<PAGE>
As filed with the Securities and Exchange Commission on October 23, 1997
Registration No. 333-_____
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
Registration Statement
Under The
Securities Act of 1933
FIDELITY HOLDINGS, INC.
(Name of Small Business Issuer in its Charter)
<TABLE>
<S> <C> <C>
Nevada [____] 11-3292094
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
Organization)
</TABLE>
80-02 Kew Gardens Road
Kew Gardens, New York 11415
(718) 520-6500
(Address and Telephone Number of Principal Executive Offices)
Bruce Bendell
Chairman
Fidelity Holdings, Inc.
80-02 Kew Gardens Road
Kew Gardens, New York 11415
(718) 520-6500
(Name, Address and Telephone Number of Agents For Service)
Approximate Date of Proposed Sale to the Public: As soon as practicable
after the effective date of this registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| ________
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ________
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| ________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<PAGE>
CALCULATION OF REGISTRATION FEE
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====================================================================================================================
Title of Each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered(1) Per Unit(2) Price(2) Fee
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ................... 1,622,500 $6.00 $9,735,000 $1,947.00
- ---------------------------------------------------------------------------------------------------------------------
TOTAL REGISTRATION FEE ..................................................................... $1,947.00
====================================================================================================================
</TABLE>
(1) Includes 172,500 shares of Common Stock which the Underwriter has an option
to purchase to cover over-allotments, if any.
(2) Estimated solely for purposes of computing the registration fee pursuant to
Rule 457.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
CROSS REFERENCE SHEET
Showing location in Prospectus of information
required by Part I of Form SB-2
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<CAPTION>
Item Number and Caption
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<S> <C>
1. Front of Registration Statement and Outside Front Front of Registration Statement and Outside Front
Cover of Prospectus Cover of Prospectus
2. Inside Front and Outside Back Cover Pages of Inside Front and Outside Back Cover Pages of
Prospectus Prospectus
3. Summary Information and Risk Factors Prospectus Summary and Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Plan of Distribution
6. Dilution Dilution
7. Selling Security Holders Selling Shareholders
8 Plan of Distribution Plan of Distribution
9. Legal Proceedings Legal Proceedings
10. Directors, Executive Officers, Promoters and Directors, Executive Officers, Promoters and
Control Persons Control Persons
11. Security Ownership of Certain Beneficial Owners Security Ownership of Certain Beneficial Owners
and Management and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Interest of Named Experts and Counsel
14. Disclosure of Commission Position on Executive Compensation - Indemnification
Indemnification for Securities Act Liabilities of Directors and Officers
15. Organization Within Last Five Years Certain Relationship and Related Transactions
16. Description of Business Description of Business
17. Management's Discussion and Analysis Management's Discussion and Analysis
or Plan of Operation
18. Description of Property Description of Property
19. Certain Relationships and Related Transactions Certain Relationships and Related Transactions
20. Market for Common Equity and Related Stockholder Market for Common Equity and Related Stockholder
Matters Matters
21. Executive Compensation Executive Compensation
22. Financial Statements Financial Statements
23. Changes In and Disagreements With Accountants on Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure Accounting and Financial Disclosure
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED October 23, 1997
FIDELITY HOLDINGS, INC.
1,150,000 Shares of Common Stock
As described below, an additional 300,000 shares of Common Stock are being
registered in connection with this offering on behalf of certain selling
shareholders; however, such shares will be offered by the selling shareholders
on a delayed basis and not as part of the underwritten offering.
----------------
This Prospectus relates to the sale by Fidelity Holdings, Inc., a
Nevada corporation (the "Company") of 1,150,000 shares (the "Shares") of its
common stock, $.01 par value per share ("Common Stock"), at a purchase price of
$6.00 per Share.
This Prospectus also relates to the sale by certain selling
shareholders (the "Selling Shareholders") of an aggregate of 300,000 shares of
Common Stock that are not a part of the underwritten offering and may not be
offered or sold prior to 91 days from the date of this Prospectus without the
prior written consent of the Underwriter. The 300,000 shares of Common Stock
offered by the Selling Shareholders consist of (i) 50,000 shares of Common Stock
issuable at a price of $1.25 per share upon the exercise of certain outstanding
warrants (the "Selling Shareholders' Warrants") and (ii) 250,000 shares of
Common Stock issuable upon the conversion of certain outstanding preferred stock
of the Company. See "Selling Shareholders," "Description of
Securities--Preferred Stock--1996-MAJOR Series of Convertible Preferred Stock"
and "--Warrants."
The Company will not receive any of the proceeds from the sale of the
Selling Shareholders' shares of Common Stock.
See "Risk Factors," beginning on Page 8, for information and a
discussion of certain factors that should be considered by prospective
investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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<CAPTION>
==================================================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $[____] $[____] $[____]
- ------------------------------------------------------------------------------------------------------------------
Total(3) $[________] $[________] $[________]
==================================================================================================================
</TABLE>
(1) Excludes the value of warrants to be issued to the Underwriter (the
"Underwriter's Warrants") to purchase up to 115,000 shares of Common Stock.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Plan of Distribution."
(2) Before deducting expenses of this offering payable by the Company estimated
at $435,000, which includes a non-accountable expense allowance. The
Selling Shareholders will not bear any of the expenses of the offering.
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date this registration statement is declared effective, to
purchase up to an additional 172,500 shares of Common Stock upon the same
terms and conditions as set forth herein solely to cover over-allotments,
if any, as to the shares of Common Stock offered by the Company. See "Plan
of Distribution." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $[________], $[________] and $[________], respectively.
The Shares are offered by the Underwriter, subject to prior sale, when,
as and if accepted by the Underwriter and subject to approval of certain legal
matters by counsel to the Underwriter and to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify the offering and to
reject any order in whole or in part. It is expected that delivery of the
certificates representing the Shares will be made against payment therefor at
the office of SouthWall Capital Corp., 110 Wall Street, New York, New York
10005, on or about [________], 1997.
SouthWall Capital Corp.
The date of this Prospectus is [________].
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports and other information with the Securities
and Exchange Commission (the "Commission"). Such reports, proxy and information
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission in
Washington, D.C. at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549
and at the Commission's regional offices in New York (7 World Trade Center,
Suite 1300, New York, New York 10048). Copies of such material can be obtained
at prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Please call the Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. The Company's Exchange Act filings are also available to the public on
the Commission's Internet site (http://www.sec.gov).
This Prospectus, which constitutes part of a registration statement on
Form SB-2 filed with the Commission under the Securities Act of 1933, as amended
(the "Securities Act"), by the Company, omits certain of the information
contained in the registration statement. Reference is hereby made to the
registration statement and to the exhibits to the registration statement for
further information about the Company and the Common Stock. Statements in this
Prospectus concerning provisions of documents are summaries of such documents,
and each statement is qualified by reference to the copy of the applicable
document filed with the Commission. Copies of such material, including the
complete registration statement and the exhibits, can be inspected, without
charge at the offices of the Commission, or obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK, INCLUDING STABILIZING, SYNDICATE SHORT COVERING AND PENALTY BID
TRANSACTIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, (i) all dollar amounts in this Prospectus are stated in the
lawful currency of the United States, (ii) all information in this Prospectus
assumes no exercise of (A) the Underwriter's over-allotment option as described
in "Plan of Distribution," (B) the Underwriter's Warrants or (C) any other
outstanding option or warrant to acquire shares of the Company's Common Stock,
(iii) all references to the Company shall include the subsidiaries of the
Company and (iv) all information in this Prospectus assumes the consummation of
the Major Auto Acquisition described in "Planned Acquisition" and that all of
the manufacturers have consented thereto.
The Company
Fidelity Holdings, Inc. (the "Company") derives revenues from its
operating subsidiaries, which are grouped into 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.
The Company's 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's Leasing division provides lease financing for motor
vehicles and the Company intends to expand the operations of such division to
provide lease financing to purchasers of certain of the Company's Computer
Telephony and Telecommunications division's products.
The Company's 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.
The Company anticipates commencing commercial sales of its spa and bath fixtures
by the second quarter of 1998.
The Company's Automotive Sales division, after giving effect to the
proposed Major Auto Acquisition described below, will be one of the
largest-volume automobile retailers in New York City. This division will own and
operate 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. This division will also distribute General
Motors vehicles in Russia.
The Company was incorporated in November 1995 under the laws of the
State of Nevada. The address of the Company's principal executive and
administrative office is 80-02 Kew Gardens Road, Kew Gardens, New York 11415.
Its fiscal year end is December 31.
4
<PAGE>
Planned Acquisition
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. See
"Use of Proceeds." 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.
See "Description of Securities--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
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 requires, references in this Prospectus 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.
5
<PAGE>
The Offering
Common Stock Offered by the Company ...... 1,150,000 shares
Common Stock Offered by the Selling
Shareholders ............................ 300,000 shares
Shares of Common Stock to be
Outstanding After this Offering(1) ..... 7,804,700 shares
Use of Proceeds .......................... To finance (i) the acquisition from
Harold Bendell of 50% of the common
stock of Major Dodge and Major
Chrysler, Plymouth, Jeep Eagle,
(ii) continued research and
development in the Company's
Plastics and Utility Products
division, the development and
testing of prototypes of spa and
bath fixtures, the commercial
production of certain spa and bath
fixtures and establishment of
office facilities, (iii) continued
research and development activities
of its Computer Telephony and
Telecommunications division and for
the general corporate and working
capital needs of that division's
research and development
subsidiary, (iv) the commencement
of operations by the service
subsidiary in the Company's
Computer Telephony and
Telecommunications division and (v)
the Company's general corporate and
working capital needs. See "Use of
Proceeds."
NASDAQ Symbol ............................ "FDHG"
- ------
(1) Excludes (i) an aggregate of 1,760,000 of the 1,810,000 shares of Common
Stock issuable upon the exercise of options and warrants outstanding as of
September 23, 1997, (ii) 495,000 shares of Common Stock reserved for
issuance under the Company's Employees Performance Recognition Plan, (iii)
an aggregate of at least 250,000 shares of Common Stock issuable upon
conversion of the Company's 1996-MAJOR Series of Convertible Preferred
Stock, (iv) an aggregate of at least 1,800,000 shares of Common Stock
issuable upon conversion of the Company's 1997-MAJOR Series of Convertible
Preferred Stock, (v) 115,000 shares of Common Stock issuable upon exercise
of the Underwriter's Warrant and (vi) 172,500 shares of Common Stock
issuable upon exercise of the Underwriter's over-allotment option.
Risk Factors
Investment in the shares of Common Stock offered hereby involves a high
degree of risk and immediate and substantial dilution from the price to the
public. See "Risk Factors" and "Dilution."
6
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
Set forth below is certain summary financial information for the periods and as
of the dates indicated. This information is derived from, and should be read in
conjunction with, the financial statements of the Company and of Major Auto,
including the notes thereto, and the pro forma financial statements appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Fiscal Year Ended Dec. 31,
--------------------------
Fidelity Holdings, Inc. Major Auto Pro Forma
Combined
Nov. 7, 1995 1996 1996
(inception date
to Dec. 31, 1995)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Computer products and
telecommunications $ --0-- $ 3,175 $ --0-- $ 3,435
equipment
Automobile Division --0-- --0-- 144,081 144,081
Leasing Income --0-- 258 --0-- 951
Total Revenues --0-- 3,434 144,081 148,467
Operating Expenses (2) 2,270 142,103 145,595
Net Income (loss) (6) 675 316 574
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
----------------
Fidelity Holdings, Inc. Major Auto Pro Forma
Combined
June 30, 1996 June 30, 1997 June 30, 1997
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Computer products and
telecommunications $ 626 $ 1,988 $ --0-- $ 1,988
equipment
Automobile Division --0-- --0-- 72,040 72,040
Leasing Income --0-- 489 --0-- 489
Total Revenues 626 2,477 72,040 74,517
Operating Expenses 742 1,714 70,686 72,556
Net Income (loss) (132) 508 475 663
</TABLE>
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<CAPTION>
June 30, 1997
------------- Pro Forma
Fidelity Holdings, Inc. Major Auto Combined
----------------------- ---------- ---------
Actual As Adjusted Actual As Adjusted
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
short-term investments $ 672 $ 2,509 $ 2,360 $ 4,808
Total assets 9,503 15,340 44,452 64,865
Total liabilities 3,708 3,708 43,265 47,140
Retained earnings 1,178 1,178 279 1,332
Stockholders' equity 5,794 11,641 1,186 17,724
</TABLE>
- --------------------
(1) Adjusted to reflect the sale of 1,150,000 shares of Common Stock offered by
the Company hereby at the offering price set forth on the cover page of
this Prospectus (after deducting underwriting discounts and commission and
estimated offering expenses), the application of the estimated net proceeds
from such sale and the consummation of the Major Auto Acquisition. See "Use
of Proceeds" and "Capitalization."
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a
high degree of risk and is speculative in nature. Prospective investors should
carefully consider the following risk factors, as well as others described
elsewhere in this Prospectus, relating to the business of the Company and this
offering. The discussion below highlights some of the more important risks
regarding the Company and this offering. The risks highlighted below should not
be assumed to be the only things that could affect future performance. In
addition, the discussion in this Prospectus regarding the Company and its
business and operations contains "forward-looking statements." Such statements
consist of any statement other than a recitation of a historical fact and can be
identified by the use of forward-looking terminology such as "may," "expect,"
"anticipate," "estimate" or "continue" or the negative of any thereof or other
variations thereon or comparable terminology. Prospective investors are
cautioned that all forward-looking statements are necessarily speculative and
there are certain risks and uncertainties that could cause actual events or
results to differ materially from those referred to in such forward-looking
statements. The Company does not have a policy of updating or revising
forward-looking statements and thus it should not be assumed that silence by
management of the Company over time means that actual events or results are
occurring as estimated in such forward-looking statements.
Risks Associated with the Company Generally
Consent of Automobile Manufacturers to Acquisition of Major Auto
Dealerships
Major Auto is required to obtain the consents of the respective
automobile manufacturers with whom it has entered into franchised dealerships
(the "manufacturers") to any change in the ownership of the respective
franchises. In addition, General Motors Corporation has a right of first refusal
with respect to the proposed transfer of the Chevrolet franchise. Major Auto has
requested the respective consents of the manufacturers to the Company's
acquisition of Major Auto's Chevrolet, Dodge, Subaru, Chrysler, Plymouth, Jeep
and Eagle franchised dealerships. To date, only Subaru Distributors Corp. has
consented to such change in ownership. As described under "Legal Proceedings"
below, Major Chevrolet has filed an action against General Motors Corporation
seeking an order compelling General Motors to consent to the proposed transfer
of the Chevrolet franchise. There can be no assurance that General Motors
Corporation, with respect to the Chevrolet franchise, or Chrysler Corporation,
with respect to the Dodge, Chrysler, Plymouth, Jeep and Eagle franchises, will
consent to the change in control, that General Motors Corporation will not
exercise its right of first refusal, or that any manufacturers that may
determine not to consent will not attempt to prevent such acquisition, terminate
franchises, refuse to renew franchises or take other actions that could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Description of Business--Automotive Sales
Division--Relationships with Manufacturers" and "Legal Proceedings."
The closing of the Major Auto Acquisition is presently scheduled for
November 29, 1997, and is subject to the receipt of the relevant manufacturers'
respective approvals. If not obtained the parties can extend the closing date,
or can close with Major Auto only the dealership subsidiaries as to which
manufacturers' consents have been obtained. In the latter case, the
consideration payable at closing (shares of preferred stock to Bruce Bendell and
cash to Harold Bendell) will be reduced in accordance with the value allocations
described under "Planned Acquisition" below. Also in that event, the parties are
obligated to use their best efforts during the 90-day period following the
closing to obtain the missing approvals. Should any not be obtained, the Company
will not acquire the relevant dealership and the proceeds of this offering that
would have been used to pay for that dealership will be added to the Company's
working capital and may be used for other general corporate purposes. See
"Planned Acquisition."
Bruce and Harold Bendell will each own 50 shares of the Company's
1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock. These shares carry a
limited and special voting right that allows the Bendell brothers to elect a
majority of the directors of Major Auto (and, should the Company later have
other affiliates engaged in the operation of automobile dealerships, those
affiliates as well). The 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock
has been issued to help facilitate receipt of the required manufacturers'
consents with respect to the transfer of the Major Auto dealerships in part to
demonstrate continued control of the Major Auto dealerships by Bruce and Harold
Bendell. There is no assurance that these additional corporate governance
arrangements will be accepted by the manufacturers. See "Description of
Securities--Preferred Stock--Company's 1997A-MAJOR AUTOMOTIVE GROUP Series of
Preferred Stock."
8
<PAGE>
Dependence on Management
The Company's future performance depends in significant part upon the
continued service of Bruce Bendell, its Chairman, and Doron Cohen, its
President, Chief Executive Officer and Treasurer. The loss of either Mr. Bendell
or Mr. Cohen could have an adverse effect on the Company. While the Company has
a consulting agreement with Mr. Bendell and an employment agreement with Mr.
Cohen, both such agreements expire on December 31, 1998 and such agreements
restrict Mr. Bendell and Mr. Cohen from competing with the Company only for
limited periods of time and under limited circumstances. The Company does not
maintain key-man life insurance on either Mr. Bendell or Mr. Cohen. See
"Executive Compensation--Compensation of Directors" and "--Employment Contracts
and Termination of Employment, and Change in Control Arrangements."
Concentration of Voting Power; Anti-Takeover Provisions
After this offering, Doron Cohen will be the beneficial owner of
approximately 32.0% and Bruce Bendell will be the beneficial owner of
approximately 46.9% of the Company's Common Stock (assuming no exercise of the
Underwriter's over-allotment option). Mr. Bendell will also have a two-year
proxy to vote an additional 1,250,000 shares (750,000 of which are legally owned
by Doron Cohen). This concentration of voting power will severely limit the
ability of other stockholders of the Company, including purchasers of the
Company's Common Stock in this offering, to elect directors or influence other
corporate decisions and may, among other things, have the effect of delaying or
preventing a change in control of the Company or preventing the Company's
stockholders from realizing a premium on the sale of their shares upon an
acquisition of the Company. See "Security Ownership of Certain Beneficial Owners
and Management."
The Company's Board of Directors has the authority to issue shares of
Preferred Stock and to determine the price, rights, preferences and privileges,
including voting rights, of those shares without any further action by the
Company's stockholders. The rights of holders of the Company's Common Stock will
be subject to and may be adversely affected by the rights of the holders of any
Preferred Stock. The Board of Directors has already designated and issued the
1996-MAJOR Series of Convertible Preferred Stock and has designated the
1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock and the 1997-MAJOR Series
of Convertible Preferred Stock, each of which series will be issued in
connection with the Company's acquisition of Major Auto. Any future designation
and issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire control of the Company. The Company is
also subject to the provisions of the Nevada General Corporation Law regulating
business combinations, takeovers and control share acquisitions, which also
might hinder or delay a change in control of the Company. Anti-takeover
provisions that could be included in the Preferred Stock when designated and
issued and the Nevada statutes can have a depressive effect on the market price
of the Company's Common Stock and can prevent the Company's stockholders from
realizing a premium on the sale of their shares by discouraging takeover and
tender offer bids. See "Description of Securities--Preferred Stock" and
"--Anti-Takeover Provisions."
As noted above, 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) and also will have control over the day-to-day operations of Major Auto
by virtue of a Management Agreement. See "--Consent of Automobile Manufacturers
to Acquisition of Major Auto Dealerships," "Description of Securities--Preferred
Stock--1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock" and "Certain
Relationships and Related Transactions." Should the Board of Directors of Major
Auto and the Company disagree as to a particular course of action, the Board of
Directors of Major Auto will nonetheless be able to take that action,
notwithstanding the objection of the Company. Conflicts could arise between the
Board of Directors of the Company and the Board of Directors of Major Auto as to
the appropriate course of action to be taken in the future. The Management
Agreement does prohibit certain actions from being taken without the prior
approval of the Company's Board of Directors, including, (i) disposition of any
of the major auto dealerships, (ii) acquisition of new dealerships, and (iii)
the Company incurring liability for Major Auto indebtedness. 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
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<PAGE>
successor manager designated by the Company (subject to approval by the
applicable manufacturers). See "Certain Relationships and Related Transactions."
The Company will have the right to redeem the shares of the 1997A-MAJOR
AUTOMOTIVE GROUP Series of Preferred Stock under certain limited circumstances.
See "Description of Securities--Preferred Stock--Company's 1997A-MAJOR
AUTOMOTIVE GROUP Series of Preferred Stock."
Risks Associated with Expansion
The Company's future growth will depend, in part, on its ability to
acquire additional automobile dealerships after the consummation of the Major
Auto Acquisition. In pursuing a strategy of acquiring additional dealerships,
the Company will face risks commonly encountered with growth through
acquisitions. These risks include incurring significantly higher capital
expenditures and operating expenses, failing to assimilate the operations and
personnel of the acquired dealerships, disrupting the Company's ongoing
business, dissipating the Company's limited management resources, failing to
maintain uniform standards, controls and policies, and impairing relationships
with employees and customers as a result of changes in management. There can be
no assurance that the Company will be successful in overcoming these risks or
any other problems encountered with such acquisitions.
In addition, acquiring additional dealerships, as the Company intends,
will have a significant impact on the Company's financial condition and could
cause substantial fluctuations in the Company's quarterly and annual operating
results. Acquisitions could result in significant goodwill and intangible
assets, which are likely to result in substantial amortization charges to the
Company that would reduce stated earnings.
Lack of Independent Directors
Upon completion of this offering, only one of the Company's directors
will not be an employee of the Company and there can be no assurance that the
Company's Board of Directors will have a majority of independent directors in
the future. In the absence of a majority of independent directors, the Company's
executive officers, who are also principal stockholders and directors, could
establish policies and enter into transactions without independent review and
approval thereof. This could present the potential for a conflict of interest
between the Company and its stockholders generally and the controlling officers,
stockholders or directors.
Shares Eligible for Future Sale; Exercise of Options and Warrants;
Registration Rights
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"). Restricted Shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144 promulgated under the Securities Act.
The Company and its officers and directors have agreed with the
Underwriter 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, as well as any shares of Common Stock sold in this offering to
Affiliates, will be eligible for sale in the public market, subject to the
conditions and restrictions of Rule 144 and other applicable laws.
The sale of a substantial number of shares of Common Stock in the
public market following this offering, or the perception that such sales could
occur, could adversely affect the market price for the Common Stock and impair
the Company's ability to raise additional capital in the future through the sale
of equity securities should it desire to do so. See "Security Ownership of
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<PAGE>
Certain Beneficial Owners and Management," "Market for Common Equity and Related
Stockholder Matters--Shares Eligible for Future Sale" and "Plan of
Distribution."
Holders of the Company's outstanding options and warrants are likely to
exercise them when, in all likelihood, the Company could obtain additional
capital on terms more favorable than those provided in the options and warrants.
In addition, one individual unaffiliated with the Company has piggyback
registration rights with respect to (i) 50,000 shares of the Common Stock and
(ii) 50,000 shares of Common Stock underlying options. Also, holders of shares
of the Company's 1997-Major Series of Convertible Preferred Stock, to be issued
upon the consummation of the Major Auto Acquisition, will have piggyback
registration rights with respect to the minimum 1,800,000 shares of Common Stock
into which such shares of Preferred Stock are convertible. Exercise of these
registration rights may adversely affect the terms upon which the Company may
obtain additional financing. Further, while these warrants are outstanding, the
Company's ability to obtain additional financing may be adversely affected. See
"Description of Securities--Warrants," "--Preferred Stock" and "Market for
Common Equity and Related Stockholder Matters --Registration Rights."
Lack of 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. See "Market for Common Equity and Related Stockholder
Matters--Dividends."
Cost and Availability of Capital
After the consummation of the Major Auto Acquisition, the Company's new
and used automobile sales will continue to require significant capital
resources. The Company's future operating results will be directly related to
the availability and cost of its capital. The principal sources of financing for
the Major Auto's new and used automobile inventories have historically been
lines of credit from banks and other financial institutions and from cash
generated from operations. There can be no assurance that the Company will be
able to continue to obtain capital for its current or expanded operations on
terms and conditions acceptable to the Company.
The Company's strategy of growth through the acquisition of additional
dealerships will require substantial capital. The Company's expansion and new
acquisitions may involve cash, incurring debt or issuing equity securities,
which could have a dilutive effect on the then outstanding capital stock. The
Company may seek to obtain funds through borrowings from institutions or by the
public or private sale of its securities subsequent to this offering. There can
be no assurance that the Company will be able to obtain capital to finance its
growth on terms and conditions acceptable to the Company.
Risks Associated with this Offering
Possible Reallocation of Net Proceeds
Approximately 70% of the net proceeds of this offering are intended to
be applied as payment to Harold Bendell for his shares in the corporations
operating Major Auto's Dodge, Chrysler, Plymouth, Jeep and Eagle dealerships.
Transfer of those dealerships to the Company requires that the relevant
manufacturers' approvals be obtained. Should these not be obtained (and the
manufacturers are not obligated to give their approval), a large portion of the
proceeds of this offering would be allocated for the general corporate purposes
of the Company. See "Use of Proceeds."
Dilution
A purchaser of the Company's Common Stock in this offering will
experience immediate and substantial dilution of $5.87 per share ($5.76 per
share if the Underwriter's over-allotment option is exercised in full) in that
the offering price exceeds the net tangible book value of the Company after
giving effect to the offering. See "Dilution."
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<PAGE>
Underwriter's Limited Offering Experience
The Underwriter has been in business since May 1996. The Underwriter
has co-managed one other offering of securities and has acted as an underwriter
in several others prior to this offering. There can be no assurance that the
Underwriter's limited underwriting experience and small size relative to other
broker-dealers will not adversely affect this offering or the subsequent
development, if any, of a trading market for the Company's Common Stock. See
"Plan of Distribution."
Arbitrary Offering Price
The offering price of the Shares offered by the Company hereby was
determined by negotiation between the Company and the Underwriter and does not
necessarily bear any relationship to the assets, book value, results of
operations or other established criteria of value, and may not be indicative of
prices that will prevail in any trading market. See "Plan of Distribution."
Risks Associated with the Company's Computer Telephony and
Telecommunications Division
Rapid Technological Change
The computer and telecommunications industries are undergoing rapid
technological changes. The success of the Company's Computer Telephony and
Telecommunications division will depend upon its ability to understand and
utilize changing technology to keep its products competitive. Failure to develop
and introduce new products or enhancements to its existing products in a timely
fashion could result in product obsolescence, diminished market acceptance of
its products and a loss of business, which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Description of Business--Computer Telephony and Telecommunications
Division--Talkie."
Competition
The products sold by the Company's Computer Telephony and
Telecommunications division presently face either limited competition or no
direct competition. However, the markets in which the Company's Computer
Telephony and Telecommunications division sells its products can be highly
competitive. There are at present no significant barriers to entry into such
market. Many of the producers of products that presently compete with the
Company's products, as well as 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. There can be no assurance that the Company will
continue to compete effectively. See "Description of Business--Computer
Telephony and Telecommunications Division--Competition."
In addition, the master agents that purchase the Company's Talkie Power
Web Line Machine and resell the available telephone time 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, close ties to governmental authorities in their home countries and
decreased prices for direct-dialed international calls. Master agents' customers
could become unwilling 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 its joint venture with
Nissko Telecom, L.P. described under "Description of Business--Computer
Telephony and Telecommunications Division--Talkie--Arrangements with Nissko."
Adverse Regulation
Government-owned monopolies operate the telephone systems of many of
the countries to which the Company's Talkie Power Web Line Machine is used to
provide telephone services. While the Company is not aware that any such action
is contemplated by any of these entities, there can be no assurance that in the
future one or more of them will not adopt regulations limiting or prohibiting
persons such as the Company's master agents from providing such services. The
effect of such regulation could be to reduce the Company's ability to sell the
Talkie Power Web Line Machine and also to reduce the Company's income from its
participation in its joint venture with Nissko Telecom, L.P. described under
"Description of Business--Computer Telephony and Telecommunications
Division--Talkie--Arrangements with Nissko."
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<PAGE>
Risks Regarding International Operations
The master agents that purchase the Company's Talkie Power Web Line
Machine and purchasers of the Company's Talkie-Globe system use the Company's
products to provide services to foreign countries. These purchasers of the
Company's products will be subject to the risks associated with international
operations, including unexpected changes in legal and regulatory requirements
such as those described in the preceding paragraph, changes in tariffs, exchange
rates and other barriers, political and economic instability, difficulty in
accounts receivable collection, longer payment cycles, difficulty in maintaining
and repairing equipment abroad, possible confiscation of equipment and
potentially adverse tax consequences. These realization of these risks by
purchasers of the Company's Talkie products could adversely affect the ability
of the Company to sell its Talkie products and could reduce the Company's income
from its participation in its joint venture with Nissko Telecom, L.P. described
under "Description of Business--Computer Telephony and Telecommunications
Division--Talkie--Arrangements with Nissko."
Risks Associated with the Company's Plastics and Utility Products Division
Uncertainty of Market Acceptance
Although the Company believes that the products being developed by its
Plastics and Utility Products division offer certain advantages over competitive
products, there can be no assurance that such products will attain a sufficient
level of market acceptance for such division to become profitable. In addition,
with respect to the Company's spa and bath fixtures and related installation
method, although the Company has received indications from several manufacturers
and producers of whirlpool baths, spas and tubs that they will purchase the
Company's fixtures, they are not obligated to do so. No assurance can be given
that such manufacturers and producers will make such purchases initially, or if
they do, that they will be sufficiently satisfied with such fixtures to continue
making such purchases.
Proprietary Rights; Risk of Infringement
The success of the Company's Plastics and Utility Products division
will depend in part upon the strength of its patents and its ability to operate
without infringing the proprietary rights of others. The Company has two United
States patents and one Canadian patent application relating to the armored
conduit technology and has filed an application for a United States patent
relating to its spa and bath fixtures and related installation method. 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. There can be no assurance that the Company will
choose to file such separate applications or that any of the Company's
applications for patents will be granted. Nor can there be any assurance that
any patents that issue from such applications or the Company's issued patents
will not be challenged and, if challenged, will be upheld. Nor can there be any
assurance that issued patents will provide the Company with a significant
competitive advantage. See "Description of Business--Plastics and Utility
Products Division--Intellectual Property."
Moreover, the Company may be required to defend a claim of infringement
or to institute litigation to prevent infringement. The costs of such
litigation, even if the Company is successful, can be substantial and may be
beyond the Company's financial capability. If the Company were unsuccessful in
its defense of an infringement claim, it could be liable for substantial damages
and could be enjoined from manufacturing or selling the infringing product or
required to obtain a license which may not be available on acceptable terms or
at all.
Risks Associated with the Company's Automotive Sales Division
Dependence on Automobile Manufacturers
Major Auto is significantly dependent upon its relationships with, and
the success of, the manufacturers with whom it has entered into franchised
dealerships. Major Auto is also dependent on the manufacturers to provide it
with an inventory of new vehicles. The most popular vehicles tend to provide
Major Auto with the highest profit margin and are the most difficult to obtain
from the manufacturers. In order to obtain sufficient quantities of these
vehicles, Major Auto may be required to purchase a larger number of less
desirable makes and models than it would otherwise purchase. Sales of less
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<PAGE>
desirable makes and models may result in lower profit margins than sales of more
popular vehicles. If Major Auto is unable to obtain sufficient quantities of the
most popular makes and models, its profitability may be adversely affected.
Major Auto's franchise agreements with the manufacturers do not grant
it the exclusive right to sell that manufacturer's vehicles within a given
geographical area. Accordingly, a manufacturer could grant another dealer a
franchise to start a new dealership or permit an existing dealer to relocate to
a geographic location that would be directly competitive with Major Auto. Such
an event could have a material adverse effect on Major Auto's business,
financial condition and results of operations.
The success of Major Auto's franchises depends to a great extent on the
success of the respective manufacturers. Major Auto's success is therefore
linked to the financial condition, marketing, vehicle demand, production
capabilities and management of the manufacturers. Events such as labor strikes
or negative publicity concerning a particular manufacturer could adversely
effect Major Auto. Major Auto has attempted to lessen its dependence on any one
manufacturer by entering into franchise agreements with multiple manufacturers.
Automakers' Control Over Dealerships
Historically, manufacturers have exercised significant control over
dealerships through the terms and conditions of the franchise agreements
pursuant to which the Major Auto dealerships operate. These franchise agreements
restrict dealerships to specific locations and retain for the manufacturers
approval rights over changes in the dealerships' ownership and management. Major
Auto's ability to expand through the acquisition of new dealerships will require
the consent of the manufacturers. While Major Auto's acquisitions to date have
been approved and Major Auto has not been materially adversely affected by other
limitations imposed by the manufacturers, there can be no assurance that Major
Auto will in the future be able to obtain necessary approvals on acceptable
terms or that it will not be materially adversely affected by other limitations.
The franchise agreements between Major Auto and the manufacturers are
for fixed terms with no renewal obligation on the part of the manufacturers and
permit the manufacturers to terminate the agreements for a variety of causes.
Major Auto believes that it has been and is in material compliance with the
terms of its franchise agreements. While none of the manufacturers has
terminated or failed to renew its franchise agreement with Major Auto, any such
termination or failure to renew could have a material adverse effect on Major
Auto and its business, financial condition and results of operations. See
"Description of Business--Automotive Sales Division--Relationships with
Manufacturers."
Competition
The automobile dealership business is highly competitive. Major Auto's
competitors include automobile dealers, private sellers of used vehicles, used
vehicle dealers, other franchised dealers, service center chains and independent
service and repair shops. Gross profit margins on the sale of new vehicles have
been decreasing over the past two decades and the used car market faces
increasing competition from independent leasing companies and from used vehicle
"superstores" that may have inventories that are larger and more varied than
Major Auto's. Some of Major Auto's competitors may be larger, have access to
greater financial resources and be capable of operating on smaller gross margins
than Major Auto. There can be no assurance that the Company will continue to
compete effectively or that manufacturers will not modify the historical
automobile franchise system in a manner that increases competition among dealers
or market and sell their vehicles through other distribution channels. See
"Description of Business--Automotive Sales Division--Competition."
Mature Industry; Cyclical Nature of Automobile Sales; Geographic
Concentration of Operations
The United States automobile industry is generally considered to be a
mature industry in which minimal growth is expected in unit sales of new
vehicles. In addition, the market for automobiles, particularly new vehicles, is
subject to substantial cyclical variation and has experienced significant
downturns characterized by oversupply and weak demand. Many factors affect the
automobile industry, including general and local economic conditions, taxes,
consumer confidence, interest rates, credit availability, and the level of
personal discretionary income. A material decrease in vehicle sales by Major
Auto would materially adversely affect its business, financial condition and
results of operations.
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<PAGE>
In addition, all of the Major Auto dealerships are located in the New
York metropolitan area. While Major Auto may pursue acquisitions outside of the
New York metropolitan area, Major Auto expects that its operations will be
concentrated in the New York metropolitan area for the foreseeable future. As a
result, Major Auto's results of operations will depend substantially on general
economic conditions and consumer spending habits and preferences in the New York
metropolitan area, as well as various other factors, such as tax rates and
applicable state and local regulation. There can be no assurance that Major Auto
will be able to expand geographically or that any such expansion will adequately
insulate it from the adverse effects of local or regional economic conditions.
See "Description of Business--Automotive Sales Division--Growth Strategy."
Governmental Regulation
Major Auto's operations are subject to various Federal, state and local
laws and regulations including those relating to local licensing and consumer
protection. While Major Auto believes that it maintains all requisite licenses
and permits and that it is in substantial compliance with all applicable laws
and regulations, there can be no assurance the Major Auto will be able to
continue to maintain all requisite licenses and permits or to comply with
applicable laws and regulations, and its failure to do so could have a material
adverse effect on its business, financial condition and results of operations.
In addition, the adoption of any new laws or regulations and the cost to Major
Auto of complying therewith, could have a material adverse effect on its
business, financial condition and results of operations.
In addition, 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 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. However,
environmental laws are complex and subject to frequent change. There can be no
assurance that compliance with amended, new or more stringent laws, stricter
interpretations of existing laws or the future discovery of environmentally
hazardous conditions will not require material expenditures by the Company. See
"Description of Business--Automotive Sales Division--Governmental Regulation."
PLANNED ACQUISITION
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 and Major Subaru and 50% of the issued and
outstanding shares of common stock of Major Dodge and Major Chrysler, Plymouth,
Jeep Eagle, which, collectively, operate five franchised automobile dealerships.
Pursuant to the 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. See
"Use of Proceeds." 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.
See "Description of Securities--Preferred Stock."
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 aggregate purchase price to be paid by the
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<PAGE>
Company to consummate the Major Auto Acquisition was determined on the basis of
the aggregate earnings before interest and taxes of Major Chevrolet, Major
Subaru, Major Dodge and Major Chrysler, Plymouth, Jeep Eagle for the 1996 fiscal
year of such companies multiplied by eight.
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
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.
POTENTIAL ACQUISITIONS AND JOINT VENTURES
The Company has signed a Memorandum of Understanding with a non-United
States entity looking towards the creation of a joint venture to exploit a
newly-developed communications technology. The technology relates to an
interactive communications receiving terminal that can be used in moving
vehicles on land, sea and in the air, and will make possible the receipt of
communications that at present can only be received if the receiving terminal is
stationary. The Company anticipates signing a definitive agreement relating to
this joint venture before the end of its current fiscal year.
The Company has signed a Letter of Intent (the "Lichtenberg Letter of
Intent") with the shareholders of Lichtenberg Robbins Buick, Inc., d/b/a
Lichtenberg Buick, and Lichtenberg Motors, Inc., d/b/a Lichtenberg Mazda,
looking towards the acquisition by the Company or one of its wholly-owned
subsidiaries of all of the issued and outstanding common stock of Lichtenberg
Buick and Lichtenberg Mazda. The Lichtenberg Letter of Intent contemplates that
the parties will negotiate definitive documentation that will provide for such
acquisition for an aggregate purchase price equal to the pro forma after-tax
earnings of Lichtenberg Buick and Lichtenberg Mazda for the twelve months ending
December 31, 1996 multiplied by eight. Twenty-five percent of the purchase price
(but in no event less than $500,000) is to be payable in cash and the balance is
to be payable in Common Stock of the Company. Either party will have the right
to terminate the transactions contemplated by the Lichtenberg Letter of Intent
if, among other things, lower-than-expected earnings result in a purchase price
of less than $1.8 million.
Each of the foregoing transactions is in the preliminary stages and is
subject to significant further negotiation and due diligence as part of the
preparation and execution of definitive agreements. There can be no assurance
that either of these transactions will occur.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,150,000 shares of
Common Stock offered by the Company hereby, assuming an initial public offering
price of $6.00 per share, are estimated to be approximately $5,775,000
($6,706,500 if the Underwriter's over-allotment option is exercised in full)
after deducting the estimated underwriting discounts and commissions and other
offering expenses payable by the Company. The Company currently intends to use
the estimated net proceeds of this offering as follows:
<TABLE>
<CAPTION>
Anticipated Use of Net Proceeds Approximate Amount Percentage
- ------------------------------- ------------------ ----------
<S> <C> <C>
To finance the acquisition from Harold
Bendell of 50% of the common stock of
Major Dodge and Major Chrysler,
Plymouth, Jeep Eagle $4,000,000 69.3%
To finance continued research in the
Company's Plastics and Utility Products
division, the development and testing
of prototypes of spa and bath fixtures,
commercial production of such fixtures
and establishment of office facilities $533,000 9.2%
To finance continued research and
development activities of its Computer
Telephony and Telecommunications
division and for the general corporate and
working capital needs of that division's
research and development subsidiary $384,000 6.6%
To commence operations by the
service subsidiary in the Company's
Computer Telephony and
Telecommunications division $75,000 1.3%
For working capital and general
corporate purposes of the Company(1) $783,000 13.6%
-------- ----
Total $5,775,000 100%
========= ===
</TABLE>
- ---------
(1) In the event that the acquisition contemplated by the Lichtenberg Letter of
Intent is consummated, the Company intends to use a portion of the amounts
designated for the Company's working capital and general corporate purposes to
finance the cash portion of such acquisition.
The foregoing represents the Company's best estimate of the allocation
of the net proceeds of this offering, based upon the current status of its
operations and anticipated business plans. It is possible, however, that the net
proceeds of this offering will be reapportioned among the above categories or to
new categories, in response to, among other things, changes in the economic
climate or unanticipated complications, delays or expenses. In particular, in
the event that Chrysler Corporation does not approve the transfer to the Company
of Major Auto's Dodge franchise and/or its Chrysler, Plymouth and Jeep Eagle
franchises in connection with the Major Auto Acquisition and the Company
nevertheless elects to consummate the Major Auto Acquisition without acquiring
such franchises, the Company would allocate $2 million or $4 million of the net
proceeds of this offering to other purposes. The Company currently estimates
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<PAGE>
that the net proceeds of this offering, together with the Company's existing
capital resources, will be sufficient to meet the Company's liquidity and
working capital requirements for a period of at least twenty-four months from
the completion of this offering. The amount and timing of expenditures will be
made in the discretion of the Company's Board of Directors. Pending the
application of such proceeds, the Company will invest the net proceeds of this
offering in short-term, interest bearing securities.
DILUTION
The net tangible book value of the Company at June 30, 1997 was
$317,918 or $0.05 per share of Common Stock. Net tangible book value per share
represents the amount of total tangible assets of the Company less total
liabilities of the Company and the liquidation preference of outstanding
Preferred Stock, divided by the number of shares of outstanding Common Stock.
After giving effect to (i) the receipt and application of the estimated net
proceeds from the sale by the Company of 1,150,000 shares of Common Stock at an
assumed initial public offering price of $6.00 per share (after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company) and (ii) the consummation of the Major Auto Acquisition, the net
tangible book value of the Company at June 30, 1997 would have been
approximately $992,132 or $0.13 per share of Common Stock, representing an
immediate increase in net tangible book value of $0.08 per share of Common Stock
to the Company's existing shareholders and an immediate dilution of $5.87 per
share of Common Stock to investors in the Offering. "Dilution" is determined by
subtracting net tangible book value per share after the offering from the
offering price to investors.
The following table illustrates this per share dilution:
Assumed initial public offering price per share ...........................$6.00
Net tangible book value per share, before this offering...........$0.05
Increase in net tangible book value per share attributable
to new investors and the closing of the Major Auto Acquisition ... 0.08
-----
Pro forma net tangible book value after this offering
and the closing of the Major Auto Acquisition ........................... 0.13
Dilution per share to new investors........................................$5.87
If the Underwriter's over-allotment option is exercised in full, the
pro forma net tangible book value per share of Common Stock after this offering
would be $0.24 per share, which would result in dilution to new investors of
$5.76 per share of Common Stock.
The foregoing dilution discussion assumes no exercise of warrants or
options and no conversion of shares of the 1997-MAJOR Series of Convertible
Preferred Stock into Common Stock or the 1996-MAJOR Series of Convertible
Preferred Stock into Common Stock after June 30, 1997, except for the exercise
of the Selling Shareholders' Warrants and the conversion of 125,000 shares of
the 1996-MAJOR Series of Convertible Preferred Stock into 250,000 shares of
Common Stock in connection with this offering. As of June 30, 1997, there were
outstanding warrants to purchase an aggregate of 1,760,000 shares of Common
Stock and the 1996-MAJOR Series of Convertible Preferred Stock which is
convertible into at least 500,000 shares of Common Stock. To the extent
additional outstanding warrants or options are exercised or additional shares of
the 1996-MAJOR Series of Convertible Preferred Stock are converted into Common
Stock, there will be further dilution to new investors.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
June 30, 1997 and as adjusted to give effect to (i) the sale of 1,150,000 shares
of Common Stock offered hereby at an assumed public offering price of $6.00 and
after deducting underwriting discounts and commissions and estimated offering
expenses and the application of the estimated net proceeds of $5,775,000
therefrom as described in "Use of Proceeds" and (ii) the consummation of the
Major Auto Acquisition. This table should be read in conjunction with
"Management's Discussion and Analysis" and the Financial Statements and Notes to
Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At June 30, 1997
----------------
(in thousands, except share data)
Actual As Adjusted
------ -----------
<S> <C> <C>
Shareholders' equity:
Shares of Preferred Stock, authorized, 2,000,000 shares of $.01 par value;
250,000 shares issued and outstanding (1,025,100 as adjusted) (1)
1996-MAJOR Series of Convertible Preferred Stock....... $ 2.5 $ 1.25
1997-MAJOR Series of Convertible Preferred Stock....... 0.0 9.0
1997A-MAJOR AUTOMOTIVE GROUP Series
of Convertible Preferred Stock..................................... 0.0 0.0(2)
-------- ----------
Total Preferred Stock.............................................. 2.5 10.25
Shares of Common Stock; authorized, 50,000,000 shares of
$.01 par value; issued and outstanding, 6,351,700
shares at June 30, 1997 (7,801,700 shares, as adjusted) (3)............ 63.5 78.0
Additional paid-in capital................................................ 4,550.4 16,364.9(4)
Cumulative translation adjustment......................................... 0.3 0.3
Retained Earnings......................................................... 1,178.3 1,178.3
-------- -----------
Total shareholders' equity and total capitalization................ $5,795.0 $ 17,631.75
======== ===========
</TABLE>
- -----------------
(1) Includes the issuance of 900,000 shares of the 1997-MAJOR Series of
Convertible Preferred Stock and 100 shares of the 1997A-MAJOR
AUTOMOTIVE GROUP Series of Preferred Stock in connection with the Major
Auto Acquisition and the conversion of 125,000 shares of the 1996-MAJOR
Series of Convertible Preferred Stock into 250,000 shares of Common
Stock in connection with this offering.
(2) Includes the issuance of 100 shares of the 1997A-MAJOR AUTOMOTIVE
GROUP Series of Preferred Stock.
(3) Adjusted number of shares includes shares offered by the Company and
the Selling Shareholders in this offering. It does not include (i) an
aggregate of 1,760,000 of the 1,810,000 shares of Common Stock issuable
upon the exercise of options and warrants outstanding as of September
23, 1997, (ii) 495,800 shares of Common Stock reserved for issuance
under the Company's Employees Performance Recognition Plan, (iii) an
aggregate of at least 250,000 shares of Common Stock issuable upon
conversion of the Company's 1996-MAJOR Series of Convertible Preferred
Stock, (iv) an aggregate of at least 1,800,000 shares of Common Stock
issuable upon conversion of the Company's 1997-MAJOR Series of
Convertible Preferred Stock, (v) 115,000 shares of Common Stock
issuable upon exercise of the Underwriter's Warrant and (vi) 172,500
shares of Common Stock issuable upon exercise of the Underwriter's
over-allotment option.
(4) Includes the receipt by the Company of $62,500 upon the exercise of
the Selling Shareholders' Warrants to acquire 50,000 shares of
Common Stock for $1.25 per share.
19
<PAGE>
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, included elsewhere in this prospectus.
This Prospectus also contains, in addition to historical information,
forward-looking statements that involve risks and uncertainty. The Company's
and/or Major Auto's actual results could differ significantly from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors" as well
as those discussed elsewhere in this Prospectus.
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.
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.
20
<PAGE>
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.
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.
21
<PAGE>
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.
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.
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
22
<PAGE>
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 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.
23
<PAGE>
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.
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
24
<PAGE>
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.
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
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.
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<PAGE>
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.
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
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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.
27
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DESCRIPTION OF BUSINESS
Introduction
The Company was incorporated in Nevada on November 7, 1995. The Company
is a holding company, which means it 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. The proposed Major Auto
Acquisition will add a fourth, Automotive Sales. Unless otherwise indicated, all
references to the Company include reference to subsidiaries of the Company.
Automotive Sales Division
General
Major Auto, which the Company proposes to acquire (see "Planned
Acquisition"), 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
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:
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UNITED STATES FRANCHISED DEALER'S VEHICLES SALES
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
(Units in millions; dollars in billions)
<S> <C> <C> <C> <C> <C>
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
</TABLE>
- ----------------
(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
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. 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
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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 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,
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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 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
31
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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
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. See "Industry Background." 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:
1996 Percentage of
Manufacturer New Vehicle Sales
------------ -----------------
Chevrolet 51%
Chrysler, Plymouth, Jeep and Eagle 19%
Dodge 25%
Subaru 5%
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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
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%
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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:
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.
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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
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.
In connection with this offering, 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
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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 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 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.
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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 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
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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.
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 granted 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.
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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.
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
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
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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 the registration statement
of which this Prospectus is a part. 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.
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.
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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.
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.
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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
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. A portion of the proceeds of this offering will be used to commence the
operation of Reynard, which will service the products sold by the Company's
Computer Telephony and Telecommunications division. See "Use of Proceeds."
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.
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.
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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 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
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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.
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.
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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
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 intends to use a portion of the proceeds of this offering to
finance the acquisition of such equipment and the manufacture and production of
the fixtures. See "Use of Proceeds." 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
standard for whirlpool baths, spas and tubs. The company has a three-fold plan
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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 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.
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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
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.
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:
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
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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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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.
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.
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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.
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
Doron Cohen 41 President, Chief Executive Officer,
Treasurer and a 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.
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 $100,000 in the
fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
Annual Compensation
-------------------
All Other
Name and Principal Position Year Salary ($) Bonus ($) Other ($) Compensation ($)
- --------------------------- ---- ---------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
- --------
(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
51
<PAGE>
(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:
<TABLE>
<CAPTION>
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Exercise Price
Name Granted (#) Fiscal Year Per Share Expiration Date
---- -------------------- ------------------ -------------- ---------------
<S> <C> <C> <C> <C>
Doron Cohen --0-- 0% N/A N/A
60 days after the
date of this
Bruce Bendell 50,000(1) 100% $1.25 Prospectus
Zvi Barak --0-- 0% N/A N/A
</TABLE>
- ---------------------
(1) Represents warrants to acquire 50,000 shares of Common Stock issued
to Mr. Bendell on October 2, 1996 as a signing bonus under a management
agreement with the Company to manage the operations of Major Fleet.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended December 31, 1996 by each of the
executive officers named in the Summary Compensation Table above and the value
of unexercised options held by such persons as of December 31, 1996:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at 12/31/96 (#) 12/31/96 ($)
----------------------- -------------------------
Shares
Acquired on
Name Exercise (#) Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------------- ---------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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.
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.
52
<PAGE>
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
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.
53
<PAGE>
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.
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.
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.
54
<PAGE>
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
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
55
<PAGE>
$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
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
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.
56
<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 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.
57
<PAGE>
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, before and after giving effect to the sale of Common Stock offered
hereby, 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:
BEFORE THE OFFERING(1)
<TABLE>
<CAPTION>
1997A-Major
1996-Major Series of 1997-Major Series of Automotive Group
Convertible Preferred Convertible Series of Preferred
Common Stock Stock(2) Preferred Stock Stock
------------ -------- -------------------- --------------------
Name and Address(3) Number Percent Number Percent Number Percent Number Percent
- ------------------- -------- ------- ----------- --------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 6,106,445(9) 85.3% --- --- --- --- --- ---
executive officers
as a group
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.
58
<PAGE>
(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 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.
59
<PAGE>
AFTER THE OFFERING(1)
<TABLE>
<CAPTION>
1997A-Major
1996-Major Series of 1997-Major Series of Automotive Group
Convertible Preferred Convertible Series of Preferred
Common Stock Stock(2) Preferred Stock(3) Stock(4)
------------ --------------------- -------------------- ---------------------
Name and Address Number Percent Number Percent Number Percent Number Percent
- ---------------- ------ ------- ------ ------- ------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Bruce Bendell 4,650,010(5) 46.9% 125,000(6) 100% 900,000 100% 50 50%
Doron Cohen 2,500,000(7) 32.0% --- --- --- --- --- ---
Glenn H. Bank 1,400 * --- --- --- --- --- ---
Yossi Koren 505,035(8) 6.1% --- --- --- --- --- ---
Zvi Barak 250,000(9) 3.2% --- --- --- --- --- ---
All directors and 7,9064,45(10) 76.0% 125,000 100% 900,000 100% 50 50%
executive officers
as a group
Avraham Nissanian 507,079(11) 6.1% --- --- --- --- --- ---
Chmuel Livian 503,508(12) 6.1% --- --- --- --- --- ---
Harold Bendell 50,000 * --- --- --- 50 50%
</TABLE>
- ------------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Based on 7,804,700 shares of Common Stock outstanding, assuming all
1,450,000 shares of Common Stock offered hereby are sold to third parties.
(2) Based on 250,000 shares of the 1996-MAJOR Series of Convertible Preferred
Stock outstanding on September 23, 1997.
(3) Based on 900,000 shares of the 1997-MAJOR Series of Convertible Preferred
Stock to be outstanding upon the effectiveness of this offering and the
consummation of the Major Auto Acquisition.
(4) Based on 100 shares of the 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred
Stock to be outstanding upon the effectiveness of this offering and the
consummation of the Major Auto Acquisition.
(5) 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, (b) 50,000 shares of Common Stock which
Bruce Bendell has the right to acquire upon the exercise of warrants, and
(c) 1,800,000 shares of Common Stock, the minimum number of shares of
Common Stock into which the 900,000 shares of the 1997-MAJOR Series of
Convertible Preferred Stock owned by Bruce Bendell will be convertible,
assuming issuance of such shares upon the consummation of the Major Auto
Acquisition. 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.
(6) 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.
(7) 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.
(8) 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.,
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<PAGE>
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 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."
(9) Includes 125,000 shares of Common Stock owned by Mr. Barak's wife.
(10) 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) 2,600,000 shares of Common Stock that the directors and
executive officers as a group have the right to acquire within 60 days.
(11) 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."
(12) 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."
<PAGE>
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.
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
61
<PAGE>
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
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.
The holder of the 125,000 shares of the 1996-Major Series originally
issued to Harold Bendell is offering for sale by this Prospectus 250,000 shares
of Common Stock into which such shares of the 1996-Major Series are convertible.
See "Selling Shareholders." Holders of the remaining 125,000 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
(excluding the registration statement of which this Prospectus is a part),
subject to specified limitations.
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<PAGE>
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.
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.
1997A-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.
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<PAGE>
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.
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, 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.
64
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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.
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
65
<PAGE>
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.
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.
MARKET FOR COMMON EQUITY AND RELATED 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.
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.
66
<PAGE>
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.
SELLING SHAREHOLDERS
Up to 300,000 shares of Common Stock (the "Selling Shareholders'
Shares") may be offered and sold pursuant to this Prospectus by Castle Trust and
Management Services Limited, as Trustee under the Millenium Second Trust created
under that certain Deed of Settlement dated October 2, 1996 (the "Trustee") and
Harold Bendell (collectively, the "Selling Shareholders"). Of such 300,000
shares, 250,000 shares may be offered and sold by the Trustee. Such 250,000
shares of Common Stock are the minimum number of shares issuable upon the
conversion of 125,000 shares of the Company's 1996-MAJOR Series of Convertible
Preferred Stock. See "Description of Securities--Preferred Stock." As the
settlor and principal beneficiary of such trust, Harold Bendell has beneficial
ownership of such stock. The remaining 50,000 shares may be offered and sold by
Harold Bendell, individually, upon exercise of the Selling Shareholders'
Warrants. See "Description of Securities--Warrants."
The Company has agreed to register the public offering of the Selling
Shareholders' Shares under the Securities Act concurrently with this offering
and to pay all expenses in connection therewith. The Selling Shareholders'
Shares have been included in the registration statement of which this Prospectus
is a part. None of the Selling Shareholders' Shares may be sold by the Selling
67
<PAGE>
Shareholders prior to the 91st day after the date of this Prospectus, without
the prior written consent of the Underwriter. Harold Bendell is the brother of
Bruce Bendell, the Chairman of the Company's Board of Directors, and has a
management agreement with the Company to manage, with Bruce Bendell, the
operation of the Company's subsidiary Major Fleet. In addition, upon the
consummation of the Major Auto Acquisition, Harold Bendell will have a
management agreement with the Company to manage, with Bruce Bendell, the
operations of the Company's automobile dealerships. The Company will not receive
any of the proceeds from the sale of the Selling Shareholders' Shares.
Prior to this offering, the Trustee has legal ownership of 250,000
shares of the Common Stock (assuming the Trustee converts 125,000 shares of the
Company's 1996-MAJOR Series of Convertible Preferred Stock at a time when the
Common Stock has a value in equal to or greater than $5.00 per share), which
represents approximately 3.9% of the 6,354,700 shares of Common Stock
outstanding as of September 23, 1997. After giving effect to this offering and
assuming that the Trustee does not purchase any of the shares of Common Stock
offered hereby, the Trustee will own no Common Stock.
Prior to this offering, Harold Bendell has beneficial ownership of
350,000 shares of the Common Stock (which includes (i) the 250,000 shares of
Common Stock referred to in the immediately preceding paragraph and (ii) the
Selling Shareholders Warrants), which represents approximately 5.2% of the
6,354,700 shares of Common Stock outstanding as of September 23, 1997. After
giving effect to this offering and assuming that the Mr. Bendell does not
purchase any of the shares of Common Stock offered hereby, Mr. Bendell will own
50,000 shares of Common Stock.
The Selling Shareholders' Shares may be offered and sold from time to
time during the period commencing on the 91st day and ending on the 120th day
after the date of this Prospectus as market conditions permit in the
over-the-counter market, or otherwise, at prices related to the then-current
market price, or in negotiated transactions. The Selling Shareholders' Shares
may be sold by one or more of the following methods, without limitation: (i) a
block trade in which a broker or dealer so engaged will attempt to sell the
Selling Shareholders' Shares as agent but may position and resell a portion of
the block as principal to facilitate the transaction; (ii) purchases by a broker
or dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus; (iii) ordinary brokerage transactions and
transactions in which the broker solicits purchases; and (iv) face-to-face
transaction between the sellers and purchasers without a broker or dealer. In
effecting sales, brokers or dealers engaged by the Selling Shareholders may
arrange for other brokers or dealers to participate. Such brokers or dealers may
receive commissions or discounts from the Selling Shareholders in amounts to be
negotiated. Such brokers, dealers and any other participating brokers or dealers
may be deemed to be "underwriters" within the meaning of the Securities Act in
connection with such sales. From time to time, either of the Selling
Shareholders may pledge, hypothecate or grant a security interest in some or all
of the Selling Shares owned by it and the pledgees, secured parties or person to
whom such security interests have been hypothecated shall, upon foreclosure in
the event of default, be deemed to be Selling Shareholders for purposes hereof.
If any of the following occurs: (i) the securities are sold at a fixed
price or by option at a price other than the prevailing market price, (ii) the
securities are sold in block transactions and the purchaser takes the securities
with the intent to resell; or (iii) the compensation paid to broker-dealers is
other than usual and customary discounts, this Prospectus must be amended to
include additional disclosure relating to such price, arrangements and
compensation terms before offers and sales of the Selling Shareholders' Shares
may be made.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting
agreement (the "Underwriting Agreement"), the Company has agreed to sell to
SouthWall Capital Corp. (the "Underwriter") and the Underwriter has agreed to
purchase from the Company 1,150,000 shares of Common Stock.
The Underwriting Agreement provides that the obligation of the
Underwriter to purchase the shares of Common Stock offered hereby is subject to
approval of certain legal matters by its counsel and to certain other
conditions. The Underwriter is obligated to take and pay for all shares of
Common Stock offered hereby (other than those covered by the over-allotment
option described below) if any of such shares are purchased.
The Underwriter proposes to offer part of the shares of Common Stock
directly to the public at the public offering price set forth of the cover page
of this Prospectus and part of the shares of Common Stock to certain dealers at
68
<PAGE>
such public offering price less a concession not to exceed $0.60 per share. The
Underwriter may allow, and such dealers may reallow, a concession to certain
other dealers not to exceed $0.10 per share. The offering price of the shares of
Common Stock offered hereby was determined by negotiation between the Company
and the Underwriter and does not necessarily bear any relationship to the
assets, book value, results of operations or other established criteria of
value, and may not be indicative of prices that will prevail in any trading
market.
The Company has granted to the Underwriter an option, exercisable for
45 days from the date of this Prospectus, to purchase up to 172,500 additional
shares of Common Stock to cover over-allotments, if any, at the public offering
price, less underwriting discounts and commissions, as set forth on the cover
page of this Prospectus. If the Underwriter exercises this option, it will be
obligated, subject to certain conditions, to purchase that number of shares with
respect to which it exercised its option. The Underwriter may exercise such
option, in whole or in part, only to cover over-allotments made in connection
with the sale of the Common Shares offered hereby.
The Company and its officers and directors have agreed not to sell,
offer to sell, distribute or otherwise dispose of any shares of Common Stock 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. The
Underwriter has agreed not to withhold such consent unreasonably.
In connection with the offering made hereby, the Company has agreed to
sell to the Underwriter, for nominal consideration, the Underwriter's Warrants
to purchase 115,000 shares of Common Stock from the Company (10% of the number
of shares offered by the Company in this offering). The Underwriter's Warrants
are exercisable, in whole or in part, at an exercise price equal to 110% of the
public offering price set forth on the cover page of this Prospectus at any time
during the four-year period commencing one year after the effective date of the
registration statement of which this Prospectus is a part. The warrant agreement
pursuant to which the Underwriter's Warrants will be issued will contain
provisions providing for adjustment of the exercise price and the number and
type of securities issuable upon exercise of the Underwriter's Warrants should
any one or more of certain specified events occur.
The Company has agreed to reimburse the Underwriter for up to $207,000
(which represents 3% of the aggregate public offering price set forth on the
cover page of this Prospectus (without regard to the Underwriter's
over-allotment option)) of the Underwriter's out-of-pocket expenses (including
fees of its counsel) in connection with the sale of Common Stock offered hereby.
The Company has already paid $25,000 of such amount. The Company has also agreed
to indemnify the Underwriter or contribute to losses arising out of certain
liabilities that may be incurred in connection with this offering, including
liabilities under the Securities Act.
In connection with this offering, the Underwriter may engage in
stabilizing, syndicate short covering transactions, penalty bids or other
transactions during the offering that may stabilize, maintain or otherwise
affect the market price of the Common Stock at a level above that which might
otherwise prevail in the open market. Stabilizing transactions are bids for and
purchases of the Common Stock for the purpose of preventing or retarding a
decline in the market price of the Common Stock to facilitate the offering.
Syndicate short covering transactions are bids to purchase and actual purchases
of Common Stock on behalf of the Underwriter to provide it with enough shares of
Common Stock to deliver to those purchasing shares of Common Stock in this
offering. A penalty bid is an arrangement that permits the Underwriter to
reclaim a selling concession when the shares of Common Stock originally sold by
the Underwriter are purchased in a covering transaction. Such stabilizing,
syndicate short covering transactions, penalty bids and other transactions, if
commenced, may be discontinued at any time.
The Underwriter has been in existence since May 1996. The Underwriter
has co-managed one other offering of securities and has acted as an underwriter
in several others prior to this offering. There are no material relationships
between the Underwriter and Doron Cohen or Bruce Bendell, the promoters of the
Company.
69
<PAGE>
INTEREST OF NAMED EXPERTS AND COUNSEL
The financial statements included in this Prospectus, have been audited
by (i) Nemiroff, Cosmas & Co., CPA's, independent auditors, with respect to the
Company for the 1995 fiscal year, (ii) Peter C. Cosmas Co., CPA's, independent
auditors, with respect to the Company for the 1996 fiscal year, (iii) Doane
Raymond, chartered accountants, with respect to Info Systems for the 1996 fiscal
year, (iv) Marcum & Kliegman LLP, independent accountants, with respect to Major
Fleet for the 1995 and 1996 fiscal years, and (v) BDO Seidman, LLP, independent
auditors, with respect to Major Auto for the 1995 and 1996 fiscal years, in each
case as stated in their respective reports appearing herein and have been so
included herein in reliance upon the reports of such firms given upon their
authority as experts in accounting and auditing.
The validity of the shares of Common Stock offered hereby will be
passed upon for the Company by Piper & Marbury L.L.P., New York, New York.
Certain legal matters will be passed upon for the Underwriter by Dolgenos Newman
& Cronin LLP, New York, New York.
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.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Peter C. Cosmas Co., CPA's F-2
Fidelity Holdings, Inc. and Subsidiaries Consolidated
Financial Statements Year Ended December 31, 1996 and Period
November 7, 1995 (inception date) to December 31, 1995 F-3
Six Months Ended June 30, 1997 and 1996 (Unaudited) F-17
Pro Forma Combining Financial Statements F-23
Report of BDO Seidman, LLP F-29
Major Chevrolet and Affiliates Combined Financial
Statements for the Years Ended December 31, 1996
and 1995 and the Six-Month Period Ended
June 30, 1997 and 1996 (Unaudited) F-30
F-1
<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-2
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
F-3
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
December 31,
1996 1995
---- ----
<S> <C> <C>
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 4,072,651 505,480
liabilities
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' equity $ 9,316,864 $ 549,063
================ ================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended November 7, 1995,
December 31, (Inception date) to
1996 December 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-5
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended November 7, 1995,
December 31, (Inception date) to
1996 December 31, 1995
---- -----------------
<S> <C> <C>
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 $ -- --
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Retained Cumulative Total
Preferred Stock Common Stock 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)
------- ------ --------- ------- ---------- -------- ---- ----------
- - - - - (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 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
======= ====== ========= ======= ========== ======== ==== ==========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
<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.
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.
F-8
<PAGE>
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.
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:
F-9
<PAGE>
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-
---------- ----
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.
F-10
<PAGE>
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-11
<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-12
<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-13
<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.
F-14
<PAGE>
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.
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.
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.
F-15
<PAGE>
The Company's operation by industry segment for the year ended December
31, 1996 is as follows:
<TABLE>
<CAPTION>
Industry
---------
Computer Leasing
Products Income Other Consolidated
-------- ------- ----- ------------
<S> <C> <C> <C> <C>
Revenues $ 3,175,528 $ 258,947 - $ 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
-------------
</TABLE>
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-16
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1997
F-17
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
JUNE 30, DECEMBER 31,
1997 1996
UNAUDITED AUDITED
---------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 672,728 $ 574,486
Net Investment in direct financing leases, current 1,458,490 1,390,598
Notes receivable - officer and shareholder 140,000 142,659
Accounts receivable 806,200 179,837
Inventories 152,449 1,494,020
Other current assets 81,482 45,349
--------- ---------
Total current assets 3,311,349 3,826,949
Net investment in direct financing leases,
net of current portion 857,324 1,059,287
Property and equipment 2,072,428 1,023,523
Excess of costs over net assets acquired 2,506,892 2,645,269
Other intangible assets 470,187 483,474
Other assets 285,574 278,362
--------- ---------
Total assets $9,503,754 $9,316,864
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 579,413 $ 419,052
Accrued expenses 60,387 522,026
Current maturities of long-term debt 1,087,721 643,976
Accrued income taxes 343,000 4,378
Deferred revenue 66,501 67,409
Deposits for exercise of warrants 653,750
Due to affiliates 145,173 1,404,079
--------- ---------
Total current liabilities 2,935,945 3,060,920
Long-term debt, less current maturities 387,087 515,609
Deferred income taxes 310,000 424,000
Other 75,725 72,122
--------- ---------
Total liabilities 3,708,757 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,
6,351,700 shares issued and
outstanding in 1997 and 6,279,200 in 1996 63,517 62,792
Additional paid in capital 4,550,383 4,509,108
Cumulative translation adjustment 310 264
Retained earnings 1,178,287 669,549
--------- ---------
Total stockholders' equity 5,794,997 5,244,213
--------- ---------
Total liabilities and stockholders' equity $9,503,754 $9,316,864
========= =========
</TABLE>
F-18
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
----------- ---------
<S> <C> <C>
Revenues:
Computer products and
telecommunications equipment $ 1,988,028 $ 626,096
Leasing income 489,628 --
----------- ---------
Total revenues 2,477,656 626,096
----------- ---------
Operating expenses:
Cost of products sold 426,779 249,183
Selling, general and
administrative expenses
Products 767,132 493,703
Leasing 364,576 --
Amortization of intangible assets 156,234 --
----------- ---------
1,714,721 742,886
----------- ---------
Operating income (loss) 762,935 (116,790)
Other income (expense)
Interest expense (73,724) (17,350)
Interest income 10,472 1,778
Income on joint venture 52,055 --
----------- ---------
Income (loss) before provision
for income taxes 751,738 (132,362)
Provision for income taxes 243,000 --
----------- ---------
Net income (loss) $ 508,738 $(132,362)
=========== =========
Net income (loss) per common share $ .08 $ (.03)
=========== =========
</TABLE>
F-19
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 508,738 $(132,362)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by operating activities:
Amortization of intangible assets 156,234 52,075
Depreciation 264,758 41,752
Deferred income taxes (114,000) --
(Increase) decrease in asset
Net investment in direct financing leases 134,071 --
Notes receivable 2,659 --
Accounts receivable (626,363) (70,235)
Inventories 941,571 (4,876)
Other assets (44,266) (28,045)
Increase (decrease) in liabilities:
Accounts payable 160,361 196,357
Accrued expenses (461,639) 13,002
Accrued income taxes 338,622 --
Deferred revenue (908) 337,551
Due to affiliates (1,258,906) --
---------- --------
Net Cash provided (used) by operating activities: 932 405,219
---------- --------
Cash flows from investing activities:
Additions to property and equipment (413,663) (50,963)
Acquisition of 786710 Ontario Limited,
Net of Cash Acquired (738,636)
--------
Net Cash used in investing activities (413,663) (789,599)
---------- --------
Cash flows from financing activities:
Increase (payments) from long-term debt-net (184,777) 441,988
Proceeds from issuance of common
stock and deposits for exercise of warrants 695,750 183,800
---------- --------
Net cash provided by financing activities 510,973 625,788
---------- --------
Net increase (decrease) in cash and cash equivalents 98,242 241,408
Cash and cash equivalents, beginning of period 574,486 39,063
---------- --------
Cash and cash equivalents, end of period $ 672,728 $ 280,471
========== ========
</TABLE>
F-20
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDING 6/30/97
<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>
Balance as of 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 41,275 - - 42,000
Net Income - - - - - 508,738 - 508,738
Translation Adjustment - - - - - - 46 46
---------- -------- ---------- --------- ----------- ----------- -------- ----------
Balance as of June 30, 1997 250,000 $ 2,500 6,351,700 $ 63,517 $4,550,383 $1,178,287 $ 310 $5,794,997
========== ======== ========== ========= =========== =========== ======== ==========
</TABLE>
F-21
<PAGE>
Fidelity Holdings, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
June 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 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. These financial statements
should be read in conjunction with the audited December 31, 1996 financial
statements and related notes included elsewhere in this Prospectus.
F-22
<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 in this Prospectus.
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-23
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
ASSETS Fidelity Major Adjustments Combined
-------- ----- ----------- ----------
<S> <C> <C> <C> <C>
Current Assets:
Cash, cash equivalents and short-term $ 672,728 $ 2,360,273 $ 5,775,000 (b) $ 4,808,001
investments (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
</TABLE>
F-24
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Fidelity Major Adjustments Combined
--------- ----- ------------- ----------
<S> <C> <C> <C> <C>
Stockholders' equity
Preferred stock, $.01 par value:
2,000,000 shares authorized
250,000 shares issued and 2,500 2,500
outstanding
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
========== =========== =========== ===========
</TABLE>
F-25
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Fidelity Major Adjustments Combined
-------- ------ ------------ -----------
<S> <C> <C> <C> <C>
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
===========
</TABLE>
F-26
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Fleet 786710 Fidelity
Jan. 1, 1996 Jan. 1, 1996 Fidelity Major
thru thru April Pro Forma Pro Forma Pro Forma Pro Forma
Fidelity Sept. 30, 1996 18, 1996 Adjustments Combined Major Adjustments Combined
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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) $ (194,144) $ 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-27
<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-28
<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-29
<PAGE>
Major Chevrolet, Inc. and Affiliates
Combined Balance Sheets
<TABLE>
<CAPTION>
December 31, 1996 June 30, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
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
=================================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes
to combined financial statements.
F-30
<PAGE>
Major Chevrolet, Inc. and Affiliates
Combined Statements of Income
<TABLE>
<CAPTION>
Year ended Six months ended
December 31, June 30,
--------------------------------- --------------------------------
1996 1995 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
Revenues:
<S> <C> <C> <C> <C>
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
=================================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes
to combined financial statements.
F-31
<PAGE>
Major Chevrolet, Inc. and Affiliates
Combined Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
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:
<S> <C> <C> <C> <C>
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) 10,604,014 (15,778,491) (6,427,474) 8,295,007
operating activities
- ---------------------------------------------------------------------------------------------------------------------------------
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) 768,819 194,711 2,528,127 (1,251,259)
investing activities
- ---------------------------------------------------------------------------------------------------------------------------------
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) (11,688,720) 15,392,536 5,114,045 (7,346,569)
financing activities
- ---------------------------------------------------------------------------------------------------------------------------------
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
=================================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes
to combined financial statements.
F-32
<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-34
<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-35
<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-36
<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
===============================================================================
F-37
<PAGE>
3. Property, Plant and Major classes of property, plant and equipment
Equipment consist of the following:
December 31, 1996 Estimated
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
===============================================================================
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-38
<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 Notes payable on the vehicle floor plan
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.
F-39
<PAGE>
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.
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 89,000
and outstanding 890
Treasury stock, $100 par - 89 shares (8,900)
Major Dodge, Inc. - no par value; shares authorized 200; 250,000
issued and outstanding 20
Major Chrysler Eagle Jeep, Inc. - no par value; shares 250,000
authorized 200; issued and outstanding 100
Major Subaru, Inc. - no par value; shares authorized 200; 150,000
issued and outstanding 10
- ------------------------------------------------------------------------------
$730,100
==============================================================================
F-40
<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.
F-41
<PAGE>
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-42
<PAGE>
===============================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered securities to which it
relates. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUMMARY............................................................4
RISK FACTORS..................................................................8
USE OF PROCEEDS..............................................................17
DILUTION.....................................................................18
CAPITALIZATION...............................................................19
MANAGEMENT'S DISCUSSION AND ANALYSIS.........................................20
DESCRIPTION OF BUSINESS......................................................28
LEGAL PROCEEDINGS............................................................48
DESCRIPTION OF PROPERTY......................................................48
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.................50
EXECUTIVE COMPENSATION.......................................................51
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................54
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...............57
DESCRIPTION OF SECURITIES....................................................61
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.....................66
SELLING SHAREHOLDERS.........................................................67
PLAN OF DISTRIBUTION.........................................................68
INTEREST OF NAMED EXPERTS AND COUNSEL........................................69
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE....................................................70
FINANCIAL STATEMENTS.........................................................71
<PAGE>
Until [__________], 1997, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as Underwriters and with respect to
their unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. 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.
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.
Reference is also made to Section 8 of the Underwriting Agreement (a
form of which is attached to this registration statement as Exhibit 1.1) with
respect to undertakings to indemnify the Company, its directors, its officers
who have signed this registration statement and each person who controls the
Company within the meaning of the Securities Act, 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.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses, other than underwriting discounts and commissions, in
connection with this offering are as follows:
SEC Registration Fee..................................... $ 1,947
Nasdaq Fees.............................................. 1,474
Blue Sky Fees and Expenses............................... 30,000*
Printing Expenses........................................ 75,000*
Legal Fees and Expenses.................................. 75,000*
Accounting Fees and Expenses............................. 30,000*
Transfer Agent Fees and Expenses......................... 7,000*
Underwriter's Non-Accountable Expenses................... 207,000*
Miscellaneous............................................ 7,579*
===========
$ 435,000*
===========
- ----------
*Estimated.
Item 26. 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
II-2
<PAGE>
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.
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.
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.
II-3
<PAGE>
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.
18. In July 1997, the Company issued to Lewis Glogower, as part of the
termination of Mr. Glowgower's employment with the Company, 3,000 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.
19. In September, 1997, in connection with the execution of the MOU
relating to Computer Business Sciences' acquisition of the Agent, an aggregate
$653,750 deposit that the Nissko Principals and Robert L. 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. All of such Common Stock was issued in reliance upon
the exemption from registration contained in Section 4(2) of the Securities Act.
II-4
<PAGE>
Item 27. Exhibits.
See Exhibit Index immediately preceding the exhibits.
Item 28. Undertakings.
(a) The Company hereby undertakes that it will:
(1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement
to:
(i) Include any prospectus required by section
10(a)(3) of the Securities Act.
(ii) Reflect in the prospectus any facts or events
which, individually or together, represent a fundamental
change in the information in the registration statement;
Notwithstanding the forgoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospects filed
with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no
more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) Include any additional or changed material
information on the plan of distribution.
(2) For determining liability under the Securities Act, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to
be the initial bona fide offering.
(3) File a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering
(b) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Company pursuant to the foregoing provisions, or otherwise, the Company
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in the County of New York, and
State of New York, on the 22nd day of October, 1997.
FIDELITY HOLDINGS, INC.
By /s/ Doron Cohen
-------------------
Doron Cohen
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Doron Cohen Chief Executive Officer, President, October 22, 1997
- ------------------------------ Treasurer and Director
Doron Cohen
/s/ Bruce Bendell Chairman of the Board and Director October 22, 1997
- ------------------------------
Bruce Bendell
/s/ Yossi Koren Director October 22, 1997
- ------------------------------
Yossi Koren
/s/ Glenn H. Bank Secretary October 22, 1997
- ------------------------------
Glenn H. Bank
</TABLE>
II-6
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FIDELITY HOLDINGS, INC.
----------
EXHIBITS
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
===============================================================================
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ------------- -----
<S> <C> <C>
1.1* Proposed form of Underwriting Agreement ____
3.1** Articles of Incorporation of Fidelity Holdings, 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. N/A
3.2** Articles of Incorporation of Computer Business 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. N/A
3.3** Articles of Incorporation of 786710 (Ontario) 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.
N/A
3.4** Articles of Incorporation of Premo-Plast, Inc., 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. N/A
3.5** Articles of Incorporation of C.B.S. Computer 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.
N/A
3.6** Articles of Incorporation of Major Fleet & 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. N/A
3.7** Articles of Incorporation of Reynard Service 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. N/A
3.8** Articles of Incorporation of Major Acceptance 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. N/A
3.9** By-Laws of the Company incorporated by reference 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. N/A
4.1** Certificate of Designation for the Company's 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. N/A
4.2** Warrant Agreement for Nissko Warrants, 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. N/A
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
4.3** Warrant Agreement for Major Fleet Warrants, 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. N/A
4.3(i)* Amended and Restated Warrant Agreement, dated October 11, 1997 between the N/A
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. ____
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.
____
5.1* Opinion of Piper & Marbury L.L.P. ____
10.1** Employment Agreement, dated November 7, 1995, 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. N/A
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, 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. N/A
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 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. N/A
</TABLE>
<PAGE>
<TABLE>
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10.3(i)** First Amendment, dated September 30, 1996, to 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. N/A
10.5** Agreement, dated March 25, 1996, between Nissko 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. N/A
10.6** Asset Purchase Agreement, dated April 18, 1996, 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. N/A
10.6(i)* Amendment to Asset Purchase Agreement dated August 7, 1997. N/A
10.7** Employment Agreement dated April 18, 1996 between 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. N/A
10.8** Employment Agreement dated October 18, 1996 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. N/A
10.9** Indemnification Agreement dated November 7, 1995 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. N/A
10.10** Indemnification Agreement dated November 7, 1995 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. N/A
10.11** Indemnification Agreement dated December 6, 1995 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. N/A
10.12** Indemnification Agreement dated March 28, 1996 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. N/A
10.13** Indemnification Agreement dated March 28, 1996 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. N/A
</TABLE>
<PAGE>
<TABLE>
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10.14** Plan of Reorganization for acquisition of Major 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. N/A
10.15** Patent Purchase Agreement dated December 30, 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. N/A
10.16** Employment Agreement dated December 30, 1996 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. N/A
10.17** Employment Agreement dated January 27, 1997 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. N/A
10.18** Plan and Agreement of Merger, dated April 21, 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.
N/A
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 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. N/A
10.20** Management Agreement, incorporated by reference to 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. N/A
10.21** Employment Agreement with Moise Benedid, 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. N/A
10.22* Partnership Agreement between Nissko Telecom Associates and the Company.
____
</TABLE>
<PAGE>
<TABLE>
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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. ____
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. ____
</TABLE>
<PAGE>
<TABLE>
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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. ____
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. ____
</TABLE>
<PAGE>
<TABLE>
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10.54* Contribution Agreement dated as of October 6, 1997 between the Company, Bruce
Bendell and Doron Cohen ____
23.1 Consent Letter of Peter C. Cosmas. ____
23.2 Consent Letter of BDO Seidman, LLP. ____
23.3 Consent Letter of Doane Raymond. ____
23.4 Consent Letter of Marcum & Kliegman LLP. ____
23.5 Consent letter of Piper & Marbury L.L.P. (included in the opinion filed as Exhibit
5.1 to this registration statement). ____
- ---------
</TABLE>
* To be filed by amendment.
** Previously filed with the Commission as Exhibits to, and
incorporated herein by reference from, the registrant's
registration statement on Form
10-SB(File No. 0-29182).
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Fidelity Holdings, Inc.:
We consent to the use in this registration statement of Fidelity Holdings, Inc.
on Form SB-2 of our report dated February 27, 1997 on audit of the consolidated
financial statements of Fidelity Holdings, Inc. and subsidiaries as of December
31, 1996 and 1995, and for the year ended December 31, 1996 and for the period
ended December 31, 1995, appearing in the Prospectus, which is a part of this
registration statement, and to the reference to us under the heading "Interest
of Named Experts and Counsel" in such Prospectus.
Peter C. Cosmas Co., CPA's
400 Madison Avenue
New York, New York
October 22, 1997
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Major Chevrolet, Inc. and Affiliates
New York, New York
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated August 14, 1997 relating to the
financial statements of Major Chevrolet, Inc. and Affiliates, which is contained
in that Prospectus.
We also consent to the reference to us under the caption "Interest of Named
Experts and Counsel" in the Prospectus.
BDO Seidman, LLP
New York, New York
October 21, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF DOANE RAYMOND, INDEPENDENT AUDITORS
The Board of Directors
Fidelity Holdings, Inc.:
We consent to the incorporation by reference in the registration statement of
Fidelity Holdings, Inc. on Form SB-2 of our report dated January 22, 1997 on
audit of the financial statements of 786710 Ontario Limited as of December 31,
1996 and for the year ended December 31, 1996.
Doane Raymond
Chartered Accountants
October 14, 1997
Suite 400
7030 Woodbine Avenue
Markham, Ontario
<PAGE>
CONSENT OF INDEPENDENT AUDITOR
The Board of Directors
and Shareholders of
Fidelity Holdings, Inc.:
We consent to the use in this registration statement of Fidelity Holdings, Inc.
on Form SB-2 of our report dated February 5, 1997 on audit of the financial
statements of Major Fleet & Leasing Corp. as of December 31, 1996 and 1995, and
for the years then ended, appearing in the Prospectus, which is a part of this
registration statement, and to the reference to us under the heading "Interest
of Named Experts and Counsel" in such Prospectus.
Marcum & Kliegman LLP
Woodbury, New York
October 20, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND
RELATED FOOTNOTES OF FIDELITY HOLDINGS, INC. AND SUBSIDIARIES AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 1996 AND THE SIX MONTHS ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
FOOTNOTES.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> JUN-30-1997 DEC-31-1996
<CASH> 672,728 574,486
<SECURITIES> 0 0
<RECEIVABLES> 806,200 179,837
<ALLOWANCES> 0 0
<INVENTORY> 152,449 1,494,020
<CURRENT-ASSETS> 3,311,349 3,826,949
<PP&E> 2,372,428 1,146,852
<DEPRECIATION> (300,000) (123,329)
<TOTAL-ASSETS> 9,503,754 9,316,864
<CURRENT-LIABILITIES> 2,935,945 3,060,920
<BONDS> 1,474,808 1,159,505
0 0
2,500 2,500
<COMMON> 63,517 62,792
<OTHER-SE> 4,550,383 4,509,108
<TOTAL-LIABILITY-AND-EQUITY> 9,503,754 9,316,864
<SALES> 489,628 3,175,528
<TOTAL-REVENUES> 2,477,656 3,434,475
<CGS> 426,779 965,792
<TOTAL-COSTS> 1,714,721 2,270,797
<OTHER-EXPENSES> 0 32,410
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 73,724 24,132
<INCOME-PRETAX> 751,738 1,115,966
<INCOME-TAX> 243,000 441,000
<INCOME-CONTINUING> 508,738 675,966
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 508,738 675,966
<EPS-PRIMARY> 0.08 0.12
<EPS-DILUTED> 0.08 0.12
</TABLE>
