<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[XX] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997 or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________________
Commission File Number: 0-29182
FIDELITY HOLDINGS, INC.
-----------------------
(Exact name of small business issuer as specified in its charter)
Nevada 11-3292094
---------------------------- -------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
80-02 Kew Gardens Road, Suite 5000
Kew Gardens, New York 11415
---------------------------
(Address of principal executive offices)
(718) 520-6500
--------------
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes __XX__ No ______
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after the
distribution of securities under a plan confirmed by court. Yes _____________
No ____________
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date: The number of
shares of the registrant's common stock outstanding as of November 14, 1997
was 6,874,700.
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ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS
Discussion of the Nine-Month Periods Ended September 30, 1997 and September
30, 1996
Results of Operations
Revenues
Revenue for the nine-month period in 1997 increased by $2,384,132 to
$3,528,927. Revenue for the comparable period in 1996 was $1,144,795. The
sources for such increase were:
Computer Telephony and
Telecommunications $1,607,461
Leasing $ 776,671
The 1997 amounts reflect a full nine months of operations for both
divisions, whereas in 1996 the Computer Telephony and 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 nine months ended September 30, 1997, all of
which relates to the Computer Telephony and Telecommunications division, was
$622,398 compared with $434,802 in the 1996 period. This is an increase of
$187,596 or 43.2% and is reflective of nine full months of operations in 1997
compared with operations which commenced in the second quarter of 1996.
Gross profit
Gross profit for the Computer Telephony and Telecommunications
division in the 1997 period was $2,129,858 which represented an increase of
$1,419,865, or 200%, over the prior comparable period's gross profit of
$709,993. Additionally, gross profit as a percentage of the related revenue
increased to 77.4% in the 1997 period over the 62.0% 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 operating
efficiencies.
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Selling, general and administrative expense
Selling, general and administrative expenses ("SG&A") increased a
total of $945,264 to $1,805,210 in the 1997 period from $859,946 for the first
nine months of 1996. Of this increase $416,611 relates to the Computer
Telephony and Telecommunications division and $528,653 is from the Leasing
division. SG&A for the Computer Telephony and Telecommunications division
increased from $859,946 for the first nine months of 1996 (this division
commenced operations in the second quarter of 1996) to $1,276,567 for the
first nine months of 1997, a 48.5% increase. 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 nine months of activity in
this division which was not acquired until the fourth quarter of 1996.
Interest expense
Interest expense was $105,505 for the nine months ended September 30,
1997 compared with $25,950 for the comparable period in 1996. The increase of
$79,555 relates primarily to the debt incurred 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 $53,668 for the nine months
ended September 30, 1997. In the comparable prior period, operations of this
joint venture had not yet commenced.
Liquidity and Capital Resources
The Company's primary source of liquidity for the nine months ended
September 30, 1997 was $1,112,618 from its net income of $559,038, as adjusted
by net non-cash charges, which aggregated $553,590. This net increase in cash
was more than offset by (a) the net decrease in assets of $7,301 (resulting
primarily from an increase in accounts receivable of $1,138,502, primarily
2
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attributable to the Computer Telephony and Telecommunications division as a
result of increased sales by that division, offset by a decrease in
inventories of $991,509 resulting primarily from sales of vehicles coming off
lease in the Leasing division) and (b) a net decrease in liabilities amounting
to $1,444,987 (primarily attributable to decreases in due to affiliates of
$1,277,704 and accrued expenses of $405,362, partially offset by an increase
in accrued income taxes of $336,622). The net result was a use of cash in
operating activities of $339,660.
The Company's investing activities, i.e., additions to property and
equipment, primarily cars and trucks purchased for the Leasing division, used
cash of $465,644 which was significantly offset by $417,632 provided by the
Company's financing activities ($653,750 from the proceeds from the exercise
of warrants to purchase common stock, offset by payments of $236,118 on
long-term debt.
The foregoing activities, i.e., operating, investing and financing,
resulted in a net cash decrease of $387,672 for the nine months ended
September 30, 1997.
3
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Discussion of the Three-Month Periods Ended September 30, 1997
and September 30, 1996
Results of Operations
Revenues
Revenue for the three-month period ended September 30, 1997 increased
by $532,571 to $1,051,721. Revenue for the comparable period in 1996 was
$518,700. The sources for such increase were:
Computer Telephony and
Telecommunications $245,528
Leasing $287,043
The 1997 amounts reflect a full three months of operations for both
divisions, whereas in 1996 the Computer Telephony and 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 three months ended September 30, 1997, all of
which relates to the Computer Telephony and Telecommunications division, was
$195,619 compared with $185,619 in the 1996 period, an increase of $10,000 or
5.4%.
Gross profit
Gross profit for the Computer Telephony and Telecommunications
division in the third quarter of 1997 was $568,609. This represented an
increase of $235,528, or 70.7%, over the prior comparable period's gross
profit of $333,081. Additionally, gross profit as a percentage of the related
revenue increased to 74.4% in the 1997 period over the 64.2% 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 operating efficiencies.
4
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Selling, general and administrative expense
Selling, general and administrative expenses ("SG&A") increased a
total of $305,481 to $673,502 in the 1997 third quarter from $368,021 in the
1996 third quarter. Of this increase $141,404, or 46.3%, relates to the
Computer Telephony and Telecommunications division and $164,077, or 53.7% of
the increase, is from the Leasing division. SG&A for the Computer Telephony
and Telecommunications division increased from $368,021 for the third quarter
of 1996 to $509,425 for the third quarter of 1997, a 38.4% increase. 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 three months of activity in this division which was not acquired until
the fourth quarter of 1996.
Interest expense
Interest expense was $31,781 for the three months ended September 30,
1997 compared with $8,600 for the comparable period in 1996. The increase of
$23,181 relates primarily to the debt incurred 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 $1,613 for the three months
ended September 30, 1997. In the comparable prior period, operations of this
joint venture had not yet commenced.
Liquidity and Capital Resources
The Company's primary source of liquidity for the three months ended
September 30, 1997 was $254,898 from its net income of $50,300, as adjusted by
net non-cash charges, which aggregated $204,598. This net increase in cash was
more than offset by (a) the net increase in assets of $414,973 (resulting
primarily from an increase in accounts receivable of $512,139 attributable to
sales of computer telephony equipment) and (b) a decrease in liabilities
aggregating $222,517, primarily attributable to a decrease in accounts payable
of $251,289. The net result was a use of cash in operating activities of
$382,592.
5
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In the third quarter, the Company's investing activities, i.e.,
additions to property and equipment, used cash of $51,981 and the Company's
financing activities consumed $51,341 in cash to pay down long-term debt.
The foregoing activities, i.e., operating, investing and financing,
resulted in a net cash decrease of $485,914 for the three months ended
September 30, 1997.
The Company believes that the funds generated through operations,
together with existing cash, available credit from banks and other lenders and
the net proceeds from a planned securities offering (for which a Registration
Statement on Form SB-2 was filed with the Securities and Exchange Commission
on October 23, 1997) will be sufficient to finance its current operations,
planned expansion and internal growth for at least the next twenty-four
months.
6
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Fidelity Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
September 30, 1997
1. Basis of Presentation:
The accompanying unaudited consolidated 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 nine month period ended September 30, 1997 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1997.
These financial statements should be read in conjunction with the audited
December 31, 1996 financial statements and related notes.
2. Subsequent Event:
In October 1997, the Company filed a Form SB-2 Registration Statement
under the Securities Act of 1933. 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. Of these net proceeds, $4,000,000 will be used to fund the cash payment
required in the acquisition of Major Auto.
7
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any litigation other than as previously
reported as discussed below. The suit by the Company and its two subsidiaries
against Michael Marom and M.M. Telecom, Corp. and the counterclaim by the
defendants are proceeding and are currently in the process of discovery.
The suit by Touch Tone Connections against the Canadian subsidiary is
in discovery, with some settlement discussions. The Company has been
indemnified in this action by the Baraks in connection with the Company's
purchase of the Canadian subsidiary.
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, 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.
Item 5. Other Information
The registrant has filed with the Securities and Exchange Commission
("SEC") a registration statement on Form SB-2 in connection with an
underwritten offering of 1,150,000 shares of the common stock of the company.
The Form SB-2 is currently under SEC review.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act,
the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FIDELITY HOLDINGS, INC.
Date: November 14, 1997 __________________________________
Doron Cohen, President/CEO
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FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
UNAUDITED AUDITED
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<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 186,814 $ 574,486
Net Investment in direct financing leases, current 1,703,877 1,390,598
Notes receivable - officer shareholder 140,000 142,659
Accounts receivable 1,318,339 179,837
Inventories 102,511 1,494,020
Other current assets 164,405 45,349
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Total current assets 3,615,946 3,826,949
Net investment in direct financing leases,
net of current portion 530,334 1,059,287
Property and equipment net 1,803,455 1,023,523
Intangible assets 2,897,861 3,128,743
Other assets 237,947 278,362
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Total assets $9,085,543 $9,316,864
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 376,479 $ 419,052
Accrued expenses 116,664 522,026
Current maturities of long-term debt 898,669 643,976
Accrued income taxes 341,000 4,378
Deferred revenue 59,794 67,409
Due to affiliates 126,375 1,404,079
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Total current liabilities 1,918,981 3,060,920
Long-term debt, less current maturities 324,798 515,609
Income taxes deferred 275,000 424,000
Other 26,303 72,122
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Total liabilities 2,545,082 4,072,651
Commitments
Stockholders' equity
Preferred stock, .01 par value;
2,000,000 shares authorized,
250,000 shares issued and outstanding
in 1997 and 1996 2,500 2,500
Common stock, .01 par value
50,000,000 shares authorized,
6,874,700 shares issued and
outstanding in 1997 and
6,279,200 in 1996 68,747 62,792
Additional paid in capital 5,240,405 4,509,108
Cumulative translation adjustment 222 264
Retained earnings 1,228,587 669,549
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Total stockholders' equity 6,540,461 5,244,213
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Total liabilities and stockholders' equity $9,085,543 $9,316,864
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</TABLE>
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FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPT 30, THREE MONTHS ENDED SEPT 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Computer products and
telecommunications equipment $ 2,752,256 $ 1,144,795 $ 764,228 $ 518,700
Leasing income 776,671 -- 287,043 --
----------- ----------- ----------- -----------
Total revenues 3,528,927 1,144,795 1,051,271 518,700
----------- ----------- ----------- -----------
Operating expenses:
Cost of products sold 622,398 434,802 195,619 185,619
Selling, general and
administrative expenses
Products 1,276,557 859,946 509,425 368,021
Leasing 528,653 -- 164,077 --
Amortization of intangible assets 234,366 -- 78,132 --
----------- ----------- ----------- -----------
2,661,974 1,294,748 947,253 553,640
----------- ----------- ----------- -----------
Operating income (loss) 866,953 (149,953) 104,018 (34,940)
Other income (expense)
Interest expense (105,505) (25,950) (31,781) (8,600)
Interest income 10,922 -- 450 --
Income on joint venture 53,668 -- 1,613 --
----------- ----------- ----------- -----------
Income (loss) before provision for income taxes 826,038 (175,903) 74,300 (43,540)
Provision for income taxes 267,000 -- 24,000 --
----------- ----------- ----------- -----------
Net income (loss) $ 559,038 $ (175,903) $ 50,300 $ (43,540)
=========== =========== =========== ===========
Net income (loss) per common share $ 0.07 $ (0.03) $ 0.01 $ (0.01)
=========== =========== =========== ===========
</TABLE>
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FIDELITY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Retained Currency Total
--------------- ------------------ Paid in Earnings Translation Stockholders'
Shares Amount Shares Amount Capital (Deficit) Adjustment Equity
------- ------- ------ ------ ------- --------- ---------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock -- $ -- 5,000,000 $50,000 $ -- $ -- $ -- $ 50,000
Net Loss -- -- -- -- (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 acquistion of
786710 Ontario Ltd. -- -- 125,000 1,250 623,750 -- -- 625,000
Issuance of Preferred stock for the
acquisition 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
Effect of stock compensation --
charge -- -- 72,500 725 82,777 -- -- 83,502
Issuance of Common Stock pursuant
to exercise of warrants -- -- 523,000 5,230 648,520 -- -- 653,750
Net income -- -- -- -- -- 559,038 -- 559,038
Translation adjustment -- -- -- -- -- -- (42) (42)
------- ----- --------- ------ --------- ------- --- ---------
Balance September 30, 1997 250,000 $2,500 6,874,700 $68,747 $5,240,405 $1,228,587 $ 222 $ 6,540,461
======= ====== ========= ======= ========== ========== ======= ===========
</TABLE>
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FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 559,038 $ (175,903) $ 50,300 $ (43,541)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Amortization of intangible assets 234,366 98,821 78,132 46,746
Depreciation 384,722 59,362 119,964 17,610
Deferred income taxes (149,000) -- (35,000) --
Non cash items - stock based compensation 83,502 41,502
(Increase) decrease in assets:
Net investment in direct financing leases 215,674 -- 81,603 --
Notes receivable 2,659 -- -- --
Accounts receivable (1,138,502) (80,410) (512,139) (10,175)
Inventories 991,509 (5,610) 49,938 (734)
Other assets (78,641) (29,023) (34,375) (978)
Increase (decrease) in liabilities: 13,948
Accounts payable (90,928) 210,305 (251,289) 5,901
Accrued expenses (405,362) 18,903 56,277 --
Accrued income taxes 336,622 -- (2,000) --
Deferred revenue (7,615) 91,700 (6,707) (245,851)
Due to affiliates (1,277,704) -- (18,798) --
----------- ----------- ----------- -----------
Net Cash provided (used) by operating activities (339,660) 188,145 (382,592) (217,074)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (465,644) (80,301) (51,981) (29,338)
Acquisition of 786710 Ontario Limited, net of cash -- (738,636) -- --
----------- ----------- ----------- -----------
Net cash used in investing activities (465,644) (818,937) (51,981) (29,338)
----------- ----------- ----------- -----------
Cash flows from financing activities:
(Increase) payments on long-term debt-net (236,118) 441,988 (51,341) --
Proceeds from issuance of common
stock for exercise of warrants 653,750 738,976 -- 555,176
----------- ----------- ----------- -----------
Net cash provided by financing activities 417,632 1,180,964 (51,341) 555,176
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents (387,672) 550,172 (485,914) 308,764
Cash and cash equivalents, beginning of period 574,486 39,063 672,728 280,471
=========== =========== =========== ===========
Cash and cash equivalents, end of period $ 186,814 $ 589,235 $ 186,814 $ 589,235
=========== =========== =========== ===========
</TABLE>
