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Form 10-SB SECURITIES EXCHANGE ACT OF 1934
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
FIDELITY HOLDINGS, INC.
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(Exact name of the registrant as specified in its charter)
NEVADA 11-3292094
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
80-02 KEW GARDENS ROAD, STE 5000 KEW GARDENS, NEW YORK 11415
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, 718-520-6500
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Securities to be registered under Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
_____________________________ _____________________________________
_____________________________ _____________________________________
Securities to be registered under Section 12(g) of the Act:
COMMON STOCK
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(Title of class)
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(Title of class)
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TABLE OF CONTENTS
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PART I
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Item 1. Description of Business..................................................................................1
Item 2. Management's Discussion and Analysis or Plan of Operation...............................................12
Item 3. Description of Property................................................................................15
Item 4. Security Ownership of Certain Beneficial Owners and Management..........................................16
Item 5. Directors, Executive Officers, Promoters and Control Persons............................................19
Item 6. Executive Compensation..................................................................................25
Item 7. Certain Relationships and Related Transactions..........................................................26
Item 8. Description of Securities...............................................................................29
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and Other
Shareholder Matters.....................................................................................31
Item 2. Legal Proceedings.......................................................................................31
Item 3. Changes in and Disagreements with Accountants...........................................................32
Item 4. Recent Sales of Unregistered Securities.................................................................32
Item 5. Indemnification of Directors and Officers...............................................................35
Financial Statements
Index to Exhibits
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Business Development
Fidelity Holdings, Inc. (the "Company") was incorporated under the laws of the
State of Nevada on November 7, 1995. The Company was initially structured as a
holding company, with initial emphasis on two intended divisions: (1) the
Telecommunications Division and (2) the Plastics and Utility Products Division.
The Company's management moved expeditiously to establish the divisions,
especially building on pre-incorporation telecommunications experience.
On November 14, 1996, following substantial pre- and post-organization
negotiations, the Company acquired the "Armored Conduit" patents for the
Plastics and Utility Products Division from Progressive Polymerics
International, Inc., a non-affiliated company. The patents and the Armored
Conduit are described below. Under the terms of the purchase, the Company agreed
to pay a cash purchase price, a minimum royalty and a continuing royalty, as
follows:
1. Cash, in the total amount of $500,000 in quarterly installments over
10 years; and
2. Payment of certain expenses, totalling approximately $62,000, as a
minimum royalty; and
3. Payment of a minimum royalty equal to the greater of (i) five
percent (5%) of the manufactured cost of the Armored Conduit or (ii) two percent
(2%) of the gross sales, net of discounts, allowances and returns.
This Patent Purchase Agreement was subsequently modified as discussed below at
p. 10.
On December 15, 1995, the Company entered into a Letter of Intent with Dr. Zvi
Barak and his wife, Sarah Barak, non-affiliated Canadian residents, for the
acquisition of the "Talkie" telecommunications and interactive voice response
software and their Ontario corporation, "786710 (Ontario) Limited". In general,
the Letter of Intent, negotiated between the Company and the Baraks,
contemplated the payment of $750,000 in installments, issuance of 125,000 shares
of the Company's Common Stock to Sarah Barak, a price based upon the historical
cost of development of the software (Baraks' position) and the Company's
appraisal of the market value (potential) of the software. In addition, the
Company agreed to employ Dr. Barak to head an Israel-based R&D facility at an
annual salary of $150,000 and the issuance of 125,000 shares of the Company's
Common Stock vesting in installments over the five year term of the Employment
Agreement. The acquisition was closed on April 18, 1996, subject to completion
of certain matters which were completed in May, 1996.
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The Armored Conduit product required additional R&D and design engineering,
whereas the Talkie product was market-ready. This, together with the proposed
deregulation of the telecommunications industry, lead the Company's Management
to emphasize the telecommunications division, called the "Computer Telephony and
Telecommunications Division" and to defer development of the Plastics and
Utility Products Division.
During the first quarter of 1996, the Company secured initial investor financing
by means of an offering under Rule 504 of Regulation D promulgated by the
Securities and Exchange Commission as an exemption under the Securities Act of
1933. The total gross proceeds were $997,000. Substantially all of the proceeds
of that offering, $884,272, were directed to the Computer Telephony and
Telecommunications Division. That Division established several Master Agents to
market the Talkie Power Web Line Machines, one of which, Nissko Telecom, Inc.,
made a substantial commitment supported by immediate funding. Nissko Telecom,
Inc., organized by non-affiliated investors, agreed to purchase at least 5, and
up to 60, Talkie Power Web Line Machines, based on the 786710 pricing schedule
with additional cost for customization and added hardware. Nissko Telecom, Inc.
agreed to pay one-third of the purchase price of the Machines purchased, with
the Company to finance the other two-thirds. Due to that impetus to the early
growth of that Division, that Division continued to be the primary focus of the
Company's business plan during most of 1996. As the year closed, however, the
Company began the process of establishing a third division, an Automotive Sales
Division, as it entered into a Letter of Intent to acquire the Major Automotive
Group of dealerships.
Holding Company Structure
Fidelity Holdings, Inc. is structured as a holding company, meaning that it
provides staff functions to operating subsidiaries. As a holding company,
Fidelity Holdings, Inc. has no operations and no source of revenue and income;
all business operations are conducted by subsidiaries, presently grouped into
two divisions:
I. a Computer Telephony and Telecommunications Division; and
II. a Plastics and Utility Products Division.
A third division is in process:
III. Automobile Sales (dealerships)
Computer Telephony and Telecommunications Division
This Division is headed by a wholly-owned subsidiary, Computer Business
Sciences, Inc. ("CBS"), which in turn presently has four wholly-owned (second
tier) subsidiaries:
1. 786710 (Ontario) Limited;
2. CBS (Israel);
3. Reynard Service Bureau, Inc.; and
4. Major Fleet & Leasing Corp.
Major Fleet & Leasing Corp. has a subsidiary, Major Acceptance Corp., for
financing purposes. See Item 2. Because this Division
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is based upon technology acquired from 786710 (Ontario) Limited, the discussion
of this Division will begin with that subsidiary, rather than the Division head,
CBS, the discussion for which follows the discussion of 786710 (Ontario)
Limited.
786710 (Ontario) Limited
The central business of the Telecommunications Division derives from 786710
(Ontario) Limited ("786710"), doing business as "Info Systems". 786710 is a
corporation organized under the laws of the Province of Ontario, Canada. It was
owned by Dr. Zvi Barak and his wife, Sarah Barak, until April 18, 1996 when it
was acquired by the Company. Prior to the acquisition, neither Dr. Barak nor his
wife were affiliated with the Company. Under Dr. Barak's direction, 786710 had
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.
Under the terms of the acquisition of 786710, the Company agreed to pay cash
consideration of $750,000, of which $10,000 was paid upon the execution of the
Letter of Intent and applied to the purchase price, $340,000 was paid at Closing
(April 18, 1996), $100,000 was paid in August, 1996 and the balance is being
paid in twenty monthly installments of $15,000 each. (To date, pursuant to
indemnification provisions, the Company has withheld $100,000 against any
liability resulting from the litigation - see Part II, Item 2.) In addition, the
Company issued 125,000 shares of its Common Stock to Sarah Barak, which shares
vest at the rate of 25,000 shares per year over a five year period. In
conjunction with the acquisition, the Company employed Dr. Barak for a five year
term, at a minimum annual salary of $150,000 and the issuance of 125,000 shares
of its Common Stock which vest at the rate of 25,000 shares over the five year
term, to head an R&D facility to be established in Israel.
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 group includes:
TALKIE-ATTENDANT automatic receptionist features, including
inband signaling, dial "0" for operator,
name directories, call hunting, call
blocking, call screening, music or company
messages while on hold, paging, personalized
menus, call queuing and conversation
recording
TALKIE-MAIL allows users to record, send, receive and
retrieve voice messages from personal mailboxes
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TALKIE-AUDIO delivers pre-recorded information in response to
telephone inquiries and can serve as a talking
bulletin board
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 those
answers
TALKIE-QUERY responds to callers' inquiries using information
stored in the system database
TALKIE-TRANS responds to caller's inquiry, accepts his order,
issues the order (which can include delivery
instructions) and faxes the caller a confirmation
TALKIE-AD permits callers to browse through pre-recorded
messages ("talking classifieds") based on their
search criteria
TALKIE-FORM permits the User to set up a questionnaire and then
collects answers to pre-recorded questions
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 the participants to
dial in, and provides the Chairperson with various
options during the conference call
TALKIE has received industry recognition and it won Computer Telephony
magazines' 1994 Product of the Year Award, as well as an Editor's Choice Award.
In 1996, TALKIE won Teleconnect Magazines 1996 Product of the Year Award, as
well as an Editor's Choice Award. TALKIE-GLOBE, which was included in the
magazine Awards, is a PC-based integrated international Call Back, Debit Card,
Single Hop and Long Distance Reseller system. TALKIE-GLOBE eliminates the common
callback method, where the foreign caller first calls equipment in the United
States which calls him back in order to permit the call to be placed.
TALKIE-GLOBE permits the foreign caller to use an in-country free line to access
the multiplexing equipment, which gives him an immediate dial tone and permits
him to place the call directly.
The Business Control Software ("BCS") developed by Dr. Barak is as advanced as
TALKIE and TALKIE-GLOBE, having received 11 awards for software excellence from
the Canadian Directory of Software. BCS is a diverse but interconnected series
of powerful software modules. This full featured system includes: General
Ledger, Accounts Receivable, Accounts Payable, Sales Order, Purchase Order,
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Inventory Control, Bills of Materials, Job Costing, and Production Control.
While comprehensive for general accounting applications, BCS contains features
with particular strengths for the manufacturing, distribution, import/export,
pharmaceutical and food industries. For example, its sale analysis reports
assist management in its decision-making process in a wide variety of areas,
including: defining market trends; analyzing sales force effectiveness;
determining profitability of a job, department or entire company; or
geographical sales spread. One of the most advanced features of BCS is its
ability to handle multiple currencies across the entire system; for example,
sales purchases, and costs are maintained in the client's or vendor's currency
but with reporting capability in the company's home currency or in multiple
currencies with automatic posting of exchange rates. A major attraction of BCS
for international businesses, however, is its multi-lingual capability. BCS
allows simultaneous users, in real time, to run in a multi-lingual environment
where each user can select a different language while accessing the common
database.
Prior to the Company's acquisition of 786710, that corporation customized,
installed and serviced the software packages and sold systems integrating the
software into specific hardware. Upon the Company's acquisition of 786710, the
Talkie Power Web Line Machine system was separated from the TALKIE system and
made exclusively available to CBS. Otherwise the functions of 786710 remained
the same and it has continued to sell and install the Talkie modules. Dr. Barak
was employed by the Company to head an Israel-based Research & Development
"laboratory", for the improvement of TALKIE and the development of new products.
In August, 1996 Dr. Barak moved to Israel and commenced the operations of a new
Israeli-incorporated subsidiary, "CBS (Israel)". Moise Benedid, Dr. Barak's
brother-in-law, who had previously been associated with 786710 and who had been
with a company selling and installing the 786710 products, became the President
of 786710.
Computer Business Sciences, Inc. ("CBS")
The Company assigned 786710 to CBS, in the Telecommunications Division, and gave
exclusive control of the Talkie Power Web Line Machine system to CBS, which
began establishment of an international (domestic to foreign) calling business.
Following execution of the Letter of Intent with Dr. Barak and Sarah Barak in
December, 1995 CBS established a "Master Agent" program. Under the program, an
appointed Master Agent was given the right to sell the Talkie Power Web Line
Machine system, which otherwise was not available in the market. CBS initially
appointed five Master Agents. In March, 1996 CBS entered into both a Master
Agent Agreement with Nissko Telecom, Inc. and an agreement for the formation of
a Joint Venture to offer international calling services using the Talkie Power
Web Line Machine System. Under the Agreement, Nissko Telecom, Inc. purchased an
initial fifteen "Talkie Power Web Line Machines" ("Machines") for $1,887,000
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($2,787,000 if upgraded Machines) with an option to purchase up to forty-five
more such Machines. Nissko Telecom, Inc. was required to pay one-third of the
purchase price as a cash downpayment and CBS was required to secure lines of
credit to finance the two-thirds balance. "Talkie Power Web Line Machines" are
hardware- software integrated PC-based units capable of offering multiple-line
international call handling up to 96 channels. Nissko Telecom, Inc. formed a
limited partnership, Nissko Telecom Associates, which in turn entered into the
Joint Venture with CBS, called the "Nissko-CBS Joint Venture". Under the Joint
Venture, CBS arranges for the manufacture of the Machines and agrees to maintain
them and sells the Machines to Nissko Telecom, Inc./Nissko Telecom Associates
which in turn enters into operating agreements or partnerships with entities
desiring to offer international telecommunications services to specific
countries. Nissko Telecom Associates is a licensed "214 carrier", meaning that
it is licensed by the FCC for international telephone communications.
The Joint Venture obtains, for the operating entity, the necessary link (e.g.,
satellite channels) between the Machine in Kew Gardens and the receiver in the
destination country. Marketing and sales of the telecommunications service
created is handled by the operating entity, CBS and Nissko Telecom Associates,
primarily by selling large blocks of time to commercial users which need voice
and data communications to the foreign country, so that utilization of the
Machine is primarily in fulfillment of such block contracts. In addition, usage
is increased through so-called VIP accounts for heavier usage by individuals and
corporations, and also to some extent through credit cards.
Under the terms of its arrangements with most operating entities, the Joint
Venture shares in the revenues derived from the usage of the Machines, in a
range between 50% and 70%. In turn, the Company receives 45% of the income of
the Joint Venture, giving the Company an on-going interest in the usage of the
Machines, in addition to the profit initially derived from the sales of the
Machines and the revenues subsequently derived by Reynard Service Bureau, Inc.
from its maintenance, servicing and monitoring operations.
Currently, the basic configuration for a Machine is forty (40) channels,
twenty-four (24) digital and sixteen (16) analog. Machines are built with 40
channel capability with the intent to increase the capacity as usage demands
dictate. Based on the 24 digital channels, for a 30-day month each Machine
creates a theoretical total of 1,036,800 minutes of which 345,600 are considered
"peak time" and the balance are "off-peak". ("Peak time" is defined as the 8
hour work day in the destination country; all else is "off-peak" time.
Essentially, the rendering of the telecommunications services by the operating
entity is the selling of this Machine-created time availability. At the present
time, under the Joint Venture, Machines are in operation for the following
countries:
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Korea
Philippines (2 Machines)
Thailand
Venezuela
Israel (4 Machines)
England
Jamaica
Dominican Republic
Sales
1996 sales for the Telecommunications Division were $3,175,528, which included
$2,637,873 from the sale of Talkie Power Web Line Machines, $537,655 from the
sale of software, etc. by 786710 (Ontario) Limited (after elimination of $96,217
in intercompany sales, and $258,947 from leasing activities of Major Fleet &
Leasing Corp., primarily motor vehicle leasing.
Employees
As of March 3, 1997, the Telecommunications Division had 25 employees, divided
as follows:
CBS 2
786710 (Ontario) Limited 7
CBS Israel 3
Reynard Service Bureau 10
Major Fleet & Leasing Corp. 3
Competition
The telecommunications business is highly competitive. In addition to major
service providers, such as AT&T, MCI and Sprint, there are numerous smaller
providers which are developing their own networks. There are also many
resellers, which although not having any equipment, provide service through
agreements with providers. While the Company's Telecommunications Division is
focused in the international calling market, that is also a highly competitive
market. As a result of the recent international agreement opening many markets
which are currently state monopolies the competition will intensify. The
Company's Talkie Power Web Line Machine system permits the Company to offer a
system which operates at relatively low costs since the cost of the more common
switches is avoided by the Talkie technology. The Company believes that for the
foreseeable future it will continue to sell Talkie Power Web Line Machines as
the cost for the Machines and their operating costs are still sufficiently low
to permit service providers to offer international telecommunications services
at competitive prices. Furthermore, the Joint Venture is not in the standard
telecommunications market, as it focuses its marketing primarily on large users,
especially those who will pre-purchase large blocks of Machine-created
telecommunications time so that utilization of such time is primarily
fulfillment of such pre-sold contracts.
Reynard Service Bureau, Inc.
CBS formed "Reynard Service Bureau, Inc." to handle its
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responsibilities under the Master Agent agreements to install, debug, maintain
and service the Machines for the operating entities. All Machines are installed
at the Company's location in Kew Gardens, New York where they are monitored 24
hours a day. It is the responsibility of the operating entity to make all
arrangements in the destination country. Reynard Service Bureau, Inc. receives a
fee, consisting of a flat fee charge and a volume usage charge, as compensation
for its services.
In addition, Reynard Service Bureau performs other functions for the various
subsidiaries. For example, it provides services for 786710's installations where
the customer requests on-going service. In addition, it implements the changes,
whether final or Beta testing, developed by the R&D operations of CBS Israel.
CBS has assigned all telecommunications Customer Service responsibilities to
Reynard Service Bureau, Inc.
Major Fleet & Leasing Corp.
In order to provide 786710 with a source of internal financing to offer to
potential customers, the Company acquired Major Fleet & Leasing Corp. ("Major
Fleet") as of September 30, 1996. Major Fleet & Leasing Corp. was owned by Bruce
Bendell, the Company's Chairman of the Board, and his brother, Harold Bendell,
and was affiliated with the Major Automotive Group, based on Northern Boulevard
in Long Island City, New York. (See "Major Automotive Group" in Item 2 below)
The acquisition was a stock-for-stock exchange or a so-called "B Reorganization"
under Internal Revenue Code Section 368(a)(1)(B) by which no gain or loss is
recognized to the parties. In exchange for 100% of the outstanding shares of
Major Fleet & Leasing Corp. the Bendells received 250,000 shares of the
Company's Preferred Stock, designated as the 1996-Major Series.
See Item 7.
Established in 1985, Major Fleet has been engaged in the leasing of automotive
vehicles. Accordingly, Major Fleet has well established credit lines and a
business "track record" for its leasing operations. The Company is developing
separate financing lines under Major Fleet to provide the required financing of
the two-thirds balance to Nissko Telecom, Inc. in connection with the sale of
the initial 15 Machines. At the same time, Major Fleet will continue with its
established business of leasing motor vehicles under the experienced management
of the Bendells. To expand the available credit lines so as to service the
leasing and/or financing of Talkie Power Web Line Machines, Major Fleet &
Leasing Corp. has established a subsidiary called "Major Acceptance Corp., a
Florida corporation, which is engaged in a private offering of debentures to
raise up to $4,500,000 for leasing and financing purposes. See Item 2.
CBS Israel
CBS (Israel) has established an R&D facility at Ra'ananna, Israel.
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Headed by Dr. Barak, the facility employs a receptionist/secretary and a
programmer. This subsidiary provides R&D functions to (1) improve the existing
software, including especially Talkie and to adapt such software to changing PC
environments, (2) to expand the current software, and (3) to develop new
products and applications.
Plastics and Utility Products Division
The Company's original business plan emphasized the Computer Telephony and
Telecommunications Division; as noted above, the proceeds from the Company's
initial financing were intended primarily to support that Division. Furthermore,
as discussed below, during 1996 the Division's basic product line, "Armored
Conduit", was the subject of substantial disputes and, ultimately, litigation.
Accordingly the Plastics and Utility Products Division was not developed in
1996. The Company anticipates seeking financing through a public offering in the
near term to support development of this Division; from the proceeds of such an
offering approximately $400,000 will be used to finance the remaining R&D and
production design phase.
Immediately following its organization, the Company entered into an
Agreement with Progressive Polymerics, Inc. and its subsidiary,
Progressive Polymerics International, Inc. (collectively "PPYM") to
acquire two patents covering "Armored Conduit":
Date of Issue Patent Number
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June 8, 1993 5,217,667
May 17, 1994 5,312,658
"Armored Conduit" is the name that was given by PPYM to its conduit system.
Electric distribution lines are often run through conduits buried in the ground,
usually in the street. This has increasingly become the common way of delivering
electric service in new subdivisions, but many major cities, such as New York
City, have utilized this method for many years. Originally, conduit was made
from creosoted wood or so-called "Transite" asbestos-concrete pipe. Today, the
standard conduit is made from PVC duct, which is installed and then encased in
concrete poured in place, or cement or concrete tubing, or metal tubing. Each of
these types has its own problems. For example, PVC becomes brittle and
inflexible in cold weather, binds the electric wire if there is a short (fire,
heat), and is required to be encased in concrete which must be properly placed
around it. Once in place, the entire "system" must be removed if there is a
problem. The "Armored Conduit" system is assembled in the field from
pre-fabricated pieces, each consisting of a pre-formed plastic shell which is
filled with a pourable cement, with male-to-male extensions, joined in an
end-to-end fashion with couplings or connectors. The pieces have a rectangular
exterior, with linear ribs, a square exterior cross section, and a tubular
interior. The linear ribs permit the conduit to be interlocked when stacked for
storage or shipment, while increasing its structural strength. The "Armored
Conduit" is
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lighter than standard concrete conduit, yet it has a high strength to weight
ratio that exceeds the physical property requirements of standard conduit.
Under the original acquisition agreement, the Company agreed to pay a cash
purchase price of $500,000 payable in fifty-six quarterly installments, an
initial minimum royalty, and an on-going royalty equal to the greater of 5% of
the manufactured cost of the product or 2% of gross sales net of returns and
allowances. Subsequent to the acquisition, as the Company began R&D, a dispute
developed with PPYM, and, when negotiations proved unfruitful, the Company filed
a suit to rescind the acquisition. The dispute was resolved in October, 1996
when the Company and PPYM executed an amended agreement which settlement was
filed in the court to terminate the Company's suit. Under the amended agreement,
the minimum royalty was eliminated, the on-going royalty was retained, and the
cash purchase price was amended to a cash purchase price of $100,000 and the
issuance of eighty thousand Units of the Company's securities. Each Unit
consists of two (2) shares of the Company's Common Stock and two (2) Warrants
exercisable for one year, each Warrant being for the purchase of one (1) share
of the Company's Common Stock at an exercise price of $3.125 per share. The
Company has an option, exercisable for one year, to redeem 80,000 of the 160,000
shares issued at a redemption price of $2.50. As the shares are restricted as to
transfer, a value of $2.50, or one-half of the approximate $5.00 market price,
was assigned to the shares issued. No value was assigned to the Warrants, as
they are for the purchase of restricted shares at a price greater than the
assigned value of the shares at that time.
During 1996, despite the on-going renegotiation involving the Armored Conduit
transaction, the Company retained Mr. Ronald K. Premo, a plastics industry
consultant, to determine the necessary R&D required to complete the product to
the production stage, to investigate alternative plastics usable for the shell,
to provide liaison with the mold builder as well as the injection, blow and
extrusion molders and locate alterative and back-up molders, and to establish an
initial budget for the initiation of the Plastics Division.
Since its organization the Company has sought other plastics products which
would enhance the Division. As noted above, the Company retained an experienced
consultant in the plastics industry, Mr. Ronald K. Premo, to search out and
analyze potential opportunities. During the first three quarters of 1996, Mr.
Premo presented various opportunities to the Company. However, the Company
elected not to proceed in order to concentrate on the Telecommunications
Division and not to dilute the limited funds and manpower in the Plastics
Division. At the same time, various products to which the Company had originally
obtained certain rights (at no cost) were terminated as not offering sufficient
market volume to justify the development risks. During 1996, the
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Company, with Mr. Premo, formed a wholly-owned subsidiary, called "Premo-Plast,
Inc." to operate the Plastics and Utility Products Division. The Division was
activated on January 1, 1997 with the employment of Mr. Premo. During the fourth
quarter of 1996, Mr. Premo had presented an opportunity involving a Patent
Pending relating to a method for assembling and installing hydrotherapy fixtures
for hot tubs, spas and pools, developed by Mr. John Pinciaro. In January, the
Division acquired the Patent Pending. The acquisition agreement was negotiated
at arms-length between the Company and Mr. Pinciaro, who was not affiliated with
the Company prior to the acquisition. Under the terms of the acquisition, the
Division will establish a separate subsidiary for exploitation of the fixtures,
of which Mr. Pinciaro will own 20% and which he will head at an annual salary of
$75,000. Mr. Pinciaro will receive a royalty of five percent (5%) of the
wholesale cost less reasonable discounts, returns and allowances on all fixtures
and all enhancements, modifications and improvements. The fixture line
constitutes an integrated system which can consist of some 20 to 30 parts,
including air and light nozzles and light fixtures, in various sizes and
configurations, together with related controls. For example, nozzles which are
fixed, adjustable, or spin are available in various sizes. The Patent Pending
relates to the method of assembling the components and then installing them in
the hot tub, spa or pool wall. As part of the acquisition, Premo-Plast, Inc.
employed Mr. Pinciaro to oversee a new subsidiary to-be-formed ("NEWCO") which
will complete the development of the product line, produce it, and market it.
Sales
Since the Plastics Division was not operational in 1996, it had no sales.
Employees
During 1996 the Plastics Division had no employees. As of March 3, 1997 the
Division has two employees, Mr. Premo and Mr. Pinciaro.
Competition
The "Armored Conduit" will face competition from the established methods: PVC
duct encased in concrete poured at the site and concrete conduit. While the
Armored Conduit product offers advantages over both current methods, it must
pass rigorous testing by utilities which are unlikely to shift from current
methods without confidence in the Armored Conduit product. Accordingly it should
be anticipated that a substantial effort will have to be made in order to secure
a market share. However, once accepted by major utilities, the market should
become easier and once established as an accepted method the product will have
the advantage of being an established method.
The hydrotherapy spa products are not new or unique, as such, as water and air
nozzles and lighting fixtures are currently available. What is new is the method
of assembly and attachment to
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the spa, hot tub or pool. The Company believes that the ease of assembly and the
time saved in installation will provide the Company's products with a profitable
market share.
Premo-Plast, Inc.
Premo-Plast, Inc. is both the head of the Plastics and Utility Products Division
and an operating company. As an operating company, Premo-Plast, Inc. is
responsible for the development of the Armored Conduit. As the head of the
Division, Premo-Plast, Inc. will supervise the development, production and
marketing of the hydrotherapy spa products by NEWCO.
Premo-Plast, Inc. must complete the development of the Armored Conduit, begun by
the prior owner. The process of determining the current status of the product
and understanding the development of the product to date has begun. Upon
completion of that, it is anticipated that the product will go through a
mechanical design phase which will lead to a modification of existing tooling,
as required, to enable the company to produce sufficient actual product to
solicit sales and permit the completion of testing by the various potential
customers. The major design factor is to coordinate the three plastic parts of
the conduit, one of which is blow-molded, one of which is injection molded, and
the third is extrusion molded. A major emphasis will be on the determination of
the plastic used for the shell, in order to meet test specifications, and a
determination of the best cement mixture for both production and field use. At
present. Mr. Premo is reviewing the prior marketing studies and efforts and is
developing a market proposal for the Company. By the fourth quarter of 1997 it
is expected that new sources of materials and molding will be identified, all
engineering issues will be resolved, and manufacture of production tooling can
be commenced, with the possibility that field test quantities of Armored Conduit
can be manufactured.
NEWCO
The subsidiary to complete the development of, produce and market the
hydrotherapy fixtures has not yet been formed. It is expected that upon
formation the initial operation will be research on the possible modification of
the existing components to permit the most effective production of the
components. In addition, there will be a determination of the initial components
to make up the starting product line. Limited production will follow, with field
testing and any required modifications prior to commencement of full production.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Operations to date
1996 was a formative year in which the Company experienced rapid
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<PAGE>
growth, based upon the foundation laid in late 1995 following the Company's
incorporation. On November 14, 1995 the Company purchased two patents for the
"Armored Conduit". On December 15, the Company entered into a Letter of Intent
to acquire 786710 (Ontario) Limited, which owned various software, including
especially "Talkie". These transactions placed the Company in the position of
needing the cash to exploit the acquisitions. However, because the Armored
Conduit required additional R&D and design engineering, because the transaction
in which the Armored Conduit patents were acquired was under re-negotiation,
because the 786710 software was market-ready, and because of the then proposed
deregulation of the telecommunications industry, the Company decided to focus on
its Telecommunications Division.
On or about February 6, 1996 the Company commenced an offering pursuant to Rule
504 of Regulation D. The offering was of 20,000 Units at $5.00 per Unit, each
Unit consisting of 2 shares of Common Stock and 23 Common Stock Purchase
Warrants exercisable at $1.95 each. Oversubscribed, the offering closed on March
6, 1996, providing the Company with $100,000 for the sale of the Units, intended
primarily for the Telecommunications Division.
Concurrently, the Company began negotiations with a group of investors (Nissko
Telecom, Inc.) for their financial support of the Telecommunications Division
and the acquisition of 786710 (Ontario) Limited. Agreement was reached on March
25, 1996 and on March 27, 1996 the investors (Nissko Telecom, Inc., see Item 1,
"Description of Business") made an initial deposit of $629,000.
The combination of the closing of the Rule 504 offering and the deposit by
Nissko Telecom, Inc. provided the Company with the financing needed to close the
acquisition of 786710 (Ontario) Limited. Agreement was reached on April 18, 1996
subject to certain conditions subsequently met in May.
Some of the Common Stock Purchase Warrants issued in the Rule 504 offering were
exercised during the second quarter, providing the Company with an additional
$179,400. The remaining Warrants, scheduled to expire on July 31, 1996, were
extended and all the Warrants were exercised by September 30, 1996. Overall, the
exercise of the 460,000 Warrants provided the Company with an additional
$897,000 which gave it the liquidity required for the balance of 1996. At the
end of 1996, the Company had cash of $574,486 which taken together with
collection of accounts receivable and continuing operations is sufficient for
1997.
The Company believes that the Telecommunications Division and the (Nissko) Joint
Venture will continue to grow, despite the potential for increased international
calling competition. The Joint Venture will continue to grow by concentrating on
its niche market of fulfillment of pre-sold time blocks for voice and data
transmission. The Company recognizes that as the costs for such
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<PAGE>
calling drop, the margins of resellers will continue to shrink, and the Company
anticipates that many of those will be forced out of the market. In addition,
newer providers relying upon the more expensive switches who have not yet
recovered the costs for such equipment may experience problems, while lowered
margins may become a barrier to market entry for new providers. The Company
believes that its lower cost PC-based system will permit it to attract providers
who, by concentrating on the niche market, will still be able to profit despite
the decreasing margins.
In October, 1996 the Company closed the acquisition of Major Fleet & Leasing
Corp. Major Fleet & Leasing Corp., owned by Bruce and Harold Bendell, was
incorporated in 1985 and was engaged in leasing and financing motor vehicles,
primarily in conjunction with the Major automobile dealerships, using
established lines of credit. The Company acquired Major Fleet & Leasing Corp. in
a stock-for-stock exchange, effective as of September 30, 1996, to provide a
means to finance Talkie Power Web Line Machines.
In December, 1996 the Company entered into a Letter of Intent with Bruce Bendell
and Harold Bendell for the acquisition of their automobile dealerships. The
interests of Harold Bendell in Major Dodge, Inc. and Major Chrysler, Plymouth,
Jeep, Eagle, Inc. are being purchased for $4,000,000 in cash while the interests
of Bruce Bendell in those dealerships and Major Chevrolet, Inc. and Major
Subaru, Inc. are being acquired for the Company's 1997-Major Automotive Group
Series of Preferred Stock. In order to secure the funds for the purchase of
Harold Bendell's interest the Company has entered into an agreement with Sun
Coast Capital, Inc. for a public offering of 1,000,000 shares of its Common
Stock for which a Registration Statement is currently in preparation. It is the
Company's intent to establish a third division, the Automobile Sales Division,
centered around the Major Automotive Group dealerships being acquired.
Capital Resources and Liquidity
Management believes that the cash on hand and the cash to be provided by
continuing operations are sufficient to provide working capital and liquidity
for the Company's current level of operations for the next twelve months.
Current financing arrangements, together with the proceeds from the sale of
Talkie Machines, is expected to be sufficient to support growth of the
Telecommunications Division.
However, expansion of the proposed Automotive Sales Division will undoubtedly
require cash which the Company will be required to raise. As noted, the Company
intends to file a Registration Statement for a public offering of 1,000,000
shares of its Common Stock. The net proceeds from such offering will cover the
payment of the $4,000,000 to Harold Bendell for the purchase of his interest in
the two automobile dealerships, $400,000 for completion
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<PAGE>
of the R&D for the Plastics and Utility Products Division, and the balance for
working capital, including additional development of the Plastics Division,
development of Internet automotive marketing sites and methods to be used in
conjunction with the Major Automotive Group, and expansion of the Automotive
Sales Division which will be centered around the Major Automotive Group upon
completion of that acquisition. Acquisition of additional automobile dealerships
will be pursued; to date, no specific acquisitions have been agreed upon,
although the Company is exploring many possibilities. The Company may acquire an
additional dealership owned by Bruce Bendell, Major Nissan, Inc., which
acquisition would be based on the current acquisition, without obtaining further
outside controls.
ITEM 3. DESCRIPTION OF PROPERTY.
Real Estate
The Company does not own any real estate or plants. All operations are conducted
from locations leased from non-related third parties. The primary location is at
80-02 Kew Gardens Road where the Company leases space on two separate floors.
One area, consisting of 2,800 square feet, houses the corporate offices as well
as the Machines operated by the (Nissko) Joint Venture. For easy access to the
Machines, both CBS and Reynard Service Bureau, Inc. also utilize the premises.
The rent for these premises is $5,833 per month, subject to annual increases not
to exceed 5%, for an initial term of five years and the right to extend for a
further five years. The other area, consisting of 4,000 square feet, houses
offices for other personnel. The rent for these premises, which are subleased at
a subsidized rate by the original lessee, is $5,500 per month for a term of
three years. Whether these premises will prove adequate for the Company's needs
will depend upon its growth; the Company anticipates requiring additional space.
CBS Israel operates in 1,100 square feet located at Hash'chafim 46 Ra'ananna,
Israel 43724, leased for a term of three years at the rate of $24,000 per year.
786710 (Ontario) Limited operates in 1,200 square feet located at 1110 Finch
Avenue West, Suite 906, Toronto, Ontario, Canada M3J 2T2, leased for a term of
one year at the rate of $18,000 per year.
Major Fleet & Leasing Corp. operates in 2,100 square feet located at 55-11
Northern Blvd., Woodside, New York 11377, leased for a term of 3 years at the
rate of $33,600 per year.
The Plastics Division does not yet have any office space; Mr. Premo operates
from his home and Mr. Pinciaro operates from office space of a separate
business. As the Division begins to function, it is the intent to obtain
specific space for it.
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Patents
The Company owns the two patents covering the Armored Conduit:
Date of Issue Patent Number
------------- -------------
June 8, 1993 5,217,667
May 17, 1994 5,312,658
In addition, the Company owns the Patent Pending for the hydrotherapy spa
products invented by Mr. Pinciaro.
In order to keep its proprietary technology secret, 786710 elected not to apply
for any patents covering its software, and there are no patents; the systems
remain proprietary with no public access to the technology.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
(a) The following table sets forth certain information with respect to the
beneficial ownership of the Company's voting securities by each person who, to
the knowledge of the Company, on February 24, 1997 was the owner of 5% or more
of the outstanding shares on that date:
<TABLE>
<CAPTION>
(3) Amount
(2) Name and address and nature (4) Per-
(1) Title of of beneficial of beneficial Cent of
Class owner ownership Class
----- ----- --------- -----
<S> <C> <C> <C>
Common Doron Cohen L&B(1) 39.8%(2)
47 Parker Blvd.
Monsey, New York 10952
Common Bruce Bendell L&B(1) 40.6%(2),(3)
75 Georgian Court
Roslyn, New York 11576
Pfd(4) Bruce Bendell L&B(1) 50.0%(5)
75 Georgian Court
Roslyn, New York 11576
Pfd(4) Harold Bendell L&B(1) 50.0%(5)
200 Pershing Road
Englewood Cliffs, New Jersey 07632
</TABLE>
(1) "L" means legal ownership; "B" means beneficial ownership.
(2) Based upon 6,286,700 shares issued and outstanding as of February 24, 1997.
(3) Does not include warrants to purchase 50,000 shares, provided in Management
Agreement for Major Fleet & Leasing Corp.
(4) Refers to the 1996-Major Series issued for the acquisition ofMajor Fleet &
Leasing Corp. of which 250,000 shares are issued and outstanding which are
convertible into a total of 500,000 shares of the Company's Common Stock. If Mr.
Bendell converted his 125,000 shares of the 1996-Major Series, his holding of
the Company's Common Stock would be increased to 2,800,000 shares and he would
own 42.8% of 6,536,700 shares then issued and outstanding.
(5) Based on 250,000 shares of the 1996-Major Series issued and outstanding as
of February 24, 1997.
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<PAGE>
(b) The following table sets forth certain information with respect to the
beneficial ownership of the Company's voting securities by each director, each
executive officer, and all directors and executive officers as a group as of
February 24, 1997:
<TABLE>
<CAPTION>
(3) Amount
(2) Name and address and nature (4) Per-
(1) Title of of beneficial of beneficial Cent of
Class owner ownership Class
----- ----- --------- -----
<S> <C> <C> <C>
Common Bruce Bendell L&B(1) 40.6%(2)
75 Georgian Court
Roslyn, New York 11576
Common Doron Cohen L&B(1) 39.8%(2),(3)
47 Parker Blvd.
Monsey, New York 10952
Common Zvi Barak L&B(1) 2.0%(2),(4)
Hash'chafim 46
Ra'ananna, Israel 43724
Common Richard C. Fox -0- 0%(2)
Molino Lane
Pecos, New Mexico 87552
Common Yossi Koren L&B(1) 0%(2),(5)
124 Audley Street
Kew Gardens, New York 11418
Common All officers and
directors as a
group (5) L&B(1) 82.4%(2)
Pfd(6) Bruce Bendell L&B(1) 50.0%(7)
75 Georgian Court
Roslyn, New York 11576
Pfd(6) Harold Bendell L&B(1) 50.0%(7)
200 Pershing Road
Engelwood Cliffs, New Jersey 07632
</TABLE>
(1) "L" means legal ownership; "B" means beneficial ownership.
17
<PAGE>
(2) Based upon 6,286,700 shares issued and outstanding as of February 24, 1997.
(3) Does not include warrants to purchase 50,000 shares, provided in Management
Agreement for Major Fleet & Leasing Corp.
(4) Dr. Barak denies any beneficial interest in the 125,000 shares issued to his
wife, Sarah Barak, in the acquisition of 786710 (Ontario) Limited.
(5) Yossi Koren denies beneficial ownership in the shares owned by various
relatives. This calculation does not include any interest in the 1,500,000
Warrants issued to Nissko Telecom, Inc. and its investors under the March, 1996
agreement between Nissko Telecom, Inc. and the Company's wholly-owned
subsidiary, Computer Business Sciences, Inc.
(6) Refers to the 1996-Major Series issued for the acquisition of Major Fleet &
Leasing Corp. See footnote 3 under (a) above.
(7) Based upon 250,000 shares of the 1996-Major Series issued and outstanding as
of February 24, 1997.
(c) Changes in Control. There are no arrangements, known to the Company which
may at a subsequent date result in a change in control of the Company. However,
in December, 1996 the Company entered into a Letter of Intent with Bruce Bendell
and Harold Bendell for the acquisition for stock (Bruce Bendell) and cash
(Harold Bendell) of certain automobile dealerships. The Company is currently
completing such transaction, subject to certain conditions, including the
approval of the applicable manufacturers for such dealerships. If and when such
transaction closes, Mr. Bendell will receive the 1997-Major Automotive Group
Series of the Company's Preferred Stock which, when converted, will convert into
at least 1,800,000 shares of Common Stock. Taken together with the shares of the
Company already owned by Mr. Bendell, Mr. Bendell will then be in sole control
of the Company, subject to the continuing management by Doron Cohen of the other
areas of the Company's business. As of the date of this filing, the number of
shares of the 1997-Major Automotive Group Series to be issued is not known, but
approximately 600,000 shares, convertible into 1,800,000 shares of Common Stock
is probable.
Also, in connection with the closing of the acquisition of the automobile
dealerships, as part of the Management Agreement and for the purpose of securing
the approval of the applicable manufacturers, the Company will issue its
1997A-Major Automotive Group Series of Preferred Stock to Bruce and Harold
Bendell. Consisting of 100 shares, with no dividend rights and limited voting
rights, such Series will give the Bendells the power to continue their control
of the automobile dealerships following the acquisition by the Company. As
noted, the Company is doing this in order to secure the required manufacturer
approvals, since none of the executives of the Company, other than Bruce
Bendell, have any automobile dealership experience.
In connection with the Company's acquisition of Major Fleet &
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<PAGE>
Leasing Corp., the Company entered into a Management Agreement with Bruce
Bendell and Harold Bendell in order to secure their continued management of the
acquired motor vehicle leasing and financing operations. Under the Management
Agreement, which has an initial term of 5 years, the Bendells have exclusive
authority and responsibility for the management of the motor vehicle operations.
They are responsible for the profitability of the operations: after a
contribution of 15% to general corporate overhead and public company expenses,
all profits attributable to the "old business" or existing block of business
purchased by the Company are paid to the Company, for deposit into a sinking
fund. If there is any profit from "new operations", that is paid to the Managers
as the management fee. As an inducement to the Bendells to sign the agreement,
the Company issued them Warrants to purchase 100,000 shares of its Common Stock
at an exercise price of $1.25 per share.
While the Bendells control the on-going operations of Major Fleet & Leasing
Corp. and will continue their control of the automobile dealerships, the
operations of the other areas of the Company's business will remain under the
control of Doron Cohen, the Company's President.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.
(a) The Company was founded by Mr. Bruce Bendell and Mr. Doron Cohen, who may be
considered the promoters of the Company.
(b) The directors and executive officers of the Company are:
Name Age Office
- --------------------- --- --------------
Bruce Bendell 43 Chairman of the Board (director)
Doron Cohen 39 President/CEO/Treasurer, Director
Zvi Barak, Ph.D. 44 Director
Yossi Koren 47 Director
Richard C. Fox 62 Secretary
Mr. Bendell and Mr. Cohen have been directors since the incorporation of the
Company. Mr. Bendell, Mr. Cohen and Mr. Fox have held the indicated offices
since incorporation. Dr. Barak became a director following the Letter of Intent
for the acquisition of 786710 (Ontario) Limited. Yossi Koren became a director
following the March, 1996 agreement between the Company and Nissko Telecom, Inc.
The directors hold office until the next annual meeting of shareholders of the
Company or until successors are elected and qualified. Directors are not
compensated for their services, but may receive reimbursement of expenses for
attendance
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<PAGE>
at meetings of the Board. Company officers hold office until the first meeting
of directors following the annual meeting of shareholders and until their
successors are elected and qualified, subject to earlier removal by the Board of
Directors.
In addition to their positions with the Company, Mr. Bendell, Mr. Cohen and Dr.
Barak have positions within the Company's Divisions and subsidiaries described
elsewhere in this Registration Statement.
BRUCE BENDELL, age 43, is the Chairman of the Board of the Company. Mr. Bendell
attended City College of New York from 1971 to 1973 and then transferred to
Queens College from which he was graduated in 1975 with a B.A. in Accounting and
Economics. He then attended Baruch College for post-graduate courses. Mr.
Bendell is President of the Major Automotive/Group which includes Major
Chevrolet, Inc., Major Dodge, Inc., Major Chrysler Plymouth, Jeep, Eagle, Inc.,
Major Subaru, Inc., and Major Fleet & Leasing Corp. and has been so employed for
many years. In addition to other personal companies and investments, Mr. Bendell
is active in community and charitable affairs. He is a Director of the Queens
Chamber of Commerce, a Director and Capital Campaign Chairman of the Long Island
City YMCAs, a Director of the Long Island City Business Development Corp., a
Member of the NYNEX Business Advisory Council, a Member of the Queens District
Attorney's Business Advisory Council, and several industry/trade groups such as
the Tristate Chrysler Plymouth Advertising Association.
DORON COHEN, age 39, is the President/CEO. Mr. Cohen was born in Israel, holds
Israeli citizenship, and served as an officer in the Israel Defense Force (IDF)
for seven years. He attended the Professional Officer's School in Tel Aviv from
1973 to 1977, with special training in Human Resources, and received advanced
technical training. Mr. Cohen completed his service in the IDF in 1981. Mr.
Cohen entered the United States in January, 1982 and has had a broad range of
managerial, financial and business/ entrepreneurial experience and has been a
business and financial consultant. In 1985, Mr. Cohen developed ERA Ben Franklin
(real estate) into a chain of five offices equipped with the latest in computer
technology. In that connection, Mr. Cohen created and implemented the
integration of all available "multiple listing"
20
<PAGE>
services into a computer database, combined with an imaging system, data
processing, and instant mortgage approvals. In 1989, Mr. Cohen purchased the
Holtzman operations, founded in 1945, which he expanded to include: carpeting,
tile and floor coverings, and cabinetry; a decorator showroom for the
construction industry and retail trade; and a construction management company
for which he implemented a computer expediting management system which allowed
direct, daily on-line reporting from field operations to management. In early
1996, Mr. Cohen closed the Holtzman operations to concentrate his efforts on the
Company.
DR. ZVI BARAK, age 44, is a Director and is in charge of the Company's
Israel-based Research & Development facilities of the Computer Telephony and
Telecommunications Division. Born in Israel, Zvi Barak is bilingual, speaking
both English and Hebrew. He served in the Israel Defense Force from 1970 to
1976, completing a course in Personnel and Human Resources in 1974. In 1974 he
completed a course in FORTRAN at the Weitzman Institute and then received a
B.Sc. in Physics from the University of Beer Sheva in 1978 and a M.Sc. in
Physics from the University of Toronto in 1979. In 1981 he received a Ph.D. in
Theoretical Solid State Physics from the University of Toronto. During
1981-1982, Dr. Barak developed the first Canadian Payroll software for the PC
platform, the rights to which were sold to Tandy Corporation, to which he then
provided technical support, further enhancements and upgrades. In 1982, Dr.
Barak joined Informatic Systems in Toronto for which he had successively more
responsible positions; in 1989-1991 he served as Vice-President of Technical
Operations. During that time he developed software, including the Business
Control Software, as well as handling independent projects for major clients,
including customizing of other software and installing Local and Wide Area
Networks, including the use of Novell Netware. From 1991 to August, 1996, Dr.
Barak was the President of Info Systems, and has developed the Talkie system.
Dr. Barak has extensive knowledge of PC software, PC hardware, various operating
systems (including, to name a few, Novell, Lantastic, UNIX, OASIS and
Multi-Link) and PC integration with various telephone systems (including, to
name a few, Norstar, Panasonic, Toshiba, Vodavi, Isotec, and Centrex).
YOSSI KOREN, age 47, is a Director of the Company. (He is also affiliated with
Nissko Telecom, Inc. and that company's joint
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<PAGE>
venture with the Company's subsidiary, CBS.) Mr. Koren founded, and has been CEO
of, Nissko Jewelry Trading, a manufacturer of jewelry based in New York City,
since 1983. Mr. Koren was born in Israel, attended the Military Academy of Haifa
from 1966 to 1968, joined the Israeli Army as a paratrooper in February, 1968
and completed his military service in 1971. Following that, he was a sales
executive for Gesttener, a large printing company, in Jerusalem. In 1977 he
joined his family's diamond business and gained experience in that industry
before moving to the United States in February, 1980. Initially, he joined Neli
Gems, a large importer of emeralds into the United States and was with that firm
until 1983 when he left to found Nissko Jewelry Trading.
RICHARD C. FOX, age 62, is the Secretary of the Company. He has been an attorney
since 1961, following his graduation from the University of Chicago Law School
where he was an editor of the Law Review and admitted to the Order of the Coif.
He is admitted to practice in Pennsylvania and in Florida, practicing primarily
in the corporate, securities, tax, and business law areas. He taught various
corporate law and paralegal topics at the Harrisburg Area Community College from
January, 1972 to June 1980. He also taught entrepreneurial business seminars for
the College's Foundation (e.g., "How to Start Your Own Business"). He also
taught corporate and securities law topics for the Pennsylvania Bar Institute at
various times from the mid-1960s to 1990. His practice was based in Harrisburg,
Pennsylvania until 1987, when he moved the base to Boca Raton, Florida. Mr. Fox
has served as an officer and director to various companies, providing legal and
financial services. In 1991 Mr. Fox co-founded Microterra, Inc. (now called
"Atlantis Group, Inc.") and initially served as its Secretary/Treasurer, CFO and
General Counsel. In October, 1991 he became President/CEO of Microterra, Inc.
and served in that capacity until November 28, 1994, when he resigned and
returned to private practice. From approximately March, 1995 to November, 1995
he served as an attorney and consultant to Microterra, Inc. ("Atlantis Group,
Inc."), while providing legal and business consulting services to other clients,
including the Company. Since November, 1995 he has been in private practice.
(c) Significant Employees
22
<PAGE>
MOISE BENEDID, age 47, has been the President of 786710 (Ontario) Limited since
August 1, 1996 when he replaced Dr. Barak upon his departure for Israel. (Mr.
Benedid has been loaned to that subsidiary under a special contract between the
Company and the Canadian corporation by which Mr. Benedid is employed. From
November, 1994 to August 1, 1996 Mr. Benedid was employed by TelePower
International, Inc. as Vice President in charge of marketing and technical
support. A major part of his responsibilities was the sale, in Canada, of
franchises based on the Talkie system, which gave him a thorough understanding
of that system and familiarity with its marketing. From 1992 to November, 1994
he was President of Powerpoint Microsystems, Inc. where he marketed computer
network systems. Prior to that, from 1987 to 1992 he was President of Computer
Junction, computer retail stores based in Toronto. Mr. Benedid was graduated
from the Technical School ORT in Strasbourg, France in 1969 from which he
received a technical electronics certificate. He then was graduated from the
High Technical Engineering School in Geneva, Switzerland in 1993 as a Nuclear
Engineer. Mr. Benedid is the brother of Sarah Barak, Dr. Barak's wife.
LEWIS GLOGOWER, age 45, is the President of Reynard Service Bureau, Inc. where
he has responsibility for not only the service bureau functions of that
subsidiary but also has responsibility for customer service. Mr. Glogower was
with MCI Telecommunications, Inc. from January, 1995 to January, 1997, when he
joined the Company. Mr. Glogower was a Technical Service Consultant with MCI,
providing project management and implementation. Prior to that, from February,
1992 to January, 1995, he was self-employed as a consultant in the
telecommunications industry, specializing in LAN-WAN networks. For the five
years prior to that he was a Field Technical Manager with Prodigy Services
Company, where he engineered, implemented and maintained all remote sites in the
Bell Atlantic region.
MICHAEL S. LUKIN, age 49, is the President of CBS (Israel) and also is the
recruiter and manager of the agents for the International Calling Services of
the Company. Prior to joining the Company in October, 1996 Mr. Lukin was a
Registered Representative in the securities brokerage industry. From 1990 to
January, 1996 he was with Kern Suslow Securities where he handled the sale of
fixed
23
<PAGE>
income securities. From January, 1996 until he joined the Company, he was
associated with Weiner, Abrams where he handled the sale of fixed income
securities and tax-free bonds. Mr. Lukin was graduated from Brooklyn College in
1970 with a B.A. (Psychology). He became a Registered Representative in 1979
when he joined Ampal Securities Corp. and was associated with that firm for ten
years. He then joined A.T. Brod and was associated there until he joined Kern
Suslow.
SHLOMO NESSIM, age 37, is the Technical Manager of Reynard Service Bureau, Inc.,
having joined the Company in August, 1996. He is responsible for installation
and maintenance of all systems, liaison with the accounting and service staffs,
and interfacing with the R&D [CBS (Israel)] staff and implementing their
improvements and changes. Mr. Nessim was graduated from Tel Aviv University in
June, 1985 with a degree in Electrical Engineering. From November, 1993 to
August, 1996 Mr. Nessim was a Senior Technical Support Engineer with Dialogic
Corp., where he provided technical support to customers, primarily engineers.
From February, 1993 to October, 1993 he was a Technical Support Engineer for
Racal Redac, a subsidiary of Racal. Prior to that, from 1991 when he came to the
United States, Mr. Nessim was a free-lance consultant.
JOHN A. PINCIARO, age 47, is the President of the hydrotherapy spa fixture
subsidiary presently in the process of organization and referred to in this
Registration Statement as "NEWCO". From 1983 to the present, Mr. Pinciaro has
been CEO of Thermo Spas, Inc. a manufacturer of spas, which both distributes the
spas at wholesale and has a retail operation.
RONALD K. PREMO, age 58, is the President of Premo-Plast, Inc. which heads the
Plastics and Utilities Division. His entire career has been in the plastics
industry, beginning in 1955. From 1993 to the present, he has founded and
managed a Manufacturer's Representative Agency for the plastics industry, R.K.
Premo & Associates. Prior to that, from 1987 to 1993, he was a Manufacturer's
Representative for R.W. Mitscher, Inc. for whom he successfully opened and
developed a new territory including Connecticut and Rhode Island. His
substantial and well-rounded experience in the industry includes extensive
product development,
24
<PAGE>
as well as establishment of technical training programs, establishment and
improvement of purchasing and distribution systems, product design and quality
control, engineering, marketing, sales, purchasing and inventory control,
offshore sourcing, and has covered a wide variety of plastic types, production
methods, and product types. Mr. Premo was the co-founder of the Mystic,
Connecticut Chapter of the American Production and Inventory Control Society and
he is a 23 year veteran of the U.S. Air Force (including duty as the Purchasing
Agent for Westover Air Force Base) and the U.S. Navy.
PAUL VESEL, age 36, was graduated from the University of Colorado in 1983 with a
B.A. in Economics with a Major in International Affairs and from the University
of South Carolina in 1986 with a Master's Degree in International Business. He
has been employed by Computer Business Sciences, Inc. since November, 1996 as
the Executive Vice President for Sales & Marketing and manages the distribution
and marketing of telecommunication services for the operating entities under the
(Nissko) Joint Venture. Prior to his employment by the Company, Mr. Vesel was
employed by MTC Netsource, a telecommunications company, where he was
responsible for product development, from May, 1995. From 1993 to May, 1995 he
was Director of Sales & Marketing for ATC Distributing. From November, 1989 to
1993 Mr. Vesel was Managing Partner of Focus International, an international
trade and marketing consultant in Barcelona, Spain. From 1990 to September,
1992, while based in Barcelona, he was also Managing Director of Alobarna, S.A.
which planned and provided housing and hospitality services in connection with
the 1992 Olympic Games.
ITEM 6. EXECUTIVE COMPENSATION.
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 both performance-based and discretionary bonuses.
Mr. Doron Cohen, President and Treasurer of the Board of the Company, entered
into an Employment Agreement effective January 1,
25
<PAGE>
1996. The Consulting 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.
To date, the Board of Directors has not considered the award of any bonuses and
has not considered or established the method of determining performance-based
bonuses, although it is expected that revenues, profits, and/or percentage
increases therein would be the type of criteria used.
Both Mr. Bendell and Mr. Cohen waived their compensation for 1996; there is no
accrual. Neither Mr. Bendell nor Mr. Cohen has any stock options, stock
appreciation rights ("SAR") or deferred compensation.
ITEM 7. CERTAIN RELATIONSHIPS AND TRANSACTIONS.
The Company was founded by Bruce Bendell and Doron Cohen who were the initial
directors and who continue as directors and officers of the Company and its
subsidiaries. Upon incorporation, Mr. Bendell and Mr. Cohen each received
2,500,000 shares of Common Stock for investments of $25,000 each. These
investments provided the initial capitalization of the Company. Mr. Bendell is
Chairman of the Board and Mr. Cohen is President and Treasurer of the Company.
Mr. Cohen entered into an Employment Agreement with the Company, which commenced
on January 1, 1996. Mr. Bendell entered into a Consulting Agreement with the
Company, which also commenced January 1, 1996. Both agreements provide for
annual base compensation of $150,000 per year, together with possible increases
and bonuses. Both Mr. Bendell and Mr. Cohen waived their compensation for 1996.
In March, 1996 the Company's telecommunications subsidiary, Computer Business
Sciences, Inc., entered into an agreement with Nissko Telecom, Inc. for the sale
of at least 5, and up to 60, "Talkie" Power Web Line machines, and calling for a
downpayment of $629,000 for the first 15 machines. The total purchase price for
the first 15 machines is $1,887,000, increasing to 2,787,000 if upgraded
versions are ordered. In addition, the two companies
26
<PAGE>
agreed to form a joint venture for the sale/leasing/operation of the machines.
Nissko Telecom, Inc. and its investors receive 55% and Computer Business
Sciences, Inc receives 45% of the net revenues of such joint venture. To involve
Nissko Telecom, Inc. as a strategic partner at such an early stage of the
Company's development, prior to the closing of the acquisition of 786710
(Ontario) Limited, the owner of "Talkie", 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. As the Company had just completed
its Rule 504 offering and the Common Stock was not trading and had no market, no
value was ascribed to the Warrants. Of these warrants, however, 750,000 are
contingent upon completion of the purchase of the initial fifteen Machines.
Following closing of the agreement, one of the Nissko investors, Yossi Koren,
became a director of the Company.
On April 18, 1996 the Company closed an Agreement for the acquisition of 786710
(Ontario) Limited, a corporation organized in the Province of Ontario, which
owned certain telecommunications software ("Talkie") and certain accounting
software ("BCS"). To acquire 786710, the Company agreed to pay the owners, Dr.
Zvi Barak and Sarah Barak, his wife, $750,000 and issued 125,000 shares of its
Common Stock to Sarah Barak. In connection with the acquisition, the Company
employed Dr. Barak to head its R&D facility to be established in Israel. The
Company entered into an Employment Agreement with Dr. Barak, calling for a base
annual salary of $150,000, and providing Dr. Barak with 125,000 shares of its
Common Stock vesting over the 5 year term of the Agreement. On December 15,
1995, prior to the acquisition itself, the Company had entered into a Letter of
Intent with Dr. Barak and his wife, for the acquisition, and the valuation of
the shares to be issued was based on the status of the Company at that date. In
conjunction with that Letter of Intent, Dr. Barak became a director of the
Company. Subsequent to the acquisition, Dr. Barak moved to Israel and has
established the R&D facility, "CBS Israel".
The Company has loaned Mr. Cohen $140,000, which is formalized by a promissory
note due on December 31, 1998. Interest is calculated at the rate of 5.77% per
year.
In October, 1996, but effective as of October 1, 1996, the Company
27
<PAGE>
acquired Major Fleet & Leasing Corp. from Bruce Bendell and his brother, Harold
Bendell, who had owned the company equally. Major Fleet & Leasing Corp.,
organized in 1985, is engaged in the leasing and financing of motor vehicles.
The Bendells were 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 Bendells were issued 100,000 shares of Common Stock. The Company
acquired Major Fleet & Leasing Corp. in order to provide leasing capability to
its Telecommunications Division, but with the intent of continuing the existing
motor vehicle operations. In order to assure continuity for such operations, the
Company entered into a Management Agreement with the Bendells, who have
exclusive authority and responsibility for the motor vehicle operations. In
addition to a performance based management fee, the Bendells were issued
warrants for the purchase of 100,000 shares of the Company's Common Stock at a
price of $1.25 per share.
In December, 1996 the Company entered into a Letter of Intent with Bruce Bendell
and his brother, Harold Bendell, for the acquisition of certain automobile
dealerships (the "Major Automotive Group"). In summary, the Company agreed to
purchase Harold Bendell's 50% interest in two dealerships (Major Chrysler,
Plymouth, Jeep, Eagle, Inc., and Major Dodge, Inc.) for $4,000,000 and the
Company agreed to acquire Bruce Bendell's 100% interest in two dealerships
(Major Chevrolet, Inc. and Major Subaru, Inc.) and his 50% interest in the other
two dealerships for shares of its Preferred Stock (the 1997 Major Automotive
Group Series) which are convertible into at least 1,800,000 shares of the
Company's Common Stock. To assure securing of the approvals of the manufacturers
for the transfer of ownership, the Company has agreed to enter into a Management
Agreement with Bruce Bendell and Harold Bendell continuing their management of
the dealerships. (This Management Agreement for the automobile dealerships would
be separate from the earlier Management Agreement for the management of Major
Fleet & Leasing Corp.) To assure the manufacturers of such continuity, the
Company has also agreed to issue shares of its Preferred Stock (1997A-Major
Automotive Group Series) which provide the holders (the Bendells) with control
of the automobile dealership operations.
28
<PAGE>
ITEM 8. DESCRIPTION OF SECURITIES.
The Company's Articles of Incorporation, as amended, provide for the issuance of
50,000,000 shares of Common Stock having a par value of $.01 per share and
2,000,000 shares of undesignated Preferred Stock having a par value of $.01 per
share.
Common Stock
As of February 24, 1997 there were 6,286,700 shares of the Company's issued and
outstanding, all of which were fully paid and non-assessable. Common Stock
shareholders are entitled to cast one vote for each share at all shareholders'
meetings for all purposes, including the election of directors. Holders share
equally on a per share basis in dividends that may be declared by the Board of
Directors out of funds legally available after dividend distributions to holders
of Preferred Stock. Upon liquidation or dissolution, any assets remaining after
payment of creditors and after distribution of accrued and unpaid dividend to
holders of Preferred Stock will be available for distribution to holders of the
Company's Common Stock. Shares of Common Stock are not redeemable, and have no
conversion rights. The Common Stock does not have cumulative voting rights,
which means that the holders of more than fifty percent of the Common Stock
voting for election of directors can elect one hundred percent of the directors
of the Company if they choose to do so. The Company has not paid any dividends
on its Common Stock and it is not anticipated that any dividends will be paid in
the foreseeable future. Dividends upon Preferred Shares must have been paid in
full for all past dividend periods before distribution can be made to the
holders of Common Stock; no dividends on the Preferred Shares have been
declared, however. In the event of a voluntary or involuntary liquidation, all
assets and funds of the Company remaining after payments to the holders of
Preferred Stock will be divided and distributed among the holders of Common
Stock according to their respective shares. No holder of Common Stock has any
preemptive or other right to subscribe for or purchase any part of any new or
additional issue of Common Stock or securities convertible thereunto.
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
29
<PAGE>
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. 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.
The Company has agreed to issue a new series of Preferred Stock, designated as
the 1997-Major Automotive Group Series; however, such series has not yet been
authorized and designated. Subject to any adjustments which may occur prior to
Closing of the acquisition of the dealerships (assuming that the required
factory approvals are obtained and the acquisition in fact closes), the shares
of the series are expected to be voting, to vote with the Common Stock and not
as a separate class, with the number of votes per share to reflect the
underlying conversion rate. It is anticipated that the shares of the Series
would convert into a minimum of 1,800,000 shares, but the exact number of shares
could increase depending upon the market price of the Company's Common Stock at
the time of Closing, as the value of the Series upon conversion (as of Closing)
is to be $6,000,000. Dividends would also depend upon the underlying conversion
rate.
Dividend Policy
The Company has not declared or paid any cash dividends on its Common Stock or
its Preferred Stock and the Board of Directors has no present intention of
declaring any cash dividends. The declaration and payment of dividends in the
future will be determined by the Board of Directors in light of conditions then
existing, including the Company's earnings, financial condition, capital
requirements, and other factors.
30
<PAGE>
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS.
(a) The Company's Common Stock is traded on the NASDAQ Bulletin Board.
(b) The Company's Common Stock was listed on approximately April 2, 1996, first
traded on May 2, 1996, and the opening regular quotations were on May 9, 1996
when the Common Stock was priced at $4.25 bid, $5.00 asked.
(c) During 1996 its high and low bid and asked prices were as
follows:
High Bid Low Bid High Ask Low Ask
Second Quarter $5.00 $4.00 $5.50 $4.75
Third Quarter $4.75 $3.50 $5.50 $4.50
Fourth Quarter $4.875 $3.75 $5.50 $4.50
On March 6, 1997 the closing prices of the Company's Common Stock were $5.50 bid
and $6.125 asked, as quoted on the NASDAQ Bulletin Board.
To date no dividends have been declared or paid on the Common Stock.(See Part I,
Item 8, "Dividend Policy")
ITEM 2. 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
31
<PAGE>
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. The Company regards the Counterclaim under the
Lanham Act as being without merit, since the Company had purchased 786710
(Ontario) Ltd. which owned all rights, including the copyrights, to the Talkie
software. The Company regards the Counterclaim for breach of contract as without
merit, as the contract which the Defendant entered into was with a third-party,
and not with the Plaintiff. Accordingly, no impact on the Company's financial
condition, liquidity and operating results are anticipated.
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. The indemnification is
collateralized by $100,000 in payments due to the Baraks which have been
withheld by the Company for that purpose, as well as by all unvested shares
issued to Sarah Barak under the Purchase Agreement. Accordingly, no impact on
the Company's financial condition, liquidity and operating results are
anticipated.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS.
The Company's auditor for the fiscal year ended December 31, 1995 was Nemiroff,
Cosmas & Co., CPA's. The Company's auditor for the fiscal year ended December
31, 1996 is Peter C. Cosmas Co., CPA's. The change was due solely to the opening
of a separate practice by Mr. Cosmas and there have been no disagreements with
respect to accounting and financial disclosure.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES.
32
<PAGE>
On November 7, 1995, in connection with its formation, the Company issued
2,500,000 to each of its two founders, Doron Cohen and Bruce Bendell at the par
value of $.01, for total consideration of $50,000. The issuance was exempt by
reason of Section 4(2) of the Securities Act of 1933, as amended.
In February, 1996 the Company engaged in a Rule 504 offering of 20,000 Units to
residents of New York, where the offering was registered. Each Unit consisted of
2 shares of Common Stock and 23 Common Stock Purchase Warrants exercisable at a
purchase price of $1.95 per share. All Units were sold by the directors of the
Company, and all Common Stock Purchase Warrants subsequently exercised,
resulting in the total issuance of 500,000 shares of Common Stock. The issuance
was exempt by reason of Rule 504 of Regulation D promulgated pursuant to Section
3(b) of the Securities Act of 1933, as amended.
On or about March 23, 1996, the Company entered into a certain Agreement with
Nissko Telecom, Inc. for the sale of certain equipment. As an inducement to
Nissko Telecom, Inc. to enter into the Agreement, the Company issued Common
Stock Purchase Warrants, denominated as Class A and Class B Warrants, all
exercisable at a purchase price of $1.25. The exercise price was set by
negotiation of the parties, based upon the per share offering price in the Rule
504 Offering then completed and prior to any trading market in the Company's
Common Stock. None of such Warrants has yet been exercised. The issuance was
exempt by reason of Section 4(2) of the Securities Act of 1933, as amended.
On or about April 18, 1996, the Company entered into a certain Agreement to
acquire 786710 (Ontario) Limited, a Canadian corporation, and to employ Dr. Zvi
Barak, the then President of 786710 and the inventor of the Talkie software. In
connection with the acquisition, as partial payment for the acquisition
including certain accounting software, the Company issued 125,000 shares of its
Common Stock to Sarah Barak, an owner of 786710. In connection with the
employment of Dr. Barak, the Company issued 125,000 shares of its Common Stock
to Dr. Barak. In both cases the shares are subject to certain vesting
conditions. The issuances were exempt by reason of Regulation S and by reason of
Section 4(2) of the Securities Act of 1933, as amended.
33
<PAGE>
On or about August 12, 1996, as an inducement to Moise Benedid's corporation to
permit Mr. Benedid to become President of 786710 (Ontario) Limited upon Dr.
Barak's departure for Israel to head the R&D Division, the Company agreed to
issue 20,000 shares of its Common Stock, subject to certain vesting conditions,
to said corporation. The shares were issued in November, 1996. The issuance was
exempt by reason of Regulation S and by reason of Section 4(2) of the Securities
Act of 1933, as amended.
On or about August 19, 1996, as an inducement to Shlomo Nessim to become an
employee of Computer Business Sciences, Inc., a wholly-owned subsidiary of the
Company, the Company agreed to issue 15,000 shares of its Common Stock, subject
to certain vesting conditions, to Mr. Nessim. The shares were issued in
November, 1996. The issuance was exempt by reason of Section 4(2) of the
Securities Act of 1933, as amended.
On October 10, 1996, in connection with its acquisition of Major Fleet & Leasing
Corp. as of September 30, 1996, the Company issued (a) 250,000 shares of its
Convertible Preferred Stock and (b) agreed to issue 100,000 shares of its Common
Stock subject to Major Fleet & Leasing Corp. having met certain requirements as
of September 30, 1996. The requirements were met and the Common Stock was issued
in November, 1996. Contemporaneously, the Company entered into a Management
Agreement with the former managers of Major Fleet & Leasing Corp. in which the
Company issued Common Stock Purchase Warrants, exercisable at a purchase price
of $1.25 per share, for the purchase of 100,000 shares of Common Stock; however,
such Warrants were not exercisable until after January 1, 1997. The issuances
were exempt by reason of Section 4(2) of the Securities Act of 1933, as amended.
On or about October 15, 1996, the Company resolved its dispute with Progressive
Polymerics, Inc. regarding the Armored Conduit (see "Business of the Company").
Under the Settlement Agreement, the Company converted $400,000 of its purchase
price (total price: $500,000) into equity, consisting of eighty thousand Units,
each Unit consisting of two (2) shares of the Company's Common Stock and two (2)
Warrants, each for the purchase of an additional share at an exercise price of
$3.125. The issuance was exempt by reason of Section 4(2) of the Securities Act
of 1933, as amended.
34
<PAGE>
On October 31, 1996, upon completion of performance of services pursuant to oral
agreements made in January, 1996, the Company issued 200,000 shares of its
Common Stock as compensation under certain consulting agreements negotiated at
arms-length with unaffiliated persons in January, 1996. 100,000 shares were
issued to Richard R. Rozzi for certain investment banking services and 100,000
shares were issued to Rebecca Frommer for services in the introduction of
persons interested in purchasing Talkie Power Web Line Machines. The shares were
issued at par value ($.01 per share) consistent with the price paid by the
founders in November, 1995. The issuance was exempt by reason of Section 4(2) of
the Securities Act of 1933, as amended.
On November 25, 1996, as an inducement to Paul Vesel to become an employee of
Computer Business Sciences, Inc., a wholly-owned subsidiary of the Company, the
Company issued 30,000 shares of its Common Stock, subject to certain vesting
conditions, to Mr. Vesel. In addition, Mr. Vesel's Employment Agreement contains
certain stock options none of which have vested or are exercisable. The issuance
was exempt by reason of Section 4(2) of the Securities Act of 1933, as amended.
On December 19, 1996 the Company adopted an Employees Performance Recognition
Plan and issued 4,200 shares of its Common Stock to various employees in
recognition of their services in 1996. The shares were restricted, subject to
vesting requirements requiring 112 months of further employment by the Company,
and valued at $2.50 for accounting purposes, as provided in the Plan. The
issuance was exempt by reason of Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Nevada law and the Company's Articles of Incorporation and By-laws,
officers and directors of the Company (and former officers and directors) are
entitled to indemnification from the Company to the full extent permitted by
law. The Company's Articles of Incorporation and By-laws generally provide for
such indemnification for claims arising out of the acts or omissions of the
Company's officers and directors in their capacity as such,
35
<PAGE>
undertaken in good faith and in a manner reasonably believed to be in, or not
opposed to, the best interests of the Company and, with respect to any criminal
action or proceeding, had no reasonable cause to believe that his conduct was
unlawful. The conditions and extent of indemnification are set forth in the
Articles of Incorporation and By-laws of the Company and in the Indemnity
Agreements between the Company and each officer and director. Insofar as
indemnification for liabilities arising under the Securities Act of 1933 may be
permitted to officers, directors or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
Limitation On Liability
As permitted by Nevada law, the Company's Articles of Incorporation provide that
a director of the Company shall not be personally liable for monetary damages
for a breach of fiduciary duty as such, except for liability (i) for any breach
of the director's duty of loyalty, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, or (iii)
for any transaction from which the director derived an improper personal
benefit. This provision is intended to afford the Company's directors additional
protection from, and limit their potential liability from, suits alleging a
breach of their duty of care. As a result of the inclusion of such a provision,
shareholders may be unable to recover monetary damages against directors for
actions taken by them which constitute negligence or gross negligence or which
are in violation of their fiduciary duties although it may be possible to obtain
injunctive or other equitable relief with respect to such actions. If equitable
remedies are found not to be available to shareholders for any particular case,
shareholders may not have any effective remedy against the challenged conduct.
Indemnity Agreement
In order to induce and encourage highly experienced and capable persons to serve
as directors and officers, the Company has entered into an Indemnity Agreement
with each director and officer presently serving the Company and will provide
the same agreement
36
<PAGE>
to future directors and officers as well as certain agents and employees. The
Agreement provides that the Company shall indemnify the director and/or officer,
or other person, when he or she is a party to, or threatened to be made a party
to, a proceeding by, or in the name of, the Company. Expenses incurred by the
indemnified person in any proceeding are to be paid to the fullest extent
permitted by applicable law. The Agreement may at some time require the Company
to pay out funds which might otherwise be utilized to further the Company's
business objectives, thereby reducing the ability of the Company to carry out
its projected business plans.
Director's and Officer's Liability Insurance
At present, the Company does not have any liability insurance for the benefit of
its officers and directors. It is probable that the Company does not currently
meet the underwriting requirements to obtain such insurance. In any event,
because of the expected cost of such insurance the Company has no present plans
to obtain such insurance.
SIGNATURE
In accordance with Section 12 of the Securities Exchange Act of 1934,
the Registrant caused this Registration Statement to be signed on its behalf by
the undersigned, thereunto duly authorized.
FIDELITY HOLDINGS, INC.
Date: July ___, 1997
By: _____________________________________
Doron Cohen, President
(Signature)
37
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
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 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 2,645,269 -
Other intangible assets 483,474 500,000
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
Income taxes 424,000 -
Other 72,122 -
---------------- ----------------
Total liabilities 4,072,651 505,480
Commitments
Stockholders' equity
Preferred stock, .01 par value;
2,000,000 shares authorized,
250,000 shares issued and outstanding
in 1996 and none in 1995 2,500 -
Common stock, .01 par value
50,000,000 shares authorized,
6,279,200 shares issued and
outstanding in 1996 and
5,000,000 in 1995 62,792 50,000
Additional paid in capital 4,509,108 -
Cumulative translation adjustment 264 -
Retained earnings (deficit) 669,549 (6,417)
---------------- ----------------
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-2
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended November 7, 1995
December 31, (Inception date) to
1996 December 31, 1995
---- -----------------
<S> <C> <C>
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 1,116,966 (6,417)
Provision for income taxes 441,000 -
----------- ----------
Net income (loss) $ 675,966 $ (6,417)
========== ===========
Earnings (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.
</TABLE>
F-3
<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 assets:
Net investment in direct financing leases (1,612,675) -
Notes receivable (142,659) -
Accounts receivable (20,229) -
Inventories (1,173,082) -
Other assets (31,304) (10,000)
Increase (decrease) in liabilities:
Accounts payable 108,079 -
Accrued expenses 416,282 5,480
Accrued income taxes 4,378 -
Deferred revenue 3,075 -
Due to affiliates 1,184,177 -
---------- ----------
Net Cash provided by operating activities 137,442 (10,937)
---------- ----------
Cash flows from investing activities:
Additions to property and equipment 77,326 -
Acquisition of 786710 Ontario Limited, -
net of cash acquired 738,636 -
---------- ----------
Net cash used in investing activities (815,962) -
---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 400,000 -
Payments of long-term debt (170,321) -
Proceeds from issuance of common
stock and exercise of warrants net of expenses 984,000 50,000
---------- ----------
Net cash provided by financing activities 1,213,679 50,000
---------- ----------
Effect of exchange rates on cash 264 -
---------- ----------
Net increase in cash and cash equivalents 535,423 39,063
Cash and cash equivalents, beginning of period 39,063 -
========== ==========
Cash and cash equivalents, end of period $ 574,486 $ 39,063
========== ==========
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for:
Interest $ 24,132 -
Income taxes $ - -
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Retained
----------------------- ----------------------- Paid-In Earnings
Shares Amount Shares Amount Capital (Deficit)
------ ------- -------- ------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of
Common Stock - $ - 5,000,000 $ 50,000 $ - $ -
Net Loss (6,417)
------- ------ --------- ------- ----------- --------
- - - - - (6,417)
Balance
December 31, 1995 - - 5,000,000 50,000 - (6,417)
Issuance of Common
Stock and exercise of
warrants net of
expenses - - 865,000 8,650 980,250
Issuance of Common
Stock as payment for
long-term debt - - 160,000 1,600 398,400 -
Issuance of common
Stock for the acquisition of
786710 Ontario Ltd. - - 250,000 2,500 622,500 -
Issuance of Preferred
stock for the acquisition
of Major Fleet &
Leasing Corp. 250,000 2,500 - - 2,497,500 -
Net income - - - - - 675,966
Effect of stock compensation
charge - - 4,200 42 10,458 -
Translation
adjustment - - - - - -
Balance
December
31, 1996 ======= ====== ========= ======= =========== ========
250,000 $2,500 6,279,200 $62,792 $ 4,509,108 $669,549
======= ====== ========= ======= =========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Currency Total
Translation Stockholders'
Adjustment Equity
------------- -------------
<S> <C> <C>
Issuance of
Common Stock $ - $ 50,000
Net Loss (6,417)
---- ----------
- (6,417)
Balance
December 31, 1995 - 43,583
Issuance of Common
Stock and exercise of
warrants net of
expenses 988,900
Issuance of Common
Stock as payment for
long-term debt - 400,000
Issuance of common
Stock for the acquisition of
786710 Ontario Ltd. - 625,000
Issuance of Preferred
stock for the acquisition
of Major Fleet &
Leasing Corp. - 2,500,000
Net income - 675,966
Effect of stock compensation
charge - 10,500
Translation
adjustment 264 264
Balance
December
31, 1996 ==== ==========
$264 $5,244,213
==== ==========
</TABLE>
<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.
<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 $137,593.
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
Amounting 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 we as follows:
<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 1,451,625 -0-
---------- -----
$1,494,020 $ -0-
---------- -----
6) Property and Equipment:
Property and equqmcnt consisted of the following:
December 31,
------------
1996 1995
---- ----
Leasehold Improvements $ 22,096 $ -0-
Furniture and fixtures 10,314 -0-
Computer equipment and softwere 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.
<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,
Temporary Differences 1996 1995
- --------------------- ------ ------
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.
<PAGE>
Maturities are as follows:
Year Ending December 31,
--------------------------
1996 1995
--------- ---------
1997 $463,976 $-0-
1998 230,851 -0-
1999 70,437 -0-
2000 6,594 -0-
---------- ---------
Total $771,858 $-0-
---------- ---------
In addition long-term debt includes $387,727 still due from the acquisition of
786710 Ontario Limited.
Maturities are as follows:
Year Ending 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 module's 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 250,000 of its shares valued at $625,000 for the acquisition.
These shares shall vest as to ownership as follows:
Fifty thousand (50,000) at the end of the first year after closing, one
hundred thousand (100,000) at the end of the second year after closing and one
hunder thousand (100,000) at the end of the third year after closing.
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
----------
<PAGE>
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.
The cost of $2,500,000 was allocated as follows:
Fair value of net assets acquired at October 1, 1996 $ 401,512
Intangible asset-excess of costs over net assets acquired 2,098,488
----------
Total $2,500,000
----------
The excess of costs over net assets acquired amounting to $401,512 is being
amortized over a fifteen-year period.
Separate results for the periods prior to the acquisition were as follows:
Nine month
period ended Year ended
9/30/96 December 31, 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.
<PAGE>
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.
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
danages 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 Counterlcaim 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
<PAGE>
Division) by Touch Tone Connections, indexed at 96-CU-111059. Touch Tone
Connection 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 owned by the Company's leasing subsidiary for
advances made in the ordinary course of business from various entities which are
wholly owned by the subsidiaries former Stockholders. The advances are in the
form of non-interest-bearing obligations with no specified maturity dates. The
subsidiary also, purchased a substantial portion of its leased vehicles from
affiliates.
13) Warrants:
In October 1996 the Company revised the Patent Purchase Agreement. Under the
amendment the purchase price was changed from $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 at 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
<PAGE>
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 recission 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.
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.
<PAGE>
Chartered Accountants
Canadian Member Firm of
Grant Thornton International
DOANE RAYMOND
786710 Ontario Limited
(Operating as Info Systems)
Financial Statements
(Expressed in Canadian Dollars)
December 31, 1996
<PAGE>
CONTENTS
Page
----
Auditor's Report 1
Statements of Operations and Retained Earnings 2
Balance Sheet 3
Statement of Cash Flow 4
Notes to the Financial Statements 5-8
<PAGE>
Chartered Accountants
Canadian Member Firm of
Grant Thornton International
DOANE RAYMOND
AUDITOR'S REPORT
To the Directors of
786710 Ontario Limited
We have audited the balance sheet of 786710 Ontario Limited as at December 31,
1996 and the statements of operations and retained earnings and cash flow for
the year then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
acounting principles used and significant estimates made by management, as well
as evaluating the overall finacial statement presentation.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1996 and the
results of its operations and changes in its financial position for the year
then ended in accordance with accounting principles generally accepted in the
United States.
Doane Raymond
Chartered Accountants
Markham, Canada
January 22, 1997
Suite 400
7030 Woodbine Avenue
Markham
Ontario
L3R 6G2
Tel: (905) 475-1100
Fax: (905) 475-8906
1
<PAGE>
- --------------------------------------------------------------------------------
786710 Ontario Limited Five Months
(Operating as Info Systems) Year Ended Ended
Statements of Operations and Retained Earnings December 31, December 31,
(Expressed in Canadian Dollars) 1996 1995
- --------------------------------------------------------------------------------
Revenue
Computer software and programming $ 520,503 $248,193
Computer equipment 677,986 186,365
Other 20,227 5,447
--------- -------
1,218,716 440,005
--------- -------
Cost of sales
Computer equipment 478,238 153,719
Computer staff wages and benefits 221,193 96,197
Computer software and programming 6,585 3,171
Software consulting 21,286 1,461
--------- -------
727,302 254,548
--------- -------
Gross profit 491,414 185,457
--------- -------
Expenses
Automotive 11,283 4,453
Bad debts 694 266
Bank charges and interest 1,441 1,767
Depreciation 4,495 1,474
Management salaries 14,805 40,869
Management fees 219,035 183,333
Office and general 41,785 4,251
Professional fees 44,734 19,097
Promotion and trade shows 79,091 22,048
Rent 19,694 9,762
Research and development (net of investment
tax credits) 9,554 5,789
Shipping and handling 14,504 4,016
--------- -------
461,115 297,125
--------- -------
Earnings (loss) before income taxes 30,299 (111,668)
--------- -------
Income taxes - current 8,874 -
- deferred - (22,451)
--------- -------
8,874 (22,451)
--------- -------
Net earnings (loss) $ 21,425 $(89,217)
========= =======
- --------------------------------------------------------------------------------
Retained earnings, beginning of year $ 13,887 $103,104
Net earnings (loss) 21,425 (89,217)
--------- -------
Retained earnings, end of year $ 35,312 $ 13,887
========= =======
- --------------------------------------------------------------------------------
*See accompanying notes to the financial statements.
2
<PAGE>
- --------------------------------------------------------------------------------
786710 Ontario Limited
(Operating as Info Systems)
BALANCE SHEET
(Expressed in Canadian Dollars) 1996 1995
- --------------------------------------------------------------------------------
Assets
Current
Cash and cash equivalents $ 93,401 $241,769
Receivables 177,476 44,040
Income taxes and investment tax credits
receivable - 89,442
Inventories 8,121 1,959
Prepaid expenses 1,875 2,427
------- -------
280,873 379,637
Capital assets (Note 2) 14,269 10,320
------- -------
$295,142 $389,957
======= =======
- --------------------------------------------------------------------------------
Liabilities
Current
Payables and accruals $118,513 $292,692
Deposits 700 13,210
Income taxes payable 6,000 -
Deferred revenue 92,391 70,156
Advances from parent company (Note 3) 42,214 -
------- -------
259,818 376,058
------- -------
Shareholder's Equity
Capital Stock (Note 4) 12 12
Retained earnings 35,312 13,887
------- -------
35,324 13,899
------- -------
$295,142 $389,957
======= =======
Commitments (Note 5)
- --------------------------------------------------------------------------------
On behalf of the Board
__________________________________Director_____________________________Director
See accompanying notes to the financial statements
3
<PAGE>
- --------------------------------------------------------------------------------
786710 Ontario Limited Five Months
(Operating as Info Systems) Year Ended Ended
STATEMENT OF CASH FLOW December 31, December 31,
(Expressed in Canadian Dollars) 1996 1995
- --------------------------------------------------------------------------------
Operating activities
Net earnings (loss) $ 21,425 $(89,217)
Depreciation 4,495 1,474
Deferred income taxes - (22,451)
Gain from sale of fixed assets (639) -
Changes in operating assets and liabilities
Receivables (133,436) (9,790)
Income taxes 95,442 -
Inventories (6,162) (1,330)
Prepaids 552 2,976
Payables and accruals (174,179) 201,497
Deposits (12,510) 8,714
Deferred revenue 22,235 (1,967)
------- -------
Net cash provided by (used in) operating
activities (182,777) 89,906
------- -------
Financing activities
Advances from parent company 42,214 -
------- -------
Investing activities
Proceed from sale of fixed assets 4,500 -
Purchase of equipment (12,305) -
------- -------
Net cash provided by (used in) investing
activities (7,805) -
------- -------
Increase (decrease) in cash and cash equivalents (148,368) 89,906
Cash and cash equivalents
Beginning of year 241,769 151,863
------- -------
End of year $ 93,401 $241,769
======= =======
- --------------------------------------------------------------------------------
See accompanying notes to the financial statements.
4
<PAGE>
- --------------------------------------------------------------------------------
786710 Ontario Limited
(Operating as Info Systems)
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
December 31, 1996
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
The Company's principal business is the development and sale of computer
software
REVENUE RECOGNITION
Revenue from sale of software program and hardware equipment is recognized upon
delivery of products. Revenue from service contract is amortized over the life
of the contract.
INVENTORIES
Inventories are valued at the lower of cost and net realizable value. Cost is
determined on a first-in, first-out basis.
DEPRECIATION
Rates and bases of depreciation applied to write-off the cost less estimated
salvage value of equipment over their estimated lives are as follows:
Furniture and fixtures 30%, declining balance
Automotive equipment 30%, declining balance
Computer equipment 30%, declining balance
RESEARCH AND DEVELOPMENT
Research and development costs, including the cost of software under
development, net of any investment tax credits, are charged to earnings in the
period in which they are incurred.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments with maturities of three
months or less at the time or purchase to be cash equivalents.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities in foreign currencies have been translated into Canadian
dollars at exchange rates in effect at the year end dates; revenues and expenses
at the exchange rates during the year. Exchange gains or losses resulting from
translation are reflected in the income statement.
5
<PAGE>
- --------------------------------------------------------------------------------
786710 Ontario Limited
(Operating as Info Systems)
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
December 31, 1996
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES (continued)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash, trade receivables and accounts payable approximate
fair value due to the short term maturities of these instruments.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses dring the reporting period. Actual results could differ
from those estimates.
- --------------------------------------------------------------------------------
2. CAPITAL ASSETS
<TABLE>
<CAPTION>
1996 1995
---- ----
Accumulated Net Net
Cost Depreciation Book Value Book Value
---- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Furniture & fixtures 14,060 10,473 3,587 5,124
Automotive equipment - - - 4,878
Computer equipment 12,914 2,232 10,682 318
------ ------ ------ ------
$26,974 $12,705 $14,269 $10,320
====== ====== ====== ======
</TABLE>
- --------------------------------------------------------------------------------
3. ADVANCES FROM PARENT COMPANY
Advances from parent company have no set terms of repayment.
- --------------------------------------------------------------------------------
4. CAPITAL STOCK 1996 1995
---- ----
Authorized:
Unlimited number of non-voting, redeemable
non-cumulative, participating Class A
preference shares
Unlimited number of non-voting, redeemable,
non-cumulative, non-participating Class B
preference shares
Unlimited number of non-voting, redeemable,
non-cumulative Class C preference
shares, redeemable at $10,000 each
Issued:
120 common shares $ 12 $ 12
======= =======
6
<PAGE>
- --------------------------------------------------------------------------------
786710 Ontario Limited
(Operating as Info Systems)
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
December 31, 1996
- --------------------------------------------------------------------------------
5. COMMITMENTS
Future minimum annual lease commitment to expiry date re:
1997 $19,810
- --------------------------------------------------------------------------------
6. RELATED PARTY TRANSACTIONS
(a) Management fees of $185,039 (1995-$183,333) was paid to a company
controlled by the former shareholder.
(b) Sales of $131,875 (1995 - $Nil) was made to the parent company.
(c) Receivables include $131,875 (1995 - $Nil) due from the parent company.
- --------------------------------------------------------------------------------
7. LOSSES
The Company has recorded deferred tax for the income tax benefits of net
operating loss carryforward for provincial purposes. This loss is available to
reduce taxable income in future years and will expire in the year 2000.
Due to the uncertainty in realizing such benefit, a valuation allowance of
$11,400 has been recorded which offsets the entire amount of the deferred tax
related to the net operating loss carryforward.
- --------------------------------------------------------------------------------
8. CONCENTRATION OF CREDIT RISK
The Company sells on credit terms to its customers located in Canada and the
United States. No single customer represented more than 10% of the Company's
sales in the reporting period.
- --------------------------------------------------------------------------------
9. CONTINGENCY
A legal claim of $200,000 has been filed against the Company and other parties
relating to a matter which arose in the ordinary course of business. In the
opinion of management, the likelihood of the lawsuit being successful and the
amount of loss, if any, is not determinable. Accordingly, no provision has been
made in these financial statements.
7
<PAGE>
- --------------------------------------------------------------------------------
786710 Ontario Limited
(Operating as Info Systems)
NOTES TO THE FINANCIAL STATEMENTS
(Expressed in Canadian Dollars)
December 31, 1996
- --------------------------------------------------------------------------------
10. COMPARATIVE FIGURES
Comparative figures of the prior year have been restated in order to conform
with the financial statement format adopted in current year.
8
<PAGE>
MAJOR FLEET & LEASING CORP.
FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
For the Years Ended December 31, 1996 and 1995
Marcum & Kliegman LLP
------------------------------------------
Certified Public Accountants & Consultants
<PAGE>
MAJOR FLEET & LEASING CORP.
CONTENTS
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Balance Sheets 2-3
Statements of Income 4
Statements of Retained Earnings 5
Statements of Cash Flows 6-7
NOTES TO FINANCIAL STATEMENTS 8-13
INDEPENDENT AUDITORS' REPORT ON
SUPPLEMENTARY INFORMATION 14
Schedules of Selling, General and Administrative
Expenses 15
Marcum & Kliegman LLP
------------------------------------------
Certified Public Accountants & Consultants
<PAGE>
Marcum & Kliegman LLP
------------------------------------------
Certified Public Accountants & Consultants
A Limited Liability Partnership Consisting of Professional Corporations
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors of
Major Fleet & Leasing Corp.
We have audited the accompanying balances sheets of Major Fleet & Leasing Corp.
as of December 31, 1996 and 1995, and the related statements of income, retained
earnings and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Major Fleet & Leasing Corp. as
of December 31, 1996 and 199@ and the results of its operations and is cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Marcum & Kliegman LLP
February 5, 1997
130 Crossways Park Drive o Woodbury, New York 11797-2027 o
Tel 516-390-1000 o Fax 516-390-1001
Woodbury New York Greenwich
-1-
<PAGE>
MAJOR FLEET & LEASING CORP.
BALANCE SHEETS
December 31, 1996 and 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
--------- -------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 77,806 $ 409,280
Net investment in direct financing leases, current 1,390,598 426,473
Accounts receivable 1,903 82,335
Inventory 1,175,667 25,219
Prepaid expenses 8,335 8,143
Loans to employees 35,609 0
---------- ----------
Total Current Assets 2,689,918 951,450
---------- ----------
LEASED EQUIPMENT, net 238,658 292,769
---------- ----------
NET INVESTMENT IN DIRECT
FINANCING LEASES, net of current portion 1,059,287 511,728
---------- ----------
PROPERTY AND EQUIPMENT, net 11,805 12,401
---------- ----------
OTHER ASSETS
Cash surrender value of life insurance policies 165,746 198,654
Loans to officers 13,843 9,000
---------- ---------
Total Other Assets 179,589 207,654
---------- ----------
TOTAL ASSETS $4,179,257 $1,976,002
========== ==========
===
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
MAJOR FLEET & LEASING CORP.
BALANCE SHEETS
December 31, 1996 and 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
--------- -------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 17,673 $ 2,698
Accrued expenses and taxes 20,158 31,904
Notes payable, related party 1,670,534 0
Current maturities of long-term debt 463,976 500,544
Lease deposits payable, current 43,365 45,507
Customer advances 18,613 52,075
Due to affiliates 1,404,079 136,833
---------- ---------
Total Current Liabilities 3,638,398 769,563
---------- ---------
OTHER LIABILITIES
Long-term debt, less current maturities 307,882 417,269
Lease deposits payable, non current 28,776 37,931
Loans on life insurance policies 43,346 11,973
---------- ---------
Total Other Liabilities 380,004 467,173
---------- ---------
TOTAL LIABILITIES 4,018,402 1,236,736
---------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock - no par value, 200 shares authorized,
20 shares issued and outstanding 1,000 1,000
Retained earnings 159,855 738,266
---------- ---------
TOTAL STOCKHOLDERS' EQUITY 160,855 739,266
---------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,179,257 $1,976,002
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE>
MAJOR FLEET & LEASING CORP.
STATEMENTS OF INCOME
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
REVENUE $951,261 $1,105,434
-------- ----------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 504,057 506,906
-------- ----------
INCOME FROM OPERATIONS BEFORE
DEPRECIATION 447,204 598,528
DEPRECIATION 177,533 223,848
-------- ----------
INCOME FROM OPERATIONS 269,271 374,680
-------- ----------
OTHER INCOME (EXPENSE)
Interest expense (79,594) (79,502)
Interest income 8,932 13,765
Other income 9,577 6,023
-------- ----------
TOTAL OTHER EXPENSE (61,085) (59,714)
-------- ----------
INCOME BEFORE INCOME TAXES 208,586 314,966
INCOME TAXES 11,152 4,915
-------- ----------
NET INCOME $197,434 $ 310,051
======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE>
MAJOR FLEET & LEASING CORP.
STATEMENTS OF RETAINED EARNINGS
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
RETAINED EARNINGS - Beginning $738,266 $678,215
Add: Net income 197,434 310,051
Less: Distributions to stockholders 775,845 250,000
-------- --------
RETAINED EARNINGS - Ending $159,855 $738,266
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE>
MAJOR FLEET & LEASING CORP.
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $197,434 $310,051
Adjustments to reconcile net income to net cash provided -------- --------
by operating activities:
Depreciation 177,533 223,848
Gain on sale of leased equipment (169,079) (219,963)
Decrease (increase) in net investment in direct
financing leases 158,850 (268,044)
Decrease (increase) in accounts receivable 80,432 (79,807)
Decrease (increase) in inventory 7,608 (20,588)
(Increase) decrease in prepaid expenses (192) 6,437
Increase in loans to employees (35,609) 0
Decrease (increase) in cash surrender value of
life insurance policies, net 64,281 (49,136)
Increase in loans to officer (4,843) 0
Increase (decrease) in accounts payable 14,977 (2,388)
(Decrease) increase in accrued expenses and taxes (11,746) 16,941
(Decrease) increase in lease deposits payable (11,297) 25,235
(Decrease) increase in customer advances (33,462) 42,423
Increase in due to affiliates, net 109,188 160,547
-------- ----------
TOTAL ADJUSTMENTS 346,641 (164,495)
-------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 544,075 145,556
-------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of leased equipment (288,328) (933,702)
Purchase of other equipment (2,000) (10,132)
Proceeds from trade notes receivable 0 30,781
Proceeds from sale of leased equipment 336,579 1,162,002
-------- ----------
NET CASH PROVIDED BY INVESTMENT ACTIVITIES $ 46,251 $248,949
-------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE>
MAJOR FLEET & LEASING CORP.
STATEMENTS OF CASH FLOWS, Continued
For the Years Ended December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $471,421 $701,077
Payments on long-term debt (617,376) (653,700)
Distributions to stockholders (775,845) (250,000)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES 921,800 (202,623)
-------- --------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (331,474) 191,882
CASH AND CASH EQUIVALENTS - Beginning 409,280 217,398
-------- --------
CASH AND CASH EQUIVALENTS - Ending $ 77,806 $409,280
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE>
MAJOR FLEET & LEASING CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accountina Policies
Nature of Business
Major Fleet & Leasing Corp. (the "Company") is in the business of
leasing automobiles and trucks primarily in the New York City
metropolitan area under direct financing and operating leases expiring
in various years through 2000.
Effective October 2, 1996, the Company became a wholly-owned subsidiary
of Fidelity Holdings, Inc. ("Fidelity"). Since the change in ownership,
the Company has expanded its operations to include the leasing of
telephone equipment.
Revenue Recognition
The Company records income from direct financing leases based on a
constant periodic rate of return on the net investment in the lease.
Income earned from operating lease agreements is recorded evenly over
the term of the lease.
Inventory
Inventory consists of automobiles and trucks held for sale or lease,
and is valued at the lower of cost (specific identification) or market.
Depreciation
Depreciation of leased equipment is calculated on the cost of the
equipment, less an estimated residual value, on the straight-line
method over the term of the lease. Depreciation of other property and
equipment is provided by the straight-line method over the estimated
useful lives of the assets.
Property and Equipment
Property and equipment is stated at cost. Costs of major additions and
betterments are capitalized, and maintenance, repairs and minor
renewals are expensed as incurred. When property and equipment is sold
or otherwise disposed of, the cost and related accumulated depreciation
are eliminated from the accounts and any resulting gain or loss is
reflected in income.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Income Taxes
The Company, with the consent of its stockholders, had elected under
the Internal Revenue Code to be an "S" corporation. In lieu of
corporation income taxes, the stockholders of an "S" corporation are
taxed on their proportionate share of the
-8-
<PAGE>
MAJOR FLEET & LEASING CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies, continued
Income Taxes, continued
company's taxable income. Therefore, no provision or liability for
federal income tax has been included in the financial statements
through September 30, 1996.
Effective October 2, 1996, in conjunction with the change in the
Company's ownership, the "S" Corporation election was terminated and
the Company is currently taxed as a "C" Corporation. The Company will
file a consolidated Federal tax return with Fidelity.
Advertising
The Company expenses advertising costs as incurred.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Reclassifications
Certain accounts in the prior year financial statements have been
reclassified for comparative purposes to conform with the presentation
in the current year financial statements. These reclassifications have
no effect on previously reported income.
NOTE 2 - Leased Equipment
Leased equipment is stated at cost and consists of the following at
December 31, 1996 and 1995:
1996 1995
-------- ---------
Automobiles and trucks $502,840 $685,584
Less accumulated depreciation 264,182 392,815
-------- --------
Leased Equipment, net $238,658 $292,769
======== ========
Depreciation expense related to leased equipment was $174,937 and
$222,095 for the years ended December 31, 1996 and 1995, respectively.
-9-
<PAGE>
MAJOR FLEET & LEASING CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - Net Investment in Direct Financing Leases
Components of the net investment in direct financing leases are as
follows at December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Total minimum lease payments to be received $2,705,711 $1,078,235
Estimated residual value of leased property 200,315 197,340
Unearned income (456,141) (337,374)
---------- ----------
Net Investment $2,449,885 $ 938,201
========== ==========
</TABLE>
Future minimum lease payments receivable at December 31, 1996 is as
follows:
Year Ending
December 31, Amount
------------ ------
1997 $1,512,465
1998 1,108,499
1999 77,493
2000 7,254
----------
Total $2,705,711
==========
NOTE 4 - Property and Equipment
Property and equipment at December 31, 1996 and 1995 is comprised of
the following:
Estimated
1996 1995 Useful Lives
---- ---- ------------
Furniture and fixtures $16,113 $17,555 5-7 years
Less: accumulated depreciation 4,308 5,154
------- -------
Property and Equipment, net $11,805 $12,401
======= =======
Depreciation expense related to property and equipment for the years
ended December 31, 1996 and 1995 was $2,596 and $1,753, respectively.
NOTE 5 - Long-Term Debt
Various lenders advance funds to the Company in the form of notes
payable to finance leased vehicles. Interest on each note is charged
depending on the prime rate in effect at the time the vehicle is leased
and remains constant over the term of the lease. Applicable rates at
December 31, 1996 ranged between 7% and 9.5%. Equal monthly
-10-
<PAGE>
MAJOR FLEET & LEASING CORPROATION
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - Long-Term Debt, continued
installments are paid over the term of the lease (which can range from
12 to 60 months), together with a final balloon payment, if applicable.
These loans are collateralized by the vehicles.
Maturities of long-term debt at December 31, 1996 are as follows:
Year ending
December 31, Amount
----------- ------
1997 $463,976
1998 230,851
1999 70,437
2000 6,594
--------
Total $771,858
========
NOTE 6 - Notes Payable, Related Party
In December 1996 the Company purchased telephone equipment from an
affiliated entity for $1,670,534 (see Note 12) and incurred notes
payable totalling such amount. The notes are expected to be repaid in
full in 1997 and, accordingly, are shown as a current liability in the
accompanying financial statements. The notes are collateralized by the
telephone equipment. Interest rates on these notes have not yet been
determined by management.
NOTE 7 - Related Party Transactions
The Company purchased a substantial portion of its leased vehicles and
all of its leased telephone equipment and new car inventory from
affiliates (see Note 12).
Amounts due to affiliates represent the balances owed for the purchases
of these leased vehicles and new car inventory, as well as advances
made/expenses incurred in the ordinary course of business from various
entities which are wholly-owned by the Company's former stockholders.
These amounts owed are in the form of noninterest-bearing obligations
with no specified maturity dates.
The Company conducts its business from a facility which is leased
without a formal lease agreement on a month to month basis from an
entity which is wholly-owned by the Company's former stockholders. Rent
expense for 1996 and 1995 as $37,200 and $16,000, respectively.
-11-
<PAGE>
MAJOR FLEET & LEASING CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - Officers' Loans
The Company made loans to its officers which are noninterest-bearing
and have no definitive repayment terms.
NOTE 9 - Supplemental Disclosures Of Cash Flow Information
Cash paid during the years ended December 31, 1996 and 1995 for:
1996 1995
---- ----
Interest $ 79,693 $ 82,384
Income taxes $ 10,267 $597
Noncash Transactions:
During 1996 the Company purchased vehicles and telephone equipment and
incurred liabilities of $l,158,056 and $1,670,534, respectively.
NOTE 10 - Commitments and Contingencies
Sales of Customer Installment Contracts
The Company has sold customer installment contracts to some financing
institutions with no recourse and to others with full recourse. In the
event of default on recourse loans, the Company would pay the financing
institution a predetermined amount and would repossess and sell the
vehicle. No accrual has been made for possible losses since, in
management's opinion, on an aggregate basis, the Company could sell the
repossessed automobiles for amounts in excess of outstanding
liabilities.
Guarantor of Third Party Obligations
Under the terms of a cross-guaranty, cross-default, cross-
collateralization agreement, the Company is the guarantor of debt
incurred by affiliated companies.
In addition, the Company is a guarantor on a mortgage of an entity
which is wholly-owned by the former stockholders of the Company. The
outstanding balance of the mortgage at December 31, 1996 is $877,212.
NOTE 11 - Major Customer
The Company derives a substantial portion of its lease income from one
customer. Lease income attributable to that customer was $288,322 (55%)
and $380,234 (40%) in 1996 and 1995, respectively.
-12-
<PAGE>
MAJOR FLEET & LEASING CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - Major Suppliers
The Company purchased a substantial portion of its leased vehicles from
three entities which are wholly-owned by the Company's former
stockholders. Purchases attributable to those entities were $198,108
(68%), $28,329 (10%) and $49,742 (17%) in 1996 and $519,426 (56%),
$95,685 (10%), and $95,775 (10%) in 1995, respectively.
In 1996, the Company purchased $1,158,056 (100%) of its new car
inventory from an entity which is wholly-owned by its former
stockholders.
Amounts due to these companies at December 31, 1996 and 1995 are
included in due to affiliates (see Note 7).
In addition, in 1996, the Company purchased $1,670,534 (100%) of its
leased telephone equipment from an entity wholly-owned by Fidelity. The
balance owed to this entity at December 31, 1996 is included in notes
payable, related party (see Note 6).
-13-
<PAGE>
MASTER AGREEMENT
THIS AGREEMENT, made as of this 18th day of April, 1996 by and among:
FIDELITY HOLDINGS, INC., a Nevada corporation having its principal place of
business located at 144-15 Union Turnpike, Flushing, New York 11367 (hereinafter
"FIDELITY")
AND
The following related parties, jointly and severally, as relevant and applicable
under the circumstances:
1) ZVI BARAK, Ph.D., an adult individual residing at 204 Franklin Avenue,
Thornhill, Ontario L4J 7L3 (hereinafter "ZB"), and
2) SARAH BARAK, an adult individual residing at 204 Franklin Avenue, Thornhill,
Ontario L4J 7L3 (hereinafter "SB"), and
3) 786710 ONTARIO LIMITED, an Ontario provincial corporation having its
principal place of business located at 1110 Finch Avenue W., Suite 906,
Downsview, Ontario M3J 2T2
together with its sole, operating division, "Info Systems" (hereinafter
collectively "786710")
<PAGE>
WITNESSETH THAT:
WHEREAS, ZB, SB and 786710 have developed certain software and
telecommunications systems, in conjunction with certain hardware, to provide
voice processing and telecommunications services, including long distance and
international long distance telecommunications, known generally as "TALKIE" AND
"TALKIE-GLOBE", and have been engaged in business selling such software and
systems;
WHEREAS, ZB, SB and 786710 have developed certain software and accounting
systems, known as "Business Control Software" or "BCS" and have been engaged in
business selling such software and systems;
WHEREAS, FIDELITY desires to purchase all of the issued and outstanding
shares of the capital stock of 786710 so as to acquire the rights to
TALKIE/TALKIE-GLOBE and BCS and the businesses of selling, servicing and
supporting such software and systems and the parties entered into a Memorandum
of Intent on December 15, 1996, which Memorandum of Intent contemplated a
further, formal document, which this Agreement is intended to constitute;
NOW, THEREFORE, intending to be legally bound, and in consideration of the
mutual promises and covenants contained herein, the parties have agreed as
follows:
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<PAGE>
I
PURCHASE AGREEMENT
1. (a) FIDELITY desires to acquire all of the rights, titles and interests in
and to all of the issued and outstanding capital stock of 786710 in order to
acquire TALXIE/TALKIE-GLOBE and BCS and the business of selling such software
and systems and providing support and maintenance services for such software. To
accomplish such intent, FIDELITY hereby purchases from ZB and SB all of the
issued and outstanding capital stock of 786710. ZB and SB hereby sell, transfer
and assign all of the issued and outstanding capital stock of 786710 to
FIDELITY. Such stock consists of 120 shares of Common Stock, which ZB and SB
represent and warrant are all of the issued and outstanding shares of capital
stock of 786710.
(b) ZB and SB represent and warrant (i) that prior to this Agreement, all
rights, title and interests in and to TALKIE/TALKIE-GLOBE and BCS not already
owned by 786710 have been irrevocably transferred and assigned, without
reservation or limitation, to 786710 and (ii) that by purchasing all of the
capital stock of 786710, FIDELITY has purchased the entity owning all of the
software and systems and all of the business of selling such software and
systems. This sale of 786710 does not include the subsidiary of 786710, Barak,
Computers, Inc. d/b/a "Informatic Systems, Inc" as provided in sub-paragraph (d)
following.
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<PAGE>
(c) Pursuant to the Letter of Intent, ZB has made distribution of certain of
786710's asssts. At Closing, ZB shall deliver to FIDELITY a list of those
assets remaining in 786710 which remain the property of 786710. Such list shall
be attached hereto and made a part hereof and marked as Schedule A. Assets not
listed on such Schedule shall be deemed to have been distributed.
(d) One of the assets distributed by ZB from 786710 is its former subsidiary,
Barak Computers, Inc., d/b/a "Informatic Systems", an Ontario provincial
corporation. ZB and SB represent and warrant that Barak Computers, Inc. has been
inactive for several years, has had no material business activities, has no
assets, has no right, title or interest in or to TALKIE/TALKIE-GLOBE and/or BCS,
and shall not be reactivated nor used to conduct business.
(e) The large desk and related furniture used by ZB, together with the computer,
other hardware deemed necessary and utilized by ZB, and software utilized by ZB,
although property of 786710, shall be moved by FIDELITY to the FIDELITY research
and development facility being opened in Israel where such furniture, computer
hardware and software shall be used by ZB. FIDELITY shall bear all expenses for
disassembling, shipping, delivering and re-assembling such furniture, computer,
hardware and software.
(f) Among the assets being distributed to ZB are: (i) certain tax credit
distributions for prior R&D from the federal and provincial
4
<PAGE>
governments in the estimated amount of $86,620 plus accrued interest; (ii) an
insurance claim arising out of the burglary in September, 1995 in the estimated
amount of $70,000; (iii) all cash in the corporate bank accounts; and (iv) the
collections actually received from existing receivables to the extent that such
receivables exceed all payables, including accounts payable, current and long
term debt (if any), accrued tax liabilities and accrued employee compensation
for the current period to the date of Closing (excluding vacation and
severance). 786710 shall direct its accountants to determine the full extent of
all its payables, liabilities and accruals as at April 18, 1996 (Closing) and
to complete such determination by June 30, 1996. Assuming that such
determination has been completed by June 30, 1996, distribution of the excess
receivables shall be made on or before July 5, 1996. If such determination has
not been completed by June 30, 1996, then distribution shall be made on or
before the third business day following completion of the determination. The
parties acknowledge that no liability is being recognized for accrued employee
benefits, including specifically vacation time and severance benefits and for
continuing program service and support obligations.
(g) ZB and SB represent and warrant that 786710 has no accounts payable,
debts, liabilities or unpaid expenses other than those shown on Schedule B,
attached hereto and made a part hereof by reference. They further represent and
warrant that they do not
5
<PAGE>
know of any claim or threatened claim against 786710 or its business or its
assets, other than the requirements of on-going product support, except as
disclosed on Schedule C, attached hereto and made a part hereof by reference.
The debts and liabilities shown on Schedule B and the liabilities for the claims
shown on Schedule C are deemed distributed to ZB and SB and it shall be their
responsibility to pay and/or settle such debts and liabilities in full as
provided in subparagraph (f) above with respect to receivables. In the event of
any claim by a third party, after Closing, of any debt, expense, payable or
liability owing to such third party by 786710, for which ZB and SB are
responsible pursuant to Paragraph 7 whether or not shown on Schedule B or
Schedule C, the provisions of Paragraphs 7 and 8 below shall apply.
2. (a) 786710 hereby confirms that it has acquired all of the rights, titles and
interests of ZB and SB in and to TALKIE, TALKIE-GLOBE and BCS and the business
of selling such software and systems, and the business of supporting and
maintaining such software, to the extent not owned by it previously. ZB and SB
hereby confirm that they have sold, transferred and assigned their entire
rights, titles and interests in and to TALKIE, TALKIE-GLOBE and BCS, if any, to
786710. ZB and SB represent and warrant that ZB and SB are the sole creators of
such software, that 786710 is the owner of all (100%) of the ownership rights to
TALKIE, TALKIE-GLOBE and BCS, without reservation, that there is no adverse
claim
6
<PAGE>
of inventorship, development or ownership of TALKIE, TALKIE-GLOBE or BCS, and
that there are no security interests, liens, encumbrances, mortgages, charges,
or (other than shown on Schedule C) claims against (i) TALKIE, TALKIE-GLOBE and
BCS, or (ii) ZB, SB and/or 786710 with respect to TALKIE, TALKIE-GLOBE and/or
BCS. In the event of any question about the prior development and transactions,
786710 hereby buys and ZB and SB hereby sell (quitclaim) to 786710 their entire
rights, titles and interests in and to TALKIE, TALKIE-GLOBE and BCS and the
related businesses. In the event of any claim by a third party, after Closing,
to any right, title or interest in or to the software and systems, TALKIE,
TALKIE-GLOBE and/or BCS, or to inventorship or development rights therein, the
provisions of Paragraphs 7 and 8 below shall apply.
(b) ZB and SB represent that 786710 is the sole owner of TALKIE, TALKIE-GLOBE
and BCS and further represent that 786710 is the sole owner of all of the
following property and assets:
(i) all modules of TALKIE, including but not limited to voice mail,
fax processing, automated attendant, multiple branch audiotex, outcalling,
order entry, credit card charging, and inband signaling;
(ii) all applications of TALKIE (including all modules), including
but not limited to Talkie-Conference, Talkie-Dating, Talkie-Gen, etc.;
7
<PAGE>
(iii) TALKIE-GLOBE, including all modules and applications relating
to such and including but not limited to all international long distance
telecommunications modules, a private lines and applications;
(iv) The Trademarks for "TALKIE", "B.C.S. SOFTWARE" and
"INFOSYSTEMS";
(v) BUSINESS CONTROL SOFTWARE or BCS, including all modules and
applications; and
(vi) Any and all so-called "Hardware Signature"s to permit
integration of the software with the hardware, to the extent currently
controlled.
(c) ZB and SB represent that 786710 is the owner of all source codes, object
codes, documentation, diagrams, work papers, blue prints, hardware signatures,
etc. relating to TALKIE and BCS, such that 786710 shall have the most current
versions of TALKIE and BCS, including all current updates, revisions and
enhancements. ZB and SB represent and warrant that:
(i) aside from the copies delivered to FIDELITY at Closing, there are no
other copies of the source codes, object codes, and hardware signatures,
in existence or in the possession of any other person except employees of
786710, and in the case of employees of 786710, ZB and SD have no
knowledge that any
8
<PAGE>
employee has any such copies; and
(ii) they have no knowledge of any other software, programs, systems,
source codes, object codes or hardware signatures belonging to or developed
by 786710 and/or its subsidiary.
(d) Attached hereto as Schedule D and made a part hereof by reference is a
listing of all modules and applications of TALKIE, TALKIE-GLOBE and BCS
currently available.
3. (a) In consideration of the sale by ZB and SB of their stock interests in
786710, FIDELITY agrees to pay the sum of Seven Hundred Fifty Thousand Dollars
(US$750,000) as follows:
(i) Upon execution of this formal agreement, US$10,000 by application of
the deposit made upon execution of the Memorandum of Intent of December
15, 1995;
(ii) At Closing, which shall be hold immediately following execution of
this formal agreement, US$340,000;
(iii) On or before August 8, 1996 (the second Thursday of the fourth month
after Closing, US$100,000; and
(iv) US$300,000, to be paid in twenty (20) equal monthly
9
<PAGE>
installments of US$15,000, of which the first installment shall be paid
on September 12, 1996 and the subsequent payments shall be paid on the
second Thursday of each successive month for nineteen successive months.
(b) All payments shall be made by certified check, cashier's check, treasurer's
check, bank check or by electronic funds transfer (bank wire) routed as directed
by ZB.
(c) Until all required payments have been made hereunder and under the
Employment Agreement which is attached hereto, FIDELITY shall not sell,
transfer, assign or otherwise dispose of the purchased software or trademark,
except to a controlled subsidiary of FIDELITY (e.g., Computer Business Sciences,
Inc.), which subsidiary shall be subject to the security interest provided in
Paragraph 4 following.
4. (a) As collateral for FIDELITY'S promise to pay the balance of the purchase
price, FIDELITY and 786710 hereby jointly and severally grant to ZB and SB a
security interest in and to: (i) the shares of 786710 sold hereunder; (ii) the
software and modules/applications constituting TALKIE, TALKIE-GLOBE and BCS; and
(iii) the TALKIE and B.C.S. SOFTWARE and INFOSYSTEMS trademarks; and hereby
pledge such assets to ZB and SB. FIDELITY shall execute, acknowledge and deliver
in recordable form such documents pursuant to the Ontario Personal Property
Security Act and Article
10
<PAGE>
9 of the New York Uniform Commercial Code, as applicable. FIDELITY intends to
transfer the stock of 786710 and/or the assets of 78610 to its wholly-owned
subsidiary, Computer Business Sciences, Inc. ("CBS"). CBS shall execute
acknowledge and deliver in recordable form such documents pursuant to the
Ontario Personal Property Security Act and Article 9 of the New York Uniform
Commercial Code, as applicable. In the event of any permitted further transfer
by FIDELITY to another subsidiary, such subsidiary shall execute, acknowledge,
deliver and file, at FIDELITY's expense, such additional documents as may be
necessary or desirable to perfect the security interest in the assets
transferred.
(b) In order to provide for (i) perfection of the security interest in and to
the shares of 786110 and (ii) for expeditious delivery of collateral and
assignments in the event of default and foreclosure, the parties hereby appoint
Aaron Grubner, 5140 Yonge Street, Suite 1540, North York, Ontario, M2N 6L7 as
the Bailee and Escrow Agent to hold the following pursuant to a separate Pledge
& Security Agreement:
(i) certificate(s) for the 120 shares of 786710 sold to FIDELITY pursuant
to this Agreement;
(ii) executed blank stock powers for the certificate(s) so pledged;
(iii) executed Bill of Sale and Assignment to SB of the BCS
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<PAGE>
SOFTWARE trademark as well as the BCS software and all modules and
applications thereof, and all Hardware Signatures(s);
(iv) executed Bill of Sale and Assignment to ZB and SB of the
TALKIE/TALKIE-GLOBE and INFOSYSTEMS trademarks, software, modules,
applications, etc. and all Hardware Signature(s); and
(v) executed Bill of Sale and Assignment to the assets of 786710 as set
forth on Schedule A.
(c) At Closing, the "Hardware Signature"s for integration of the software with
the hardware shall be confidentially delivered by ZB and shall be inspected by
FIDELITY to confirm its existence and accuracy, after which both parties shall
jointly place such "Hardware Signature"s in a sealed envelope, signed by both
across the seal. FIDELITY shall place such envelope in a corporate safe deposit
box to which access is limited only to two directors of FIDELITY, Doron Cohen
and Bruce Bendell, and then they are to have access only if and when there is a
need for access to such "Hardware Signaturer"s. Determination of the need shall
be made reasonably. At no time prior to completion of the payments owing to ZB
and/or SB hereunder and all payments having been made as required under the
Employment Agreement which is attached hereto, shall FIDELITY or either of the
two authorized directors open such
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<PAGE>
envelope except in the event of an emergency requiring such access. It is the
specific intent of the parties to safeguard such "Hardware Signature"s so as to
preserve the value of the collateral hereunder.
(d) If ZB and/or SB foreclose any security interest hereunder, FIDELITY and any
subsidiary then owning or using the property in which the security interest has
been foreclosed shall discontinue the use of such property except as required
for continuing product support and maintenance as provided herein. Upon any such
foreclosure, FIDELITY shall promptly notify ZB in writing of those customers
entitled to continuing support and maintenance. ZB shall assume the continuing
support and maintenance of those customers as ZB shall, in his sole discretion,
select. FIDELITY may continue the use of the foreclosed property only for
continuing support of FIDELITY's direct line customers (the "Direct Line
Customers") and for those other customers of FIDELITY whom ZB advises FIDELITY
in writing that ZB does not wish to service (the "Rejected Customers"). ZB
shall cause reasonable continuing product support to be provided to FIDELITY to
enable FIDELITY to service the Direct Line Customers and the Rejected Customers
at ZB's customary rates for similar continuing product support and, where no
similar situation exists, at reasonable rates of compensation having regard to
the circumstances.
5. (a) In further consideration of the sale by SB of her 60
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<PAGE>
shares of common stock of 786710, FIDELITY shall promptly issue to SB One
Hundred Twenty-five Thousand (125,000) shares of its Common Stock, ownership to
which shall vest as provided below. The purpose of immediate issuance is to
establish SB as a stockholder as of April 18, 1996, subject to such subsequent
vesting, for purposes of dividends, stock splits, and other capital
transactions. SB represents and warrants that she is acquiring such shares for
personal investment purposes and not with a view to resale or distribution; the
certificates for such shares shall bear legends on the face thereof indicating
(i) that such shares have not been registered under the Securities Act of 1933
and are restricted as to further transfer; and (ii) that such shares are subject
to the vesting provisions and the collateral offset provisions of this
Agreement.
(b) Ownership to the 125,000 shares shall vest at the rate of Twenty-five
Thousand (25,000) shares at the end of the first year after Closing, Fifty
Thousand (50,000) shares at the end of the second year after Closing, and Fifty
Thousand (50,000) shares at the end of the third year after Closing. The
certificates for such shares shall bear a legend on the face thereof indicating
that such shares have not vested and cannot be sold, transferred, assigned or
otherwise disposed of until and unless they have vested.
(c) During the three year vesting period, as shares shall vest, SB may, subject
to restrictions imposed by applicable securities laws
14
<PAGE>
and regulations, sell, transfer, assign or otherwise dispose of the vested
shares. SB may not sell, transfer, assign or otherwise dispose or any shares not
vested.
(d) During the three year vesting period, all dividends shall be paid to SB
subject to restriction to the extent that they are paid with respect to shares
not yet vested. As shares shall vast, all accrued dividends with respect
thereto shall vest also. Stock splits shall also follow the status of the
original shares; i.e., vested or unvested.
6. In connection with the sale, transfer and assignment of the stock of 786710
to FIDELITY, ZB and SB represent and warrant, jointly and severally, to
FIDELITY, as follows:
(a) 786710 is as of the date of this Agreement, validly existing corporation
duly organized pursuant to the laws of the Province of Ontario, with all legal
and corporate authority and power to conduct its businesses as now being
conducted and to own its properties and to the best of ZB's and SB's knowledge
it possesses all necessary permits and licenses required in connection with the
conduct of its businesses.
(b) The conduct of the present businesses of 786710 is to the best of ZB's and
SB's knowledge in full compliance with all applicable Canadian, provincial and
local governmental statutes, rules,
15
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regulations, ordinances and decrees.
(c) Pursuant to its Articles of Incorporation as amended 786710 is authorized to
issue an unlimited number of shares of Class A, Class B and Class C Preference
Stock without par value none of which shares are presently issued and
outstanding and an unlimited number of shares of Common Stock, of which 120
shares are presently issued and outstanding. There are no other authorized or
outstanding securities of any class or of any kind or character of the
corporation and, there are no outstanding subscriptions, options, warrants or
other agreements or commitments obligating the corporation, to issue or to sell
any additional shares of stock or any options or rights with respect thereto, or
any securities convertible into any shares of stock of any class.
(d) Upon transfer of the 120 shares of Common Stock of 786710 to FIDELITY,
FIDELITY will become the owner of 100% of 786710's authorized, issued
and outstanding Common Stock.
(e) The execution and delivery of this Agreement, the consummation of the
transactions herein contemplated and compliance with the terms of this Agreement
will not result in a breach of any of the terms or provisions of, or constitute
a default under: the Articles of Incorporation or By-Laws of 786710; any
indenture, other agreement or instrument to which the corporation is a party or
by which it or its assets are bound; or any applicable regulation,
16
<PAGE>
judgment, order or decree of any governmental instrumentality or court, domestic
or foreign, having jurisdiction over the corporation, its securities or its
properties.
(f) 786710 is not a party to any written or oral agreement which grants an
option or right of first refusal or other arrangement to acquire any of the
stock or to any agreement that affects the voting rights of any of the stock,
nor has the corporation made any commitment of any kind relating to the issuance
of shares of any of its stock, whether by subscription, right of conversion,
option or otherwise.
(g) 786710 is not a party to any agreement or understanding for the sale or
exchange of inventory or services for consideration other than cash or at a
discount in excess of normal discount for quantity or cash payment. Attached
hereto as Schedule "E" is a list of all OEM contracts in effect.
(h) 786710 has filed with the appropriate governmental agencies all tax returns
and tax reports required to be filed, in correct form; all Canadian, provincial
and local income, franchise, sales, use, VAT, occupation or other taxes due have
been fully paid or adequately reserved for; to the extent that tax liabilities
have accrued, but have not become payable, they are adequately reflected as
liabilities on the books of the company; and 786710 is not a party to any
action or proceeding by any governmental authority for
17
<PAGE>
assessment or collection of taxes, nor has any claim for assessments been
asserted against 786710.
(i) There are presently no contingent liabilities, factual circumstances,
threatened or pending litigation, contractually assumed obligations or
unasserted possible claims which are known to 786710, which might result in a
material adverse change in the future financial condition or operations of
786710 other than as previously disclosed to FIDELITY on Schedules "B" and "C"
or reflected in 786710's tax returns statements provided to FIDELITY.
(j) The execution, delivery and performance of this Agreement and the
transactions contemplated hereby do not require the consent, authority or
approval of any other person or entity except such as have been obtained.
(k) No transactions have be en entered into either by or on behalf of 786710,
other than in the ordinary course of business.
(1) The entering into of this Agreement and the performance there of has been
duly and validly authorized by all required corporate action and does not
require any consents other than such as have been unconditionally obtained.
(m) TALKIE/TALKIE-GLOBE and BCS, as presently constituted and in the
configurations sold to FIDELITY are warranted to be as
18
<PAGE>
represented in 786710's and INFOSYSTEM's brochures and sales materials,
including specification sheets as delivered to FIDELITY during the negotiations
of this Master Agreement and, given the intended purposes for such software and
systems, are fit for such purposes, including specifically the handling of
telephone calls; however, this warranty is to FIDELITY only and is not intended
for the benefit of third parties and no third party liability shall be derived
from this warranty. There shall be no liability on the part of ZB or SB in
respect of any breach of this warranty other than the obligation on the part of
ZB to use reasonable efforts to rectify any matter which does not comply with
this warranty, as part of ZB's employment as contemplated in this Master
Agreement and in the Employment Agreement which is attached hereto.
The foregoing representations, warranties and agreements shall be true and
correct as of Closing. Such representations, warranties and agreements shall
survive the Closing until December 31, 1997. None of such representations,
warranties and agreements contain, or shall contain as of Closing, any false or
misleading statement of a material fact, or omit, as of Closing, to state any
material fact necessary in order to make the representations, warranties and
agreements not misleading.
7. In the event of any claim by FIDELITY, for any amounts actually paid by
FIDELITY in accordance with paragraph 8 below, after Closing, based upon:
19
<PAGE>
(i) a shortfall in the payment of payables, accruals, debts and
liabilities; or
(ii) a claim to be paid by ZB and/or SB as provided in Paragraph 8 below;
FIDELITY may offset such amount against amounts owing to ZB and/or SB hereunder
(e.g., payables, cash) or against the stock not yet vested under Paragraphs 5,
above, and 12, below. FIDELITY shall not have a right of offset against the
compensation being paid to ZB under the separate Employment Agreement.
8. In the event of any claim by a third party, after Closing, the following
provisions shall apply:
(a) In the event that the claim is for payment of any debt, expense, payable or
liability, including product liability, by 786710, alleged to have existed prior
to Closing, or arising out of events which are alleged to have occurred prior to
Closing, FIDELITY shall immediately notify ZB and SE of such claim and ZB and/or
SB shall investigate such claim, determine its validity, and determine whether
it occurred prior to or after Closing. If it occurred prior to Closing, ZB and
SB shall be responsible for payment or settlement of such claim and ZB and SB
hereby indemnify FIDELITY and 786710 against, and agree to hold FIDELITY and
786710 harmless from any such claim, including legal fees and costs associated
therewith. If it occurred subsequent to Closing, ZB and/or SB shall immediately
refer such claim to FIDELITY with the
20
<PAGE>
results of their investigation and the basis for the determination that the
claim only came into existence after Closing or only arose out of events which
occurred after Closing and FIDELITY shall be responsible for payment or
settlement of such claim. FIDELITY and 786710 hereby indemnify ZB and SB
against, and agree to hold ZB and SB harmless from any such claim, including
legal fees and costs associated therewith. In the absence of cooperation from ZB
and/or SB, FIDELITY may interplead ZB and/or SB or name ZB and/or SB as a
third-party defendant, notwithstanding the arbitration clause of Paragraph 23
below. In the event of any adverse claim against ZB and/or SB for which
responsibility is that of FIDELITY and/or 786710, ZB and/or SB shall have the
right to interplead FIDELITY and/or 786710 as a third party defendant,
notwithstanding the arbitration clause of Paragraph 22 below. In the event that
ZB and/or SB reasonably believe that their interests are not being protected or
that their interests may be adversely affected in any litigation, arbitration or
proceeding then ZB, and/or SB may petition to intervene and FIDELITY shall not
oppose any such petition.
(b) In the event that the claim (i) is for any right, title and/or interest in
or to any of the software and systems sold hereunder, or (ii) is for any right,
title and/or interest in or to TALKIE, TALKIE-GLOBE or BCS, or (iii) asserts
any adverse claim of inventorship or development of such software and/or
systems, or (iv) alleges infringement of any patent or intellectual property
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<PAGE>
rights, FIDELITY and 78S710 shall immediately notify ZB and SB of such claim. ZB
and SB shall make such investigation as they shall deem warranted and shall have
the right to intervene in any suit, action, arbitration or proceeding in which
such claim is asserted and to defend such claim at their expense. FIDELITY
and/or 786710 shall have the right to participate in any such defense, at its
expense, subject to the responsibilities of ZB and SB pursuant to their
representations and warranties herein.
(c) In the event of a claim under sub-paragraph (b) above for infringement of
any patent or intellectual property rights which results in a requirement that
786710 and/or FIDELITY pay a royalty or similar fee or license charge, ZB and
SB shall be responsible for all such amounts up to and including April 18, 1996
and FIDELITY shall be responsible for all such amounts after April 18, 1996.
(d) In the event of any adverse claim against ZB, SB, FIDELITY and/or 786710,
for which responsibility is that of ZB and/or SB, FIDELITY shall not have the
right to offset any amounts against the compensation owing to ZB under Part II
of this Agreement (or under the separate Employment Agreement referred to
therein) except in the event of a requirement of legal process such as
garnishment. However, FIDELITY shall be entitled to offset any amounts which it
has actually paid in the event of a failure by ZB and/or SB to make such payment
after all steps and proceedings set out in this
22
<PAGE>
Paragraph 8 have been taken and completed by offsetting against any other
amounts owing to ZB and SB hereunder or the royalty incentive compensation, if
any, only under the Employment Agreement or by reclaiming unvested shares of
FIDELITY's Common Stock issued to SB under Paragraph 5 above or to ZB under
Paragraph 12 above.
9. (a) ZB and SB recognize and acknowledge that, with respect to the assets sold
hereunder, their knowledge of such assets has become valuable proprietary
information of FIDELITY, and that as a result of such sale and purchase that
such information now constitutes unique assets of the business of FIDELITY and
of which FIDELITY is the sole and exclusive owner. ZB and SB shall treat such
proprietary information on a confidential basis and will not hereafter
personally use or disclose all, or any part of, such proprietary information to
any person, firm, corporation, association, agency, or other entity except as
properly required in the conduct of the business of FIDELITY, or except as
authorized in writing by FIDELITY, publish, disclose or authorize anyone else to
publish or disclose, any secret or confidential matter relating to any such
proprietary information of FIDELITY. In the event of a breach, or threatened
breach, by ZB or SB, of the provisions or this Paragraph, FIDELITY shall be
entitled to a preliminary, temporary and permanent injunction restraining ZB
and/or SB, as applicable, from disclosing in whole or in part, any such
proprietary inrormation and/or form rendering any services to any person, firm,
corporation, association, agency, or other entity to
23
<PAGE>
whom such information, in whole or in part, has been disclosed or is threatened
to be disclosed. Furthermore, nothing herein shall be construed as prohibiting
FIDELITY from pursuing any other equitable or legal remedies available to it for
such breach or threatened breach, including the recovery or damages from ZB
gnawed/or SB.
(b) FIDELITY recognizes that ZB and/or SB may possess proprietary information of
third parties and that ZB and/or SB may have ongoing obligations to third
parties with respect thereto. FIDELITY expressly requires that ZB and SB shall
honor such ongoing obligations to such third parties and that neither ZB nor SB
shall use, for the benefit of FIDELITY, or disclose to FIDELITY, any such
proprietary information.
II
EMPLOYMENT
10. An integral part of FIDELITY's purchase pursuant to Part I is the
availability of ZB to provide continuity and product support, while permitting
FIDELITY to immediately enter the market with the products without a delay for
familiarization. By a separate Employment Agreement being contemporaneously
executed, FIDELITY is employing ZB as the Managing Director of R&D for the
Telecommunications Division, and ZB is accepting such employment,
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pursuant to the terms of such Employment Agreement which is attached hereto and
made a part hereof by reference. A breach by ZB of the separate Employment
Agreement as provided in paragraph 17 (b) thereof shall be a breach of Part I
of this Master Agreement. ZB acknowledges that his continuation with the
products is critical and that a breach of his Employment Agreement as provided
in paragraph 17(b) thereof could cause FIDELITY irreparable harm.
11. (a) In recognition of ZB's desire to move to Israel, promptly following
Closing FIDELITY shall establish a subsidiary for R&D. Such subsidiary, if not
incorporated in Israel, shall have an Israeli subsidiary for R&D. FIDELITY shall
establish, in Israel, an R&D facility, utilizing Israeli government grants,
credits and incentives. However, FIDELITY acknowledges that ZB is being paid
outside Israel and that therefore his compensation will not be available as a
component basis for any such grant, credit or incentive.
(b) ZB shall be the Managing Director of such R&D facility. At his sole expense,
ZB shall move himself and his family to Israel. FIDELITY shall coordinate with
ZB the opening of the R&D facility to coincide with ZB's move to Israel.
(c) FIDELITY recognizes that ZB's move to Israel may not be workable, either for
ZB or for family members, for any number of possible reasons. Accordingly, ZB in
his sole discretion may elect
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to move back to Canada or to move elsewhere. In such event, ZB and FIDELITY
shall cooperate and coordinate such move to avoid breach of agreements with
Israeli agencies; otherwise, such further move shall not be a breach of ZB's
employment agreement. However, any such further move of ZB's family and personal
effects shall be at ZB's sole expense.
(d) Regardless of any relocation, ZB and FIDELITY shall, acting reasonably,
mutually coordinate the timing of such moves so as not to interrupt on-going R&D
and ZB shall continue as Managing Director of R&D for FIDELITY.
(e) The R&D facility shall be funded by FIDELITY pursuant to an annual budget to
be mutually-agreed between ZB and FIDELITY; it being the intent of the parties
that the existence of the facility shall be maintained by FIDELITY. Such budget
shall be subject to any constraints imposed by FIDELITY's financial
circumstances, but at a level sufficient to meet the financial terms of the
employment agreement to ZB and to maintain the agreed minimun staffing of a
secretary and a programming assistant.
12. (a) As a "stock incentive", FIDELITY shall promptly issue to ZB One Hundred
Twenty-five Thousand (125,000) shares of its Common Stock, ownership to which
shall vest as provided below. The purpose of immediate issuance is to establish
ZB as a stockholder as of March 1, 1996, subject to such subsequent vesting, for
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purposes of dividends, stock splits, and other capital transactions. ZB
represents and warrants that he is acquiring such shares for personal investment
purposes and not with a view to resale or distribution; the certificates for
such shares shall bear a legend on the face thereof indicating that such shares
have not been registered under the Securities Act of 1933 and are restricted as
to further transfer.
(b) Ownership to the 125,000 shares shall vest at the rate of Twenty-five
Thousand (25,000) shares per year, with the first year commencing as of March 1,
1996 and the first 25,000 shares vesting on February 28, 1997. The
certificates for such shares shall bear a legend on the face thereof indicating
that such shares have not vested and cannot be sold, transferred, assigned or
otherwise disposed of until and unless they have vested.
(c) During the five year vesting period, as shares shall vest, ZB may, subject
to restrictions imposed by applicable securities laws and regulations, sell,
transfer, assign or otherwise dispose of the vested shares. ZB may not sell,
transfer, assign or otherwise dispose or any shares not vested.
(d) During the five year vesting period, all dividends shall be paid to ZB
subject to restriction to the extent that they are paid with respect to shares
not yet vested. As shares shall vest, all accrued dividends with respect thereto
shall vest also. Stock
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splits shall also follow the status of the original shares; i.e., vested or
unvested.
III
MISCELLANEOUS
13. FIDELITY represents and warrants to ZB and SB, jointly and severally,
that;
(a) FIDELITY shall maintain all existing records of 786710 for a minimum
period of ten (10) years from the date of Closing and shall retain all records
pertaining to any existing claim until completion of all matters pertaining to
such claim. Thereafter, FIDELITY shall advise ZB and SB of those documents which
it proposes to destroy. Unless the documents pertain to a contract or instrument
under seal, ZB and SB shall approve destruction. If, however, the records relate
to a contract or instrument under seal ZB and SB may object to destruction, in
which event FIDELITY shall retain those specified records for a period of
twenty-one (21) years after Closing.
(b) Until all payments to ZB and SB required to be made pursuant to Paragraph 3
above have been made in full, FIDELITY shall not issue, permit 786710 to issue,
or cause 786710 to issue, any additional shares of Comon Stock, it being the
intent of the parties that the 120 shares of Common Stock purchased hereunder
and pledged as collateral for the payment of the purchase price shall
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be the only shares of 786710 issued and outstanding during such period.
(c) As shares vest in SB pursuant to Paragraph 5 above or in ZB pursuant to
Paragraph 12 above, FIDELITY shall promptly advise its stock transfer agent to
reissue certificates without the legend referring to vesting and offset and,
under appropriate circumstances under U.S. securities laws, without the legend
referring to the lack of registration. ZB and SB shall be responsible for
transmittal of the appropriate legended certificates to the transfer agent
together with any legal opinions regarding the removal the securities act
legend which the transfer agent may require.
14. Any and all notices, requests, demands and other communications required or
permitted to be given pursuant to this Agreement shall be in writing and shall
be deemed to have been duly given when delivered by hand or when deposited in
the United States mail, by registered or certified mail, return receipt
requested, postage prepaid, (or equivalent, if such is not available to a
party) as follows:
If to Zvi Barak, Sarah Barak or 786710:
204 Franklin Avenue
Thornhill, Ontario L4J 7L3
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with a copy to:
Aaron Grubner
5140 Yonge Street, Suite 1540
North York, Ontario M2N 6L7
If to FIDELITY:
Fidelity Holdings, Inc.
144-15 Union Turnpike
Flushing, New York 11367
Attn: Doron Cohen, President
with a copy to:
Richard C. Fox
3401 Lakeview Drive
Delray Beach, Florida 33445
or to such other addresses as the parties hereto may from time to time give
written notice of to the others.
15. This Agreement constitutes the entire agreement between the parties hereto
with respect to the subject matter hereof and supersedes all prior agreements,
understandings, negotiations and discussions, both written and oral, between the
parties hereto with respect to such subject matter, including specifically the
Letter of Intent of December 15, 1995. This Agreement may not be amended or
modified in any way except by a written instrument executed by
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all of the parties hereto.
16. This Agreement shall be for the benefit of and binding upon the parties
hereto and their respective heirs, personal representatives, successors and,
where applicable, assigns.
17. The va iver by any of the parties hereto of any other party's prompt and
complete performance, or breach or violation, of any provision of this Agreement
shall not operate nor be construed as a waiver of any subsequent breach or
violation, and the failure by any of the parties hereto to exercise any right or
remedy which it/he/she may possess hereunder shall not operate nor be construed
as a bar to the exercise of such right or remedy by such party upon the
occurrence of any subsequent breach or violation. No right or remedy conferred
upon or reserved to any of the parties hereto by this Agreement shall exclude
any other right or remedy, except as expressly provided herein, but each such
right or remedy shall be cumulative and shall be in addition to every other
right or remedy hereunder or available at law or in equity.
18. The invalidity of any one or more of the words, phrases, sentences, clauses,
sections or subsections contained in this Agreement shall not affect the
enforceability or the remaining portions of this Agreement or any part hereof,
all of which are inserted conditionally on their being valid in law, and, in the
event that any one or more of the words, phrases, sentences,
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clauses, sections, or subsections contained in this Agreement shall be declared
invalid by a court of competent jurisdiction, this Agreement shall be construed
as if such invalid word or words, phrase or phrases, sentence or sentences,
clause or clauses, section or sections, or subsection or subsections had not
been inserted.
19. All of the legal, accounting and other costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
borne and paid by the party incurring such costs and expenses, and no party
shall be obligated for any cost or expense incurred by any other party.
20. In any legal action or other proceeding involving, arising out of or in any
way relating to this Agreement, the prevailing party shall be entitled to
recover reasonable attorneys' fees, costs, and expenses of litigation.
21. The section and other headings contained in this Agreement are for reference
purposes only and shall not affect the meaning or interpretation of any of the
provisions of this Agreement.
22. This Agreement may be executed in any number of counterparts and by the
separate parties hereto in separate counterparts, each of which shall be deemed
to be one and the same instrument.
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23. Any controversy or claim arising out of, or relating to this Agreement, or
the breach thereof, shall be settled according to the laws of the Province of
Ontario by arbitration in Toronto, Ontario in accordance with the Arbitrations
Act (Ontario), and judgment upon the award rendered may be entered in any court
having jurisdiction thereof. The losing party shall pay all costs and fees,
including reimbursement of the attorney's fees of the winning party.
24. ZB and SB shall cause to be delivered to FIDELITY when completed, financial
statements audited by Doane, Raymond for the periods ended July 31, 1994, July
31, 1995 and December 31, 1995. All costs of such audits shall be borne by ZB
and SB.
IN WITNESS WHEREOF, each of the parties hereto has duly executed and delivered
this Agreement on the date first above written.
FIDELITY HOLDINGS, INC.
ATTEST:
By Doron Cohen
--------------------------
DORON COHEN, President
_______________________________
Secretary
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