general and
administrative expenses
Products 767,132 767,132
Leasing 364,576 364,576
Automobile dealers 6,889,274 6,889,274
Amortization of intangible
assets 156,234 $ 154,813(c) 311,047
--------- ----------- -------- -----------
1,714,721 70,686,794 154,813 72,556,328
--------- ----------- -------- -----------
Operating income (loss) 762,935 1,353,214 (154,813) 1,961,336
Other income (expense)
Interest expense (73,724) (855,299) (929,023)
Interest income 10,472 10,472
Other 68,604 68,604
Income on joint venture 52,055 52,055
--------- ----------- -------- -----------
Income before provision
for taxes 751,738 566,519 (154,813) 1,163,444
Provision for taxes 243,000 91,000 166,000(d) 500,000
--------- ----------- -------- -----------
Net income $ 508,738 $ 475,519 $(320,813) $ 663,444
========= =========== ======== ===========
New income per common share $ 0.06
===========
Weighted average number of
common shares outstanding (e)10,982,934
-F-44-
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Fleet 786710 Fidelity
1/1/96 1/1/96 Fidelity Major
thru thru Pro Forma Pro Forma Pro Forma Pro Forma
Fidelity 9/30/96 4/18/96 Adjustments Combined Major Adjustments Combined
-------- ------- ------- ----------- -------- ----- ----------- --------
Revenues:
Computer products and
telecommunications
equipment $3,175,528 $ $259,095 $ $3,434,623 $ $ $ 3,434,823
Automobile division -- 144,081,578 144,081,578
Leasing income 258,947 692,314 951,261 951,261
------------- --------- --------- ----------- ---------- ----------- ---------- -------------
Total revenues 3,434,475 692,314 259,095 4,385,884 144,081,578 - 148,467,462
------------- --------- --------- ----------- ---------- ----------- ---------- -------------
Operating expenses:
Cost of products
sold 965,792 151,969 1,117,761 129,376,852 130,494,613
Selling, general
and administrative
expenses Products 935,529 137,901 1,073,430 1,073,430
Leasing 191,372 482,147 673,519 673,519
Automobile division -- 12,726,818 12,726,818
Amortization of
intangible assets 178,104 139,144(g) 317,248 309,627(c) 626,875
------------- ---------- --------- ----------- ---------- ----------- ---------- ------------
2,270,797 482,147 289,870 139,144 3,181,958 142,103,670 309,627 145,595,255
------------- ---------- --------- ----------- ---------- ------------ ---------- ------------
Operating income
(loss) 1,163,678 210,167 (30,775) (139,144) 1,203,926 1,977,908 (309,627) 2,872,207
Other income (expense)
interest expense (24,132) (60,653) (84,785) (1,675,202) (1,759,987)
interest income 9,830 8,869 18,699 -- 18,699
Other -- -- 118,940 118,940
Income on joint
venture (32,410) (32,410) (32,410)
------------- ---------- -------- ---------- ----------- ---------- --------- ------------
Income (loss) before
provision for taxes 1,116,966 158,383 (30,775) (139,144) 1,105,430 421,646 (309,627) 1,217,449
Income taxes 441,000 55,000(e) 496,000 105,973 147,000(d) 748,973
------------- ---------- -------- ---------- ----------- ---------- --------- ------------
Net income (loss) $ 675,966 $158,383 $(30,775) $(194,444) $609,430 $315,673 $(456,627) $ 468,476
============= ========= ========== ========== ========== ======== ========== ===========
Net income per common share
$ 0.04
===========
Weighted average number of
common shares outstanding (e) 10,551,200
</TABLE>
-F-45-
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS
Assumptions Used and Adjustments Made
(a) The merger transaction was accomplished by payment of $4,000,000 in
cash and the issuance of 900,000 shares of the Company's Convertible Preferred
Stock. Such shares are convertible, in accordance with their terms, into
1,800,000 shares of the Company's Common Stock. The number of shares was
determined, in accordance with the acquisition agreement, as that number of
shares of Common Stock that have a value of $6,000,000. The assets and
liabilities of Major were recorded at their historical book value. Since the
preponderance of such assets and liabilities are current; primarily cash,
receivables, inventories and related liabilities, management believes such book
value ($1,186,714 at June 30, 1997) approximates fair market value. This entire
transaction was assumed to have taken place as contemplated. However, in the
event that approval is not received from each of the respective automobile
manufacturers, the acquisitions of Major's constituent dealerships will occur
individually, as approval is received. This will result in pro rata stock and
cash payments as each individual dealership is acquired and the financial
results will, inevitably, differ from those presented in these pro forma
statements.
(b) The Company plans to sell 1,150,000 shares of its Common Stock at a
price, net of underwriting commissions, of $5.40 per share. The gross proceeds
were reduced by $435,000 of underwriting and other offering expenses, resulting
in net proceeds to the Company of $5,775,000. Of these net proceeds, $4,000,000
was assumed to have been used to fund the cash payment required in the
acquisition of Major.
(c) The excess of cost over net assets acquired ($9,288,805) is being
amortized over thirty years. The statements of operations reflects six months
and twelve months of amortization for the periods ended June 30, 1997 and
December 31, 1996 respectively.
(d) Taxes have been provided for the Company at historic rates. Major has
historically operated as a Subchapter S Corporation under provisions of the
Internal Revenue Code, wherein the stockholders are required to report taxable
income or loss on their personal returns and no such taxes are reflected on
Major's financial statements. Pro forma taxes have been provided for Major at an
estimated effective rate of 35%.
(e) Earnings per share has been calculated based on the weighted average
number of shares outstanding and assumes the exercise of outstanding warrants
and options and the related issuance of Common Stock and the conversion of the
Convertible Preferred Stock into Common Stock as of January 1, 1997, and January
1, 1996 for the periods ended June 30, 1997 and December 31, 1996, respectively.
(f) The statement of operations has been adjusted to reflect a full year's
amortization on the excess of costs over net assets acquired in the 1996
acquisitions of Major Fleet & Leasing Corp. and 786710 Ontario Limited. The
additional amortization amounted to $104,925 for Major Fleet & Leasing Corp. and
$34,219 for 786710 Ontario Ltd., a total of $139,144.
-F-46-
<PAGE>
Report of Independent Certified Public Accountants
Major Chevrolet, Inc. and Affiliates
Long Island City, New York
We have audited the accompanying combined balance sheet of Major Chevrolet,
Inc. and Affiliates as of December 31, 1996, and the related combined statements
of income, and cash flows for each of the two years in the period ended December
31, 1996. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on 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 combined financial statements referred to above present
fairly, in all material respects, the financial position of Major Chevrolet,
Inc. and Affiliates at December 31, 1996, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
New York, New York
August 14, 1997
-F-47-
<PAGE>
Major Chevrolet, Inc. and Affiliates
Combined Balance Sheets
December 31, 1996 June 30, 1997
(Unaudited)
Assets
Current:
Cash and cash equivalents $ 350,237 $1,564,935
Certificates of deposit 784,612 795,338
Trade receivables 5,227,776 7,287,280
Inventories 25,332,146 32,358,479
Notes receivable 637,166 656,281
Prepaid expenses and other current assets 70,020 98,542
---------- ----------
Total current assets 32,401,957 42,760,855
Property, plant and equipment, less
accumulated depreciation and amortization 704,782 684,141
Lease and rental vehicles 3,550,625 992,657
Other assets:
Security deposits 13,945 14,745
---------- ----------
$36,671,309 $44,452,398
Liabilities and Stockholders' Equity
Current:
Customer deposits $1,263,379 $1,097,817
Accounts payable 1,964,487 3,861,693
Accrued expenses 749,034 1,208,915
Notes payable on vehicle floor plan 31,298,202 36,582,247
---------- ----------
Total current liabilities 35,275,102 42,750,672
Loans payable to stockholders 664,060 494,060
Notes payable - other - noncurrent 20,952 20,952
---------- ----------
Total liabilities 35,960,114 43,265,684
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock 730,100 730,100
Additional paid-in capital 176,700 176,700
Retained earnings (deficit) (195,605) 279,914
---------- ----------
Total stockholders' equity 711,195 1,186,714
---------- ----------
$36,671,309 $44,452,398
----------- -----------
See accompanying summary of accounting policies and notes to combined
financial statements.
-F-48-
<PAGE>
Major Chevrolet, Inc. and Affiliates
Combined Statements of Income
Year ended Six months ended
December 31, June 30,
--------------------------- ---------------------------
1996 1995 1997 1996
---- ---- ---- ----
(Unaudited)
Revenues:
Sales $144,081,578 $118,039,902 $72,040,008 $70,231,171
Cost of sales 129,376,852 104,728,435 63,797,520 62,118,814
------------ ------------ ----------- -----------
Gross profit 14,704,726 13,311,467 8,242,488 8,112,357
Operating expenses 12,726,818 11,003,694 6,889,274 6,321,141
Interest expense 1,675,202 1,899,821 855,299 1,220,889
------------ ------------ ----------- -----------
Operating income 302,706 407,952 497,915 570,327
Other income 118,940 109,072 68,604 59,376
------------ ------------ ----------- -----------
Income before
income taxes 421,646 517,024 566,519 629,703
Income taxes 105,973 26,158 91,000 89,019
------------ ------------ ----------- -----------
Net income $315,673 $490,866 $475,519 $540,684
------------ ------------ ----------- -----------
See accompanying summary of accounting policies and notes to combined
financial statements.
-F-49-
<PAGE>
Major Chevrolet, Inc. and Affiliates
Combined Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
Year ended Six months ended
December 31, June 30,
-------------------- -------------------
1996 1995 1997 1996
---- ---- ---- ----
(Unaudited)
Cash flows from operating
activities:
Net income $315,673 $490,866 $475,519 $540,684
-------- -------- -------- --------
Adjustments to
reconcile net income
to net cash provided
by (used in) operating
activities:
Depreciation and
amortization 69,895 86,762 20,641 34,949
Changes in assets -
(increase) decrease
in:
Trade receivables 2,969,953 390,502 (2,059,504) 871,638
Inventories 6,224,583 (16,417,109) (7,026,333) 5,818,907
Prepaid expenses
and other current
assets 80,066 (89,263) (28,522) (9,315)
Security deposits (4,139) (1,024) (800) 3,486
Changes in liabilities
- increase (decrease)
in:
Customer deposits 1,078,951 (90,715) (165,562) 733,094
Accounts payable 243,203 147,915 1,897,206 142,239
Accrued expenses (374,171) (296,425) 459,881 159,325
---------- --------- ---------- ---------
Total adjustments 10,288,341 (16,269,357) (6,902,993) 7,754,323
Net cash provided
by (used in)
operating
activities 10,604,014 (15,778,491) (6,427,474) 8,295,007
---------- ----------- ---------- ---------
-F-50-
<PAGE>
Cash flows from
investing activities:
Purchase of property,
plant and equipment (118,358) (150,297) - (38,479)
Lease and rental
vehicles 943,171 900,000 2,557,968 (1,105,908)
Note receivable (36,166) (601,000) (19,115) (100)
Mortgage receivable - - - (97,484)
Certificate of deposit (19,828) 46,008 (10,726) (9,288)
--------- -------- ---------- ----------
Net cash provided
by (used in)
investing activities 768,819 194,711 2,528,127 (1,251,259)
-------- ------- --------- ----------
Cash flows from
financing activities:
Increase in (payment of)
stockholder loans (14,060) 214 (170,000) (137,500)
Increase (decrease)
in long-term debt (92,224) 453,140 - 3,508
Increase (decrease)
in floor plan notes
payable (11,382,436) 15,989,182 5,284,045 (7,012,577)
Decrease in
additional paid-in
capital - (1,041,100) - -
Treasury stock
repurchase - (8,900) - -
S corporation
distributions (200,000) - - (200,000)
----------- ----------- --------- ---------
Net cash
provided by
(used in)
financing
activities (11,688,720) 15,392,536 5,114,045 (7,346,569)
----------- ----------- --------- ----------
Net increase (decrease)
in cash and cash
equivalents (315,887) (191,244) 1,214,698 (302,821)
Cash and cash
equivalents, beginning
of period 666,124 857,368 350,237 666,124
------- ------- ------- -------
Cash and cash
equivalents, end of
period $350,237 $666,124 $1,564,935 $363,303
-------- -------- ---------- --------
Supplemental disclosures
of cash flow information:
Cash paid during the
period for:
Interest $1,812,010 $1,777,023 $1,093,243 $1,350,799
Income taxes 79,266 35,618 52,538 49,806
---------- ---------- ---------- ----------
See accompanying summary of accounting policies and notes
to combined financial statements
-F-51-
<PAGE>
Major Chevrolet, Inc. and Affiliates
Summary of Accounting Policies
Business and Principles of Major Chevrolet, Inc. and Affiliates
Combination and Reporting (the "Company") is a retailer of new and
used vehicles, trucks, parts and
accessories. The financial statements
consist of the combined operations of
Major Chevrolet, Inc., Major Dodge,
Inc., Major Chrysler Plymouth Jeep
Eagle, Inc. ("Major CPJE"), and Major
Subaru, Inc. (effective January 1,
1996), all of which are under common
control. All significant intercompany
balances and transactions have been
eliminated.
Use of Estimates The preparation of financial statements
in conformity with generally accepted
accounting principles requires management
to make estimates and assumptions that
affect the reported amounts of assets and
liabilities and disclosure of contingent
assets and liabilities at the date of the
financial statements and the reported
amounts of revenues and expenses during
the reporting period. Actual results could
differ from those estimates.
Credit Risk Financial instruments which potentially
subject the Company to concentration of
credit risk consist principally of cash
and cash equivalents. The Company places
its cash and cash equivalents in quality
financial institutions and, by policy,
limits the amount of credit exposure in
any one financial vehicle.
Financial Instruments The fair values of the financial
instruments, including cash, cash
equivalents, trade receivables,
inventories, accounts payable, accrued
expenses and notes payable on vehicle
floor plan, approximate their carrying
value because of the current nature of
these instruments. It is not practical to
determine the fair value of loans payable
to stockholders because the repayment
terms are subject to management's
discretion.
Revenue and Cost Recognition Revenues and cost
are recognized upon delivery of the
vehicle to the customer. At time of
delivery, all financing arrangements
between and among the parties have been
concluded.
-F-52-
<PAGE>
Major Chevrolet, Inc. and Affiliates
Summary of Accounting Policies
Interim Financial Information The accompanying unaudited combined
interim financial statements have been
prepared in accordance with generally
accepted accounting principles for interim
financial information. In the opinion of
management, all adjustments (consisting of
only normal recurring accruals) considered
necessary for a fair presentation have
been included. Operating results for the
six-month period ended June 30, 1997 are
not necessarily indicative of the results
that may be expected for the year ending
December 31, 1997.
Inventories New vehicle inventories are valued at the
lower of cost or market, with cost
determined on a last-in, first-out basis.
Used vehicle inventories are valued at the
lower of cost or market, with cost
determined on a specific identification
basis. Parts and accessories inventories
are also valued at the lower of cost or
market, with cost determined on the
first-in, first-out method.
Property, Plant and
Equipment Property, plant and equipment are stated
at cost. Depreciation is calculated using
the straight-line method over the
estimated useful lives of the assets
(ranging from 5 to 10 years). Leasehold
improvements are depreciated using the
straight-line method over their estimated
useful lives, not to exceed the life of
the lease.
Income Taxes The Company elected, with the consent of
its stockholders, to be taxed as an S
corporation under the provisions of the
Internal Revenue Code (Sec. 1361) and New
York State Franchise Tax Law. The
stockholders are required to report the
Company's taxable income or loss in their
personal income tax returns; accordingly,
such income taxes are not reflected in the
combined financial statements. In
addition, New York State imposes a
corporate level tax, based upon the
differential between corporate and
individual tax rates, which has been
provided for. The combined financial
statements include a provision for the New
York State tax and New York City income
taxes since New York City does not
recognize S corporation status. Deferred
income taxes reflect the impact of
temporary differences between amounts of
assets and liabilities for financial
reporting purposes and such amounts as
measured by tax laws. There are no
significant temporary differences;
accordingly, no deferred tax calculation
has been made.
-F-53-
<PAGE>
Major Chevrolet, Inc. and Affiliates
Summary of Accounting Policies
Supplemental Cash Flow The Company considers all short-term,
Information highly liquid instruments purchased with
an original maturity of three months or
less to be cash equivalents. The
Company's cash and cash equivalents are
carried at cost, which approximates
market value and consists primarily of
time deposits.
Certificates of Deposit The Company has two certificates of
deposit with a financial institution
which have initial maturities of one year
and six months, respectively, that
automatically renew on such maturity
dates. The fair value of the certificates
of deposit approximate their carrying
value due to their short-term maturities.
Long-Lived Assets The Company adopted Statement of
Financial Accounting Standards No. 121
"Accounting for the Impairment of
Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" in 1996. The
Company reviews certain long-lived assets
and identifiable intangibles for
impairment whenever events or changes in
circumstances indicate that the carrying
amount may not be recoverable. In that
regard, the Company assesses the
recoverability of such assets based upon
estimated nondiscounted cash flow
forecasts.
-F-54-
<PAGE>
Major Chevrolet, Inc. and Affiliates
Notes to Combined Financial Statements
1. Trade Receivables
(a) The Company's trade receivables include amounts due from related
parties as follows:
December 31, 1996
-----------------
Major Fleet and Leasing, Inc. $1,338,825
Major Pennsylvania, Inc. 174,761
----------
$1,513,586
These related parties have substantially the same ownership and management as
the Company.
(b) Trade receivables, at December 31, 1996, included approximately $.5
million in delayed payments which are approved by the vehicle manufacturer
and its financial institution.
2. Inventories
Inventories consist of the following:
December 31, 1996
-----------------
New automobiles $11,619,105
New trucks and vans 10,207,147
Used automobiles and trucks 6,041,011
Parts and accessories 664,138
Other 18,047
----------
28,549,448
Less: LIFO reserve 3,217,302
----------
$25,332,146
3. Property, Plant and Equipment
Major classes of property, plant and equipment consist of the following:
Estimated
December 31, 1996 useful lives
----------------- ------------
Furniture and fixtures $493,079 7-10 years
Service equipment 180,748 5-7 years
Automobiles 18,138 3 years
Leasehold improvements 596,571 Life of lease
---------
1,288,536
Less: Accumulated depreciation
and amortization 583,754
--------
$704,782
--------
-F-55-
<PAGE>
4. Lease and Rental Vehicles
The Company leases vehicles to an unrelated third party under operating
lease arrangements. These vehicles are used as rental vehicles through
agreements providing for daily, weekly or monthly terms. The Company holds title
to the vehicles and is reimbursed for the carrying charges paid on these
vehicles. The following is an analysis of the carrying amount of the leased
vehicles:
December 31, 1996
-----------------
Cost $4,161,130
Less: Accumulated depreciation 610,505
----------
$3,550,625
----------
-F-56-
<PAGE>
Major Chevrolet, Inc. and Affiliates
Notes to Combined Financial Statements
5. Mortgage Receivable
During fiscal 1994, the Company purchased a mortgage note from a financial
institution for $364,882. The borrower issuing the note is a former shareholder
of the Company. The note bears interest at a rate of 10% per annum payable on
the first day of each month. The note matures on February 24, 1998. During 1996,
an agreement was made to offset the mortgage receivable and all accrued interest
against a Company-issued note payable of $450,000 to the former stockholder. The
remaining portion of approximately $19,000 is included in accounts receivable.
6. Notes Payable - Vehicle Floor Plan
Notes payable on the vehicle floor plan are due to Chrysler Credit Corp.
and bear interest ranging from 8.7% to 10% during the year ended December 31,
1996. These notes are secured by the new vehicles inventory and will be repaid
at the time the vehicles are sold or by certain delayed payments included in
trade receivables as described in Note 1.
7. Notes Payable
On November 15, 1995, Major CPJE, Inc. issued a note payable to Chrysler
Credit Corporation in order to purchase equipment for the service department.
Because Major CPJE, Inc. and Major Dodge, Inc. equally share the service
department, an equal share was allocated to Major Dodge, Inc. amounting to
$14,029.
8. Stock Repurchase
On December 31, 1995, Major Chevrolet, Inc. repurchased 89 shares of its
Class B common stock, representing 10% of the shares then outstanding from a
stockholder. The purchase price was $1.05 million, which was comprised of a
$32,124 cash payment, a $450,000 note payable issued to the stockholder (see
Note 5), and an immediate cancellation of certain promissory notes.
9. Loans Payable To Stockholders
Amounts due to stockholders represent cash advances made to the Company for
cash flow purposes. The stockholders agreed not to demand payment of these loans
in the next fiscal year. Accordingly, the loans have been classified as
noncurrent. The loans do not bear interest.
10. Related Party Transaction
In addition to certain trade receivables as discussed in Note 1(a), on
October 16, 1995, the Company entered into an agreement with BHB Realty, LLP, a
related party with similar ownership as the Company, purchasing a note
receivable for $601,000. The note receivable bears interest at 6% per annum and
is payable annually on the anniversary of the note. The note is due on demand,
but not earlier than October 15, 1996. The Company rents its Dodge showroom
premises from its stockholders. The agreement is on a month-to-month basis. Rent
expense relating to the this agreement amounted to $96,000 for the year ended
December 31, 1996.
During 1996, the Company rented space for a used car lot from BHB Realty,
LLP. The agreement was on a month-to-month basis. Rent expense relating to this
agreement amounted to $240,000 in 1996. The Company rents its Dodge and CPJE
Service center from Bendell Realty, L.L.C. Bendell Realty, L.L.C. is owned by
the shareholders of the Company. The rent expense amounted to approximately
$120,000 for the years ended December 31, 1996 and 1995.
-F-57-
<PAGE>
11. Common Stock
Common stock consists of the following:
December 31, 1996
-----------------
Major Chevrolet, Inc. - common stock:
Class A, $100 par - shares authorized 950; none issued
and outstanding $ -
Class B, $100 par - shares authorized 1,700; issued
and outstanding 89,000
Treasury stock, $100 par - 89 shares (8,900)
Major Dodge, Inc. - no par value; shares authorized 200;
issued and outstanding 20 250,000
Major Chrysler Eagle Jeep, Inc. - no par value; shares
authorized 200; issued and outstanding 100 250,000
Major Subaru, Inc. - no par value; shares authorized 200;
issued and outstanding 10 150,000
-------------------
$730,100
===================
-F-58-
<PAGE>
Major Chevrolet, Inc. and Affiliates
Notes to Combined Financial Statements
12. Commitments
At December 31, 1996, the Company is committed to make minimum annual lease
payments under real property operating leases as follows:
1997 $692,000
1998 614,000
1999 608,000
2000 608,000
2001 608,000
Thereafter 2,934,000
Rent expense under real property operating leases approximated $961,000 and
$751,000 for the years ended December 31, 1996 and 1995, respectively.
The Company has a line of credit totaling $1,500,000 with Chrysler Credit
Corporation. The credit facility is used to secure vehicles exported overseas by
General Motors on behalf of the Company. None of the line of credit has been
used as of December 31, 1996.
The Company guarantees the obligations of Major Fleet and Leasing Corp.
under a $5 million line of credit with a financial institution. Major Fleet and
Leasing Corp. was formerly owned by shareholders of the Company.
13. Governmental Regulations
Substantially all of the Company's facilities are subject to Federal, state
and local regulations relating to the discharge of materials into the
environment. Compliance with these provisions has not had, nor does the Company
expect such compliance to have, any material effect on the financial condition
or results of operations of the Company. Management believes that its current
practices and procedures for the control and disposition of such wastes comply
with applicable Federal and state requirements.
14. Litigation
Various claims and lawsuits arising in the normal course of business are
pending against the Company. The results of such litigation are not expected to
have a material or adverse effect on the Company's combined financial position
or results of operations.
15. Subsequent Events
The Company has entered into a joint venture subsequent to the year-end.
The venture is with an out-of-state Ford dealership, the purpose of which is to
purchase Ford fleet vehicles for resale.The Company has entered into a merger
agreement with Fidelity Holdings, Inc. and Major Acquisition Corp., a
wholly-owned subsidiary of Fidelity Holdings, Inc. Pursuant to the merger
agreement, Major Acquisition Corp. will acquire all of the Company's shares of
stock in exchange for shares of a new class of preferred stock of Fidelity
Holdings, Inc. and $4 million in cash. A condition to the closing is that all
manufacturers' approvals have been obtained.
-F-59-
<PAGE>
===================================================================
EXHIBIT INDEX
Exhibit Description Page
3.1 Articles of Incorporation of Fidelity Holdings, N/A
Inc., ("Company") incorporated by reference
to Exhibit 3.1 of Company's Registration
Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission
on March 7, 1997.
3.2 Articles of Incorporation of Computer Business N/A
Sciences, Inc., incorporated by reference to
Exhibit 3.2 of Company's Registration Statement
on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7,
1997.
<PAGE>
3.3 Articles of Incorporation of 786710 (Ontario) N/A
Limited, incorporated by reference to Exhibit
3.3 of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997.
3.4 Articles of Incorporation of Premo-Plast, Inc., N/A
incorporated by reference to Exhibit 3.4 of
Company's Registration Statement on Form 10-SB,
as amended, filed with the Securities and Exchange
Commission on March 7, 1997.
3.5 Articles of Incorporation of C.B.S. Computer N/A
Business Sciences Ltd., incorporated by
reference to Exhibit 3.5 of Company's
Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange
Commission on March 7, 1997.
3.6 Articles of Incorporation of Major Fleet & N/A
Leasing Corp., incorporated by reference to
Exhibit 3.6 of Company's Registration Statement
on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7,
1997.
3.7 Articles of Incorporation of Reynard Service N/A
Bureau, Inc., incorporated by reference to
Exhibit 3.7 of Company's Registration Statement
on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7,
1997.
3.8 Articles of Incorporation of Major Acceptance N/A
Corp., incorporated by reference to Exhibit 3.8
of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997.
3.9 By-Laws of the Company incorporated by reference N/A
to Exhibit 3.9 of Company's Registration Statement
on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7,
1997.
4.1 Certificate of Designation for the Company's N/A
1996-MAJOR Series of Convertible Preferred Stock,
incorporated by reference to Exhibit 4.1
of Company's Registration Statement on Form 10-SB,
as amended, filed with the Securities and Exchange
Commission on March 7, 1997.
4.2 Warrant Agreement for Nissko Warrants, N/A
incorporated by reference to Exhibit 4.2 of Company's
Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange
Commission on March 7, 1997.
4.3 Warrant Agreement for Major Fleet Warrants, N/A
incorporated by reference to Exhibit 4.3 of
Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997.
4.3(i)* Amended and Restated Warrant Agreement, dated N/A
October 11, 1997 between the Company, Bruce Bendell
and Harold Bendell.
4.4 Warrant Agreement for Progressive Polymerics --
International, Inc. Warrants, incorporated by
reference to Exhibit 4.4 of Company's
Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange
Commission on March 7, 1997.
<PAGE>
4.5* Certificate of Designation for the Company's --
1997A-Major Series of Preferred Stock.
4.6* Certificate of Designation for the Company's --
1997-Major Series of Convertible Preferred Stock.
4.7* Registration Rights Agreement between the Company --
and Bruce Bendell.
4.8* Warrant Agreement between the Company and --
SouthWall Capital Corp.
4.9* Stock Pledge and Security Agreement, dated March --
26, 1996, between Doron Cohen, Bruce Bendell,
Avraham Nissanian, Yossi Koren, Sam Livian and
Robert Rimberg.
10.1 Employment Agreement, dated November 7, 1995, N/A
between the Company and Doron Cohen, incorporated
by reference to Exhibit 10.1 of Company's
Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange
Commission on March 7, 1997.
10.1(i)* Amendment No. 1 to Employment Agreement, dated as --
of November 7, 1995 between the Company and Doron
Cohen.
10.2 Consulting Agreement, dated November 7, 1995, N/A
between the Company and Bruce Bendell, incorporated
by reference to Exhibit 10.2 of Company's
Registration Statement on Form 10-SB, as amended,
filed with the Securities and Exchange
Commission on March 7, 1997.
10.2(i)* Amendment No. 1 to Consulting Agreement, dated as --
of November 7, 1995 between Fidelity Holdings,
Inc. and Bruce Bendell.
10.3 Agreement for Purchase of Patents, dated November N/A
14, 1995, between the Company and Progressive
Polymerics, Inc., incorporated by reference to
Exhibit 10.3 of the Company's Registration
Statement on Form 10-SB, as amended, filed with
the Securities and Exchange Commission on March 7,
1997.
10.3(i) First Amendment, dated September 30, 1996, to N/A
Agreement for Purchase of Patents, dated November
14, 1995, incorporated by reference to Exhibit
10.4 of Company's Registration Statement on Form
10-SB as amended, filed with the Securities and
Exchange Commission on March 7,1997.
10.5 Agreement, dated March 25, 1996, between Nissko N/A
Telecom, Ltd. and Computer Business Sciences,
Inc., incorporated by reference to Exhibit
10.5 of Company's Registration Statement on
Form 10-SB, as amended,filed with the Securities
and Exchange Commission on March 7, 1997.
10.6 Asset Purchase Agreement, dated April 18, 1996, N/A
between the Company and Zvi and Sarah Barak,
incorporated by reference to Exhibit 10.6 of
Company's Registration Statement on Form 10-SB,
as amended, filed with the Securities and Exchange
Commission on March 7, 1997.
10.6(i)* Amendment to Asset Purchase Agreement dated August N/A
7, 1997.
<PAGE>
10.7 Employment Agreement dated April 18, 1996 between N/A
the Company and Dr. Zvi Barak, incorporated by
reference to Exhibit 10.7 of Company's Registration
Statement on Form 10-SB, as amended, filed with
the Securities and Exchange Commission on March 7,
1997.
10.8 Employment Agreement dated October 18, 1996 N/A
between Computer Business Sciences, Inc. and Paul
Vesel, incorporated by reference to Exhibit 10.8 of
Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange
Commission on March 7, 1997.
10.9 Indemnification Agreement dated November 7, 1995 N/A
between the Company and Doron Cohen, incorporated
by reference to Exhibit 10.9 of Company's Registration
Statement on Form 10-SB, as amended, filed with
the Securities and Exchange Commission on March 7, 1997.
10.10 Indemnification Agreement dated November 7, 1995 N/A
between the Company and Bruce Bendell, incorporated
by reference to Exhibit 10.10 of Company's Registration
Statement on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7, 1997.
10.11 Indemnification Agreement dated December 6, 1995 N/A
between the Company and Richard C. Fox, incorporated
by reference to Exhibit 10.11 of Company's Registration
Statement on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7, 1997.
10.12 Indemnification Agreement dated March 28, 1996 N/A
between the Company and Dr. Barak, incorporated by
reference to Exhibit 10.12 of Company's Registration
Statement on Form 10-SB, as amended, filed with
the Securities and Exchange Commission on March 7,
1997.
10.13 Indemnification Agreement dated March 28, 1996 N/A
between the Company and Yossi Koren, incorporated
by reference to Exhibit 10.13 of Company's
Registration Statement on Form 10-SB, as amended,
filed with the Securities and Exchange Commission
on March 7, 1997.
10.14 Plan of Reorganization for acquisition of Major N/A
Fleet & Leasing Corp. dated August 23, 1996
between the Company, Bruce Bendell and Harold
Bendell, incorporated by reference to Exhibit
10.17 of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997.
10.15 Patent Purchase Agreement dated December 30, N/A
1996 between Premo-Plast, Inc. and John Pinciaro,
incorporated by reference to Exhibit 10.16 of
Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange
Commission on March 7, 1997.
10.16 Employment Agreement dated December 30, 1996 N/A
between Premo-Plast, Inc. and John Pinciaro,
incorporated by reference to Exhibit 10.17 of
Company's Registration Statement on Form 10-SB,
as amended, filed with the Securities and Exchange
Commission on March 7, 1997.
<PAGE>
10.17 Employment Agreement dated January 27, 1997 N/A
between the Company and Ronald K. Premo,
incorporated by reference to Exhibit 10.18 of
Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange
Commission on March 7, 1997.
10.18 Plan and Agreement of Merger, dated April 21, N/A
1997, the Company, Major Automotive Group, Inc.,
Major Acquisition Corp. and Bruce Bendell,
incorporated by reference to Exhibit 10.19 of
Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange
Commission on March 7, 1997.
10.18(i)*Amendment to Plan and Agreement of Merger, dated --
August 1, 1997, between Fidelity Holdings, Inc.,
Major Automotive Group, Inc., Major Acquisition
Corp. and Bruce Bendell.
10.18(ii)Amendment to Plan and Agreement of Merger, dated --
August 26, 1997, between Fidelity Holdings, Inc.,
Major Automotive Group, Inc., Major Acquisition
Corp. and Bruce Bendell.
10.19 Stock Purchase Agreement with Escrow Agreement N/A
attached, incorporated by reference to Exhibit
10.20 of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997.
10.20 Management Agreement, incorporated by reference to N/A
Exhibit 10.21 of Company's Registration Statement
on Form 10-SB, as amended, filed with
the Securities and Exchange Commission on March 7,
1997.
10.21 Employment Agreement with Moise Benedid, N/A
incorporated by reference to Exhibit 10.22 of
Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange
Commission on March 7, 1997.
10.22* Partnership Agreement between Nissko Telecom --
Associates and the Company.
10.23* Memorandum of Understanding, dated September 9, --
1997, by and among Computer Business Sciences,
Inc., Nissko Telecom Ltd., the Company and Robert
L. Rimberg.
10.24* Letter of Intent, dated June 6, 1997, between the --
Company and SouthWall Capital Corp. (formerly
known as Sun Coast Capital Corp.)
10.25* Letter of Intent, dated September 1997, between --
the Company, Lichtenberg Robbins Buick, Inc. and
Lichtenberg Motors Inc.
10.26* Consulting Agreement, dated February 18, 1997, --
with Ronald Shapss Corporate Services, Inc.
10.27* Value Added Reseller Agreement between Summa Four, --
Inc. and Computer Business Sciences, Inc., as
Reseller.
10.28* Lease Agreement, dated March 1996, between 80-02 --
Leasehold Company, as Owners and the Company, as
Tenant.
<PAGE>
10.29* Master Lease Agreement, dated December 26, 1996, --
between Major Fleet & Leasing Corp., as Lessor,
and Nissko Telecom, Ltd., as Lessee.
10.30* Sublease Agreement, dated March 1995, between --
Speedy R.A.C., Inc., as Sublessor, and Major
Subaru Inc., as Sublessee.
10.31* Lease Agreement, dated November 1, 1991, between --
Gloria Hinsch, as Landlord, and Major Chrysler-
Plymouth, Inc., as Tenant.
10.32* Store Lease Agreement, dated June 10, 1992, --
between Bill K. Kartsonis, as Owner, and Major
Automotive Group, as Tenant.
10.33* Lease Agreement, dated June 3, 1994, between --
General Motors Corporation, as Lessor, and Major
Chevrolet, Inc., as Lessee.
10.34* Lease Agreement, dated August 1990, between Bruce --
Bendell and Harold Bendell, as Landlord and Major
Chrysler-Plymouth, Inc., as Tenant.
10.35* Lease Agreement, dated February 1995, between --
Bendell Realty, L.L.C., as Landlord, and Major
Chrysler-Plymouth Jeep Eagle, Inc., as Tenant.
10.36* Lease Agreement, dated February 1996, between --
Prajs Drimmer Associates, as Landlord, and Barak
Technology Inc., as Tenant.
10.37* Sublease Agreement, dated January 8, 1997, between --
Newsday, Inc., as Sublessor, and Major Fleet &
Leasing Corp., as Sublessee.
10.37(i)*Consent to Sublease Agreement, dated January 16, --
1997, between 80-02 Leasehold Company, Newsday
Inc. and Major Fleet and Leasing Corp.
10.38* General Security Agreement between Major Fleet & --
Leasing Corp., as Debtor, and Marine Midland Bank,
as Secured Party.
10.39* Retail and Wholesale Dealer's Agreement, dated --
March 30, 1995, between Marine Midland Bank, as
Bank, and Major Fleet & Leasing Corp., as Dealer.
10.40* Wholesale Lease Financing Line of Credit between --
General Electric Capital Corporation, as Lender,
and Major Fleet & Leasing Corp., as Borrower.
10.41* Chrysler Leasing System License Agreement between --
Chrysler Motors Corporation, as Licensor, and
Major Fleet & Leasing Corp., as Licensee.
10.42* GMAC Retail Plan Agreement between General Motors --
Acceptance Corp. and Major Fleet & Leasing Corp.,
as Dealer.
10.43* Fidelity Holdings, Inc. 1996 Employees' --
Performance Recognition Plan.
10.44* Secured Promissory Note, dated December 31, 1996, --
between Doron Cohen, as Maker, and Fidelity Holdings,
Inc., as Holder.
10.45* Dealer Master Agent Agreement and License, dated --
February 1996, between Computer Business Sciences,
Inc. and Progressive Polymerics International,
Inc., as Master Agent.
10.46* Dealer Master Agent Agreement and License, dated --
February 1996, between Computer Business Sciences,
Inc. and Cellular Credit Corp. of America, Inc.,
as Master Agent.
<PAGE>
10.47* Dealer Master Agent Agreement and License, dated --
February 1996, between Computer Business Sciences,
Inc. and America's New Beginning, Inc., as Master
Agent.
10.48* Dealer Master Agent Agreement and License, dated --
February 1996, between Computer Business Sciences,
Inc. and Korean Telecom, as Master Agent.
10.49* Dealer Master Agent Agreement and License, dated --
February 1996, between Computer Business Sciences,
Inc. and Philcom Telecommunications, as Master
Agent.
10.50* Management Agreement, dated August 23, 1996, --
between Major Fleet, Bruce Bendell and Harold
Bendell.
10.51* Wholesale Security Agreement, dated April 26, --
1990, between General Motors Acceptance Corporation
("GMAC") and Major Fleet.
10.51(i)*Amendment, dated February 14, 1991, to Wholesale --
Security Agreement between GMAC and Major Fleet.
10.52* Direct Leasing Plan Dealer Agreement, dated July --
24, 1986, between GMAC and Major Fleet.
10.53* Retail Lease Service Plan Agreement, dated April --
3, 1987, between GMAC and Major Fleet.
10.54* Contribution Agreement dated as of October 6, 1997 --
between the Company, Bruce Bendell and Doron Cohen
* To be filed by amendment.
<PAGE>
PIPER & MARBURY
L.L.P.
1251 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020-1104
212-835-6000
FAX: 212-835-6001
WRITER'S DIRECT NUMBER
212-835-6068
FAX: 212-835-6001
[email protected]
November 7, 1997
VIA EDGAR TRANSMISSION
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Fidelity Holdings, Inc. Registration Statement on Form 10-SB
-----------------------------------------------------------
Ladies and Gentlemen:
On behalf of Fidelity Holdings, Inc., a Nevada corporation (the
"Registrant"), we are enclosing for filing under the Securities Exchange Act of
1934 amendment number 3 and restatement to the Registration Statement on Form
10-SB (the "Registration Statement") file number 0-29182.
Please direct your comments or any questions you have to the undersigned at
(212) 835-6167.
Very truly yours,
Marta L. Michel
Enclosure
cc: Doron Cohen
Marc Drimer
Dennis McConnell
Peter Cosmas
