<PAGE>
As filed with the Securities and Exchange Commission on January 8, 1998
Registration No. 333-38563
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 1 to
FORM SB-2 Registration Statement
Under The
Securities Act of 1933
FIDELITY HOLDINGS, INC.
(Name of Small Business Issuer in its Charter)
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<CAPTION>
<S> <C> <C>
Nevada [ ] 11-3292094
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
80-02 Kew Gardens Road
Kew Gardens, New York 11415
(718) 520-6500
(Address and Telephone Number of Principal Executive Offices)
Bruce Bendell
Chairman
Fidelity Holdings, Inc.
80-02 Kew Gardens Road
Kew Gardens, New York 11415
(718) 520-6500
(Name, Address and Telephone Number of Agents For Service)
Approximate Date of Proposed Sale to the Public: As soon as practicable
after the effective date of this registration statement.
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Secur-ities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
===============================================================================
Proposed Proposed
Title of Each Maximum Maximum
Class of Securities Amount Offering Aggregate Amount of
to be to be Price Offering Registration
Registered Registered(1) Per Unit(2) Price(2) Fee
- --------------------------------------------------------------------------------
Common Stock ...... 1,622,500 $6.00 $9,735,000 $2,950.00
- --------------------------------------------------------------------------------
TOTAL REGISTRATION FEE ....................................... $2,950.00
===============================================================================
(1) Includes 172,500 shares of Common Stock which the Underwriter has an option
to purchase to cover over-allotments, if any.
(2) Estimated solely for purposes of computing the registration fee pursuant to
Rule 457.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===============================================================================
<PAGE>
CROSS REFERENCE SHEET
Showing location in Prospectus of information
required by Part I of Form SB-2
Item Number and Caption
- -----------------------
1. Front of Registration Statement and
Outside Front Cover of Prospectus...... Front of Registration Statement
and Outside Front Cover of
Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.................... Inside Front and Outside Back
Cover Pages of Prospectus
3. Summary Information and Risk Factors... Prospectus Summary and Risk
Factors
4. Use of Proceeds........................ Use of Proceeds
5. Determination of Offering Price........ Plan of Distribution
6. Dilution............................... Dilution
7. Selling Security Holders............... Selling Shareholders
8. Plan of Distribution................... Plan of Distribution
9. Legal Proceedings...................... Legal Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons.................... Directors, Executive Officers,
Promoters and Control Persons
11. Security Ownership of Certain Beneficial
Owners and Management.................. Security Ownership of Certain
Beneficial Owners and Management
12. Description of Securities.............. Description of Securities
13. Interest of Named Experts and Counsel... Experts and Counsel
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................ Executive Compensation --
Indemnification of Directors and
Officers
15. Organization Within Last Five Years.... Certain Relationship and Related
Transactions
16. Description of Business................ Description of Business
17. Management's Discussion and Analysis or
Plan of Operation...................... Management's Discussion and
Analysis
18. Description of Property................ Description of Property
19. Certain Relationships and
Related Transactions.................... Certain Relationships and Related
Transactions
20. Market for Common Equity and Related
Stockholder Matters.................... Market for Common Equity and
Related Stockholder Matters
21. Executive Compensation................. Executive Compensation
22. Financial Statements................... Financial Statements
23. Changes In and Disagreements With
Accountants on Accounting and Financial
Disclosure............................. Changes In and Disagreements With
Accountants on Accounting and
Financial Disclosure
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED JANUARY 8, 1998
FIDELITY HOLDINGS, INC.
1,150,000 Shares of Common Stock
As described below, an additional 300,000 shares of Common Stock are being
registered in connection with this offering on behalf of certain selling
shareholders; however, such shares will be offered by the selling shareholders
on a delayed basis and not as part of the underwritten offering.
This Prospectus relates to the sale by Fidelity Holdings, Inc., a Nevada
corporation (the "Company") of 1,150,000 shares (the "Shares") of its common
stock, $.01 par value per share ("Common Stock"), at a purchase price of $6.00
per Share.
This Prospectus also relates to the sale by certain selling shareholders
(the "Selling Shareholders") of an aggregate of 300,000 shares of Common Stock
that are not a part of the underwritten offering and may not be offered or sold
prior to 91 days from the date of this Prospectus without the prior written
consent of the Underwriter. The 300,000 shares of Common Stock offered by the
Selling Shareholders consist of (i) 50,000 shares of Common Stock issuable at a
price of $1.25 per share upon the exercise of certain outstanding warrants (the
"Selling Shareholders' Warrants") and (ii) 250,000 shares of Common Stock
issuable upon the conversion of certain outstanding preferred stock of the
Company. See "Selling Shareholders," "Description of Securities--Preferred
Stock--1996-MAJOR Series of Convertible Preferred Stock" and "--Warrants."
The Company will not receive any of the proceeds from the sale of the
Selling Shareholders' shares of Common Stock.
Prior to this offering, the Common Stock has been traded on the OTC
Bulletin Board. The Company has applied to have the Common Stock listed for
quotation on the Nasdaq National Market under the symbol "FDHG."
See "Risk Factors," beginning on Page 7, for information and a discussion
of certain factors that should be considered by prospective investors.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
================================================================================
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- --------------------------------------------------------------------------------
Per Share ......... $ [6.00] $ [.60] $ [5.40]
- --------------------------------------------------------------------------------
Total(3) ......... $[6,900,000] $[690,000] $[6,210,000]
================================================================================
<PAGE>
(1) Excludes the value of warrants to be issued to the Underwriter (the
"Underwriter's Warrants") to purchase up to 115,000 shares of Common Stock.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Plan of Distribution."
(2) Before deducting expenses of this offering payable by the Company estimated
at $435,000, which includes a non-accountable expense allowance. The Selling
Shareholders will not bear any of the expenses of the offering.
(3) The Company has granted the Underwriter an option, exercisable within 45
days from the date this registration statement is declared effective, to
purchase up to an additional 172,500 shares of Common Stock upon the same
terms and conditions as set forth herein solely to cover over-allotments, if
any, as to the shares of Common Stock offered by the Company. See "Plan of
Distribution." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions and Proceeds to Company will
be $[7,935,000], $[793,500] and $[7,141,500], respectively.
The Shares are offered by the Underwriter, subject to prior sale, when, as
and if accepted by the Underwriter and subject to approval of certain legal
matters by counsel to the Underwriter and to certain other conditions. The
Underwriter reserves the right to withdraw, cancel or modify the offering and to
reject any order in whole or in part. It is expected that delivery of the
certificates representing the Shares will be made against payment therefor at
the office of Hobbs Melville Securities Corp., 110 Wall Street, New York, New
York 10005, on or about [________], 1998.
Hobbs Melville Securities Corp.
The date of this Prospectus is [________].
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING, SYNDICATE SHORT COVERING AND PENALTY BID TRANSCTIONS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and must be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless
otherwise indicated, (i) all dollar amounts in this Prospectus are stated in the
lawful currency of the United States, (ii) all information in this Prospectus
assumes no exercise of (A) the Underwriter's over-allotment option as described
in "Plan of Distribution," (B) the Underwriter's Warrants or (C) any other
outstanding option or warrant to acquire shares of the Company's Common Stock,
(iii) all references to the Company shall include the subsidiaries of the
Company and (iv) all information in this Prospectus assumes the consummation of
the Major Auto Acquisition described in "Planned Acquisition" and that all of
the manufacturers have consented thereto.
The Company
The Company was incorporated in November 1995 under the laws of the State
of Nevada. The address of the Company's principal executive and administrative
office is 80-02 Kew Gardens Road, Kew Gardens, New York 11415. Its fiscal year
end is December 31.
Fidelity Holdings, Inc. (the "Company") derives revenues from its
operating subsidiaries, which are grouped into three divisions: (i) Computer
Telephony and Telecommunications; (ii) Leasing; and (iii) Plastics and Utility
Products. The proposed Major Auto Acquisition will add a fourth, Automotive
Sales.
The Company's Computer Telephony and Telecommunications division currently
develops, manufactures, markets, sells and services two product lines. The first
product line utilizes "Talkie" technology, which consists of proprietary
computer software and hardware that (i) permits end users of the technology to
place long-distance international telephone calls at discounted rates and (ii)
offers end users a broad range of interactive voice-response applications such
as voice-mail, automatic receptionist, automated order entry, conference calling
and faxing. The second product line, "Business Control Software," is a
proprietary computer software system that provides multi-lingual general
accounting and business management applications.
The Company's Leasing division provides lease financing for motor vehicles
and the Company intends to expand the operations of such division to provide
lease financing to purchasers of certain of the Company's Computer Telephony and
Telecommunications division's products.
The Company's Plastics and Utility Products division is currently
conducting research and development with respect to two products lines: (i) a
line of spa and bath fixtures for use in whirlpool baths, spas, tubs and
swimming pools and (ii) an armored conduit system for use by utility companies.
The Company anticipates commencing commercial sales of its spa and bath fixtures
by the second quarter of 1998.
The Company and its wholly-owned subsidiary Major Acquisition Corp. have
entered into a merger agreement with Major Automotive Group, Inc. ("Major
Auto") and its sole stockholder, Bruce Bendell, who is the Company's chairman
and the beneficial owner of approximately 39.7% of the Company's outstanding
Common Stock. Bruce Bendell owns all of the issued and outstanding shares of
common stock of Major Chevrolet, Inc. ("Major Chevrolet") and Major Subaru,
Inc. ("Major Subaru") and 50% of the issued and outstanding shares of common
stock of Major Dodge, Inc. ("Major Dodge") and Major Chrysler, Plymouth, Jeep
Eagle, Inc. ("Major Chrysler, Plymouth, Jeep Eagle"), which, collectively,
operate five franchised automobile dealerships. See "Risk Factors--Risks
Associated with the Company Generally--Conflicts of Interest."
Pursuant to the merger agreement, Bruce Bendell will contribute to Major
Auto all of his shares of common stock of Major Chevrolet, Major Subaru, Major
Dodge and Major Chrysler, Plymouth, Jeep Eagle. Major Acquisition Corp. will
then acquire from Bruce Bendell all of the issued and outstanding shares of
common stock of Major Auto in exchange for shares of a new class of the
Company's preferred stock. Harold Bendell, Bruce Bendell's brother, owns the
remaining 50% of the issued and outstanding shares of common stock of Major
Dodge and Major Chrysler, Plymouth, Jeep Eagle. Major Acquisition Corp. will
purchase Harold Bendell's shares for $4 million in cash under a stock purchase
agreement. See "Use of Proceeds."
3
<PAGE>
The preferred stock to be issued to Bruce Bendell will be called the
"1997-MAJOR Series of Convertible Preferred Stock." It will have voting rights
and will be convertible into the Company's Common Stock. The number of shares of
Common Stock into which the new class will be convertible is the greater of (i)
1.8 million shares and (ii) that number of shares that have a market value of
$6,000,000. The market value per share for this purpose will be the mean between
the closing bid and ask prices for the Common Stock over the 20 trading days
immediately prior to the date of issuance of the preferred stock. See
"Description of Securities--Preferred Stock." The foregoing acquisitions from
Major Auto and Harold Bendell are collectively referred to herein as the "Major
Auto Acquisition."
The merger agreement allocates the value of the consideration payable to
Bruce Bendell as follows: (i) 61% to Major Chevrolet; (ii) 5.8% to Major Subaru;
(iii) 16.6% to Major Dodge; and (iv) 16.6% to Major Chrysler, Plymouth, Jeep
Eagle. The stock purchase agreement allocates the value of the consideration
payable to Harold Bendell 50% to each of Major Dodge and Major Chrysler,
Plymouth, Jeep Eagle. The Major Auto dealerships were valued for purposes of the
proposed merger at eight times adjusted earnings before interest and taxes for
their respective 1996 fiscal years. Adjusted earnings includes officers'
salaries, expenses not directly related to operations, non-recurring legal
expenses and LIFO adjustments. The Company believes that the eight times
earnings multiple is a relatively common pricing/valuation convention in the
automobile industry.
The Company's Automotive Sales division, after completion of the proposed
Major Auto Acquisition described below, will be one of the largest-volume
automobile retailers in New York City. This division will own and operate the
following five franchised automobile dealerships in the New York metropolitan
area: (i) Chevrolet; (ii) Chrysler and Plymouth; (iii) Dodge; (iv) Jeep and
Eagle; and (v) Subaru. This division will also distribute General Motors
vehicles in Russia.
The Company's acquisition of Major Auto's franchised dealerships must be
consented to by the automobile manufacturers (the "manufacturers"). Major Auto
has requested such consents. To date, Subaru Distributors Corp. has consented to
the change in ownership of the Subaru dealership and General Motors Corporation
has consented to the change in ownership of the Chevrolet dealership. The
Company and Major Auto are still awaiting the consent of Chrysler Corporation to
the change in ownership of the Dodge, Chrysler, Plymouth, Jeep and Eagle
franchises.
The closing of the Major Auto Acquisition is presently scheduled for March
20, 1998. The parties have the right to agree to an earlier date. If the consent
of Chrysler Corporation has not been obtained by the scheduled closing date, the
Company can elect not to close, the parties can extend the closing date, or can
close with Major Auto only the dealership subsidiaries as to which
manufacturers' consents have been obtained. In the latter case, the
consideration payable at closing (shares of preferred stock to Bruce Bendell and
cash to Harold Bendell) will be reduced in accordance with the value allocations
described above. Also, in that event, the parties are obligated to use their
best efforts during the 90-day period following the closing to obtain the
missing consents. Should any not be obtained, the Company will not acquire the
relevant dealership. Also, in that event, the Company expects to pursue other
dealership acquisitions using the proceeds of this offering that would be
otherwise unapplied.
Unless the context otherwise requires, references in this Prospectus to the
business of Major Auto shall be deemed to include reference to the businesses of
Major Chevrolet, Major Subaru, Major Dodge and Major Chrysler, Plymouth, Jeep
Eagle.
4
<PAGE>
The Offering
Common Stock Offered by the
Company........................ 1,150,000 shares
Common Stock Offered by the
Selling Shareholders........... 300,000 shares
Shares of Common Stock to be
Outstanding After this
Offering(1).................... 8,327,700 shares
Use of Proceeds................. To finance (i) the acquisition from Harold
Bendell of 50% of the common stock of Major
Dodge and Major Chrysler, Plymouth, Jeep
Eagle, (ii) continued research and
development in the Company's Plastics and
Utility Products division, the development
and testing of prototypes of spa and bath
fixtures, the commercial production of
certain spa and bath fixtures and
establishment of office facilities, (iii)
continued research and development activities
of its Computer Telephony and
Telecommunications division and for the
general corporate and working capital needs
of that division's research and development
subsidiary, (iv) the commencement of
operations by the service subsidiary in the
Company's Computer Telephony and
Telecommunications division and (v) the
Company's general corporate and working
capital needs. See "Use of Proceeds."
NASDAQ Symbol................... "FDHG"
- -------------
(1) Excludes (i) an aggregate of 1,237,000 of the 1,287,000 shares of Common
Stock issuable upon the exercise of options and warrants outstanding as of
September 30, 1997, (ii) 495,800 shares of Common Stock reserved for
issuance under the Company's Employees Performance Recognition Plan, (iii)
an aggregate of at least 250,000 shares of Common Stock issuable upon
conversion of the Company's 1996-MAJOR Series of Convertible Preferred
Stock, (iv) an aggregate of at least 1,800,000 shares of Common Stock
issuable upon conversion of the Company's 1997-MAJOR Series of Convertible
Preferred Stock, (v) 115,000 shares of Common Stock issuable upon exercise
of the Underwriter's Warrant and (vi) 172,500 shares of Common Stock
issuable upon exercise of the Underwriter's over-allotment option.
Risk Factors
Investment in the shares of Common Stock offered hereby involves a high
degree of risk and immediate and substantial dilution from the price to the
public. See "Risk Factors" and "Dilution."
5
<PAGE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
Set forth below is certain summary financial information for the periods
and as of the dates indicated. This information is derived from, and should be
read in conjunction with, the financial statements of the Company and of Major
Auto, including the notes thereto, and the pro forma financial statements
appearing elsewhere in this Prospectus.
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<CAPTION>
Fiscal Year Ended December 31,
-------------------------------------
Fidelity Holdings, Inc.
Nov. 7, 1995 Pro Forma
(inception date Major Auto Combined
to Dec. 31, 1995) 1996 1996 1996
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues
Computer products and
telecommunications $ -0- $ 3,175 $ -0- $ 3,435
equipment
Automobile Division -0- -0- 144,692 144,692
Leasing Income -0- 259 -0- 951
Total Revenues -0- 3,434 144,692 149,078
Operating Expenses (2) 2,271 142,714 146,206
Net Income (Loss) (6) 676 316 468
Nine Months Ended September 30,
-------------------------------------------------
Fidelity Holdings, Pro Forma
Inc. Major Auto Combined
1996 1997 1997 1997
Statement of Operations Data:
Revenues
Computer products and
telecommunications $1,145 $2,752 $ -0- $ 2,752
equipment
Automobile Division -0- -0- 123,265 123,265
Leasing Income -0- 777 -0- 777
Total Revenues 1,145 3,529 123,265 126,794
Operating Expenses 1,295 2,662 120,225 123,041
Net Income (Loss) (176) 559 1,664 1,486
September 30, 1997
---------------------------
Pro Forma
Fidelity Holdings, Inc. Major Auto Combined
--------------------------- ------------ ---------------
Actual As Adjusted(1) Actual As Adjusted(2)
Balance Sheet Data:
Cash, cash equivalents and
short-term investments $ 187 $ 6,024 $ 825 $ 2,850
Total assets 9,086 14,923 28,264 46,812
Total liabilities 2,545 2,545 25,889 28,434
Retained earnings 1,229 1,229 1,468 1,229
Stockholders' equity 6,540 12,378 2,375 18,378
</TABLE>
- --------------------
(1) Adjusted to reflect the sale of 1,150,000 shares of Common Stock offered by
the Company hereby at the offering price set forth on the cover page of this
Prospectus (after deducting underwriting discounts and commission and
estimated offering expenses) and the receipt by the Company of proceeds from
the exercise of the Selling Shareholders' Warrants. See "Use of Proceeds"
and "Capitalization."
(2) Reflects the consummation of the Major Auto Acquisition.
6
<PAGE>
RISK FACTORS
In investment in the shares of Common Stock offered hereby involves a high
degree of risk and is speculative in nature. Prospective investors should
carefully consider the following risk factors, as well as others described
elsewhere in this Prospectus, relating to the business of the Company and this
offering. The discussion below highlights some of the more important risks
regarding the Company and this offering. The risks highlighted below should not
be assumed to be the only things that could affect future performance. In
addition, the discussion in this Prospectus regarding the Company and its
business and operations contains "forward-looking statements." Such statements
consist of any statement other than a recitation of a historical fact and can be
identified by the use of forward-looking terminology such as "may," "expect,"
"anticipate," "estimate" or "continue" or the negative of any thereof or other
variations thereon or comparable terminology. Prospective investors are
cautioned that all forward-looking statements are necessarily speculative and
there are certain risks and uncertainties that could cause actual events or
results to differ materially from those referred to in such forward-looking
statements. The Company does not have a policy of updating or revising
forward-looking statements and thus it should not be assumed that silence by
management of the Company over time means that actual events or results are
occurring as estimated in such forward-looking statements.
Risks Associated with the Company Generally
Consent of Automobile Manufacturers to Acquisition of Major Auto
Dealerships
Major Auto is required to obtain the consents of the respective automobile
manufacturers with whom it has entered into franchised dealerships (the
"manufacturers") to any change in the ownership of the respective franchises. In
addition, General Motors Corporation has a right of first refusal with respect
to the proposed transfer of the Chevrolet franchise. Major Auto has requested
their respective consents. To date, Subaru Distributors Corp. has consented to
the change in ownership of the Subaru dealership and General Motors Corporation
has consented to the change in ownership of the Chevrolet dealership. The
Company and Major Auto are still awaiting the consent of Chrysler Corporation to
the change in ownership of the Dodge, Chrysler, Plymouth, Jeep and Eagle
franchises. There can be no assurance that Chrysler Corporation, with respect to
the Dodge, Chrysler, Plymouth, Jeep and Eagle franchises, will consent to the
change in ownership, or that, if Chrysler Corporation determines not to consent,
it will not attempt to prevent such acquisition, terminate franchises, refuse to
renew franchises or take other actions that could have a material adverse effect
on the Company's business, financial condition or results of operations. See
"Description of Business--Automotive Sales Division--Relationships with
Manufacturers."
The closing of the Major Auto Acquisition is presently scheduled for March
20, 1998 (or such earlier date to which the parties may agree), and is subject
to the receipt of the relevant manufacturers' respective approvals. If not
obtained, the Company may elect not to close, the parties can extend the closing
date, or can close with Major Auto owning only the dealership subsidiaries as to
which manufacturers' consents have been obtained. In the latter case, the
consideration payable at closing (shares of preferred stock to Bruce Bendell and
cash to Harold Bendell) will be reduced in accordance with the value allocations
described under "Planned Acquisition" below. Also, in that event, the parties
are obligated to use their best efforts during the 90-day period following the
closing to obtain the missing approvals. Should any not be obtained, the Company
will not acquire the relevant dealership. Also, in that event, the Company
expects to pursue other dealership acquisitions using the proceeds of this
offering that would be otherwise unapplied. See "Planned Acquisition."
Bruce and Harold Bendell will each own 50 shares of the Company's
1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock. Bruce Bendell has a
proxy to vote the 50 shares of the 1997A-MAJOR AUTOMOTIVE GROUP Series of
Preferred Stock owned by Harold Bendell for a seven-year period commencing on
January 7, 1998. These shares carry a limited and special voting right that
allows the Bendell brothers to elect a majority of the directors of Major Auto
(and, should the Company later have other affiliates engaged in the operation of
automobile dealerships, those affiliates as well). The 1997A-MAJOR AUTOMOTIVE
GROUP Series of Preferred Stock has been issued to help facilitate receipt of
the required manufacturers' consents with respect to the transfer of the Major
Auto dealerships in part to demonstrate continued control of the Major Auto
dealerships by Bruce and Harold Bendell. There is no assurance that these
additional corporate governance arrangements will be accepted by the
manufacturers. See "Description of Securities--Preferred Stock--Company's
1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock."
7
<PAGE>
Dependence on Management
The Company's future performance depends in significant part upon the
continued service of Bruce Bendell, its Chairman, and Doron Cohen, its
President, Chief Executive Officer and Treasurer. The loss of either Mr.
Bendell or Mr. Cohen could have an adverse effect on the Company. While the
Company has a consulting agreement with Mr. Bendell and an employment agreement
with Mr. Cohen, both such agreements expire on December 31, 1998 and such
agreements restrict Mr. Bendell and Mr. Cohen from competing with the Company
only for limited periods of time and under limited circumstances. The Company
does not maintain key-man life insurance on either Mr. Bendell or Mr. Cohen.
See "Executive Compensation--Compensation of Directors" and "--Employment
Contracts and Termination of Employment, and Change in Control Arrangements."
Concentration of Voting Power; Anti-Takeover Provisions
After this offering, Doron Cohen will be the beneficial owner of
approximately 30.0% and Bruce Bendell will be the beneficial owner of
approximately 44.6% of the Company's Common Stock (assuming no exercise of the
Underwriter's over-allotment option). Mr. Bendell will also have a two-year
proxy to vote an additional 1,250,000 shares (750,000 of which are legally owned
by Doron Cohen). This concentration of voting power will severely limit the
ability of other stockholders of the Company, including purchasers of the
Company's Common Stock in this offering, to elect directors or influence other
corporate decisions and may, among other things, have the effect of delaying or
preventing a change in control of the Company or preventing the Company's
stockholders from realizing a premium on the sale of their shares upon an
acquisition of the Company. See "Security Ownership of Certain Beneficial Owners
and Management."
The Company's Board of Directors has the authority to issue shares of
Preferred Stock and to determine the price, rights, preferences and privileges,
including voting rights, of those shares without any further action by the
Company's stockholders. The rights of holders of the Company's Common Stock will
be subject to and may be adversely affected by the rights of the holders of any
Preferred Stock. The Board of Directors has already designated and issued the
1996-MAJOR Series of Convertible Preferred Stock and has designated the
1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock and the 1997-MAJOR Series
of Convertible Preferred Stock, each of which series will be issued in
connection with the Company's acquisition of Major Auto. Any future designation
and issuance of Preferred Stock could have the effect of making it more
difficult for a third party to acquire control of the Company. The Company is
also subject to the provisions of the Nevada General Corporation Law regulating
business combinations, takeovers and control share acquisitions, which also
might hinder or delay a change in control of the Company. Anti-takeover
provisions that could be included in the Preferred Stock when designated and
issued and the Nevada statutes can have a depressive effect on the market price
of the Company's Common Stock and can prevent the Company's stockholders from
realizing a premium on the sale of their shares by discouraging takeover and
tender offer bids. In addition, under the dealer agreement that the Company will
enter into with General Motors following the Major Auto Acquisition, the Company
may be at risk of losing the Chevrolet franchise if any person or entity
acquires 20% or more of the Company's voting stock without the approval of
General Motors. See "Description of Securities--Preferred Stock,"
"--Anti-Takeover Provisions" and "Description of Business--Automotive Sales
Division--Relationship with Manufacturers."
As noted above, Bruce and Harold Bendell will retain the right to elect a
majority of the directors of Major Auto (and possibly other affiliates in the
future) and also will have control over the day-to-day operations of Major Auto
by virtue of a Management Agreement. See "--Consent of Automobile Manufacturers
to Acquisition of Major Auto Dealerships," "Description of Securities--Preferred
Stock--1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock" and "Certain
Relationships and Related Transactions." Should the Board of Directors of Major
Auto and the Company disagree as to a particular course of action, the Board of
Directors of Major Auto will nonetheless be able to take that action,
notwithstanding the objection of the Company. Conflicts could arise between the
Board of Directors of the Company and the Board of Directors of Major Auto as to
the appropriate course of action to be taken in the future. The Management
Agreement does prohibit certain actions from being taken without the prior
approval of the Company's Board of Directors, including, (i) disposition of any
of the Major Auto dealerships, (ii) acquisition of new dealerships, and (iii)
the Company incurring liability for Major Auto indebtedness. Should either of
the Bendell brothers cease managing the dealerships, the
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management agreement provides that ownership of his 1997A-MAJOR AUTOMOTIVE GROUP
Series of Preferred Stock shares and his management rights under the management
agreement will be automatically transferred to the other, and should both
brothers cease managing the dealerships for any reason, the shares and
management rights will be automatically transferred to a successor manager
designated in a successor addendum to each dealership agreement or, failing such
designation, to a successor manager designated by the Company (subject to
approval by the applicable manufacturers). See "Certain Relationships and
Related Transactions." The Company will have the right to redeem the shares of
the 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock under certain limited
circumstances. See "Description of Securities--Preferred Stock-- Company's
1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock."
Conflicts of Interest
The Company has entered into, or contemplates that it may enter into,
several transactions with its Chairman and controlling stockholder, Bruce
Bendell, and/or his brother Harold Bendell. Such transactions include the
following:
(i) the Company in 1996 acquired from the Bendell brothers its subsidiary
Major Fleet. In exchange, the Bendell brothers received (a) shares of the
Company's 1996-MAJOR Series of Convertible Preferred Stock, (b) warrants that
carry registration rights and (c) the right to manage the operations of the
Company's Major Fleet subsidiary pursuant to a management agreement. See
"Description of Securities--Preferred Stock," "Description of
Securities--Warrants" and "Certain Relationships and Related Transactions;"
(ii) the Company plans to make the Major Auto Acquisition. Bruce and
Harold Bendell will receive shares of the Company's 1997A-MAJOR AUTOMOTIVE
GROUP Series of Preferred Stock in that transaction and Bruce Bendell has a
proxy to vote the 50 shares of the 1997A-MAJOR AUTOMOTIVE GROUP Series of
Preferred Stock owned by Harold Bendell for a seven-year period commencing on
January 7, 1998. These shares will allow the Bendell brothers to elect a
majority of the directors of Major Auto. The Bendell brothers will also be
parties to a management agreement with Major Auto that will give them control
over its day-to-day operations. See "--Consent of Automobile Manufacturers to
Acquisition of Major Auto Dealerships," "Planned Acquisition," "Description
of Securities--Preferred Stock--1997A-MAJOR AUTOMOTIVE GROUP Series of
Preferred Stock" and "Certain Relationships and Related Transactions;"
(iii) The Company and Mr. Bendell are currently negotiating a letter of
intent concerning the Company's acquisition of Oyster Bay Nissan, a
dealership majority-owned by Mr. Bendell. See "Description of
Business--Growth Strategy;" and
(iv) Bruce and Harold Bendell, or entities controlled by them, lease
certain properties, as landlord, to certain of the Major Auto dealerships.
The Company will assume such leases, as tenant, upon completion of the Major
Auto Acquisition. See "Description of Property" and "Certain Relationships
and Related Transactions."
These transactions may involve situations in which Mr. Bendell's interests
as a director and shareholder of the Company conflict with his or his brother
Harold's interests as the Company's counterparty.
Risks Associated with Expansion
The Company's future growth will depend, in part, on its ability to acquire
additional automobile dealerships after the consummation of the Major Auto
Acquisition. In pursuing a strategy of acquiring additional dealerships, the
Company will face risks commonly encountered with growth through acquisitions.
These risks include incurring significantly higher capital expenditures and
operating expenses, failing to assimilate the operations and personnel of the
acquired dealerships, disrupting the Company's ongoing business, dissipating the
Company's limited management resources, failing to maintain uniform standards,
controls and policies, and impairing relationships with employees and customers
as a result of changes in management. There can be no assurance that the Company
will be successful in overcoming these risks or any other problems encountered
with such acquisitions.
In addition, acquiring additional dealerships, as the Company intends, will
have a significant impact on the Company's financial condition and could cause
substantial fluctuations in the Company's quarterly and annual operating
results. Acquisitions could result in significant goodwill and intangible
assets, which are likely to result in substantial amortization charges to the
Company that would reduce stated earnings.
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Lack of Independent Directors
Upon completion of this offering, only one of the Company's directors will
not be an employee of the Company and there can be no assurance that the
Company's Board of Directors will have a majority of independent directors in
the future. In the absence of a majority of independent directors, the Company's
executive officers, who are also principal stockholders and directors, could
establish policies and enter into transactions without independent review and
approval thereof. This could present the potential for a conflict of interest
between the Company and its stockholders generally and the controlling officers,
stockholders or directors.
Shares Eligible for Future Sale; Exercise of Options and Warrants;
Registration Rights
Immediately following this offering, there will be an aggregate of
8,327,700 shares of Common Stock outstanding (8,500,200 shares if the
Underwriter's over-allotment option is exercised in full). A minimum of (i) an
additional 2,050,000 shares of Common Stock will be issuable in the event of the
conversion of the unconverted balance of the Company's 1996-MAJOR Series of
Convertible Preferred Stock and 1997-MAJOR Series of Convertible Preferred Stock
and (ii) 1,077,000 shares of Common Stock will be issuable upon the exercise of
the Company's outstanding options and warrants. Of these shares, the 1,450,000
shares of Common Stock (1,622,500 if the Underwriter's over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are held by an
"affiliate" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Affiliate"). The remaining 6,877,700 shares were or will be
sold by the Company in reliance on exemptions from the registration requirements
of the Securities Act and are "restricted" securities within the meaning of Rule
144 under the Securities Act (the "Restricted Shares"). Restricted Shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144 promulgated under the Securities Act.
The Company and its officers and directors have agreed with the Underwriter
not to sell, offer to sell, issue, distribute or otherwise dispose of any of
their Restricted Shares for a period of one year from the date of this
Prospectus (subject to certain limited exceptions) without the prior written
consent of the Underwriter. Following such one-year period, such Restricted
Shares, as well as any shares of Common Stock sold in this offering to
Affiliates, will be eligible for sale in the public market, subject to the
conditions and restrictions of Rule 144 and other applicable laws.
The sale of a substantial number of shares of Common Stock in the public
market following this offering, or the perception that such sales could occur,
could adversely affect the market price for the Common Stock and impair the
Company's ability to raise additional capital in the future through the sale of
equity securities should it desire to do so. See "Security Ownership of Certain
Beneficial Owners and Management," "Market for Common Equity and Related
Stockholder Matters--Shares Eligible for Future Sale" and "Plan of
Distribution."
Holders of the Company's outstanding options and warrants are likely to
exercise them when, in all likelihood, the Company could obtain additional
capital on terms more favorable than those provided in the options and warrants.
The Company's ability to obtain additional financing may also be adversely
affected by its obligation to register shares of Common Stock under the
Securities Act. Castle Trust and Management Services Limited, as Trustee under
the Millenium Trust created under that certain Deed of Settlement dated October
2, 1996, the principal beneficiary of which is Bruce Bendell, has the right (on
an unlimited number of occasions) to require the Company to register all or any
portion of the Common Stock (a minimum of 250,000 shares) into which the 125,000
shares of the Company's 1996-MAJOR Series of Convertible Preferred Stock is
convertible (the "1996 Demand Shares"). In addition, Bruce Bendell has the right
to require the Company (on an unlimited number of occasions) to require the
Company to register all or any portion of the 50,000 shares of Common Stock
underlying a warrant held by him (the "Warrant Demand Shares"). Further, if the
Company registers any shares of Common Stock, it will have to offer to include
the 1996 Demand Shares, the Warrant Demand Shares and the shares of Common Stock
(a minimum of 1.8 million shares) into which the 1997-MAJOR Series of
Convertible Preferred Stock, to be issued to Bruce Bendell in the Major Auto
Acquisition, is convertible. The Company must make the same offer to Ronald
Shapss, a consultant to the Company, in respect of 50,000 shares of Common Stock
owned by him and a further 50,000 shares of Common Stock subject to options held
by him. See "Description of Securities--Warrants," "--Preferred Stock" and
"Market for Common Equity and Related Stockholder Matters -- Registration
Rights."
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Lack of Dividends
The Company has never declared dividends on any class of its securities
and has no present intention to declare any dividends on any class of its
securities in the future. See "Market for Common Equity and Related Stockholder
Matters--Dividends."
Cost and Availability of Capital
After the consummation of the Major Auto Acquisition, the Company's new and
used automobile sales will continue to require significant capital resources.
The Company's future operating results will be directly related to the
availability and cost of its capital. The principal sources of financing for the
Major Auto's new and used automobile inventories have historically been lines of
credit from banks and other financial institutions and from cash generated from
operations. There can be no assurance that the Company will be able to continue
to obtain capital for its current or expanded operations on terms and conditions
acceptable to the Company.
The Company's strategy of growth through the acquisition of additional
dealerships will require substantial capital. The Company's expansion and new
acquisitions may involve cash, incurring debt or issuing equity securities,
which could have a dilutive effect on the then outstanding capital stock. The
Company may seek to obtain funds through borrowings from institutions or by the
public or private sale of its securities subsequent to this offering. There can
be no assurance that the Company will be able to obtain capital to finance its
growth on terms and conditions acceptable to the Company.
Legal Proceedings
The Company and its wholly-owned subsidiaries Computer Business Sciences
and Info Systems are plaintiffs in a legal action against Michael Marom and M.M.
Telecom, Corp. The plaintiffs claim damages of $5,000,000 for breach of
contract, libel, slander, disparagement, violation of copyright laws, fraud and
misrepresentation. The defendants have counterclaimed for damages of $50,000,000
for breach of contract and violation of the Lanham Act.
The Company and its wholly-owned subsidiary Computer Business Sciences are
plaintiffs in a legal action against Network America, Inc. The plaintiffs claim
damages of $1,000,000 for breach of contract, misrepresentation, fraud and
tortious interference with the Company's business and operations. The defendants
have counterclaimed for damages of $2,000,000 for the Company's alleged
misappropriation of proprietary information and violation of a Non-Competition
Agreement entered into by the parties to the litigation.
While the Company believes that the its asserted claims have merit and that
it has substantial defenses to the asserted counterclaims, a judgment against
the Company and its subsidiaries with respect to either action could have a
material adverse effect on the Company's financial condition. See "Legal
Proceedings."
Risks Associated with this Offering
Possible Reallocation of Net Proceeds
Approximately 70% of the net proceeds of this offering are intended to be
applied as payment to Harold Bendell for his shares in the corporations
operating Major Auto's Dodge, Chrysler, Plymouth, Jeep and Eagle dealerships.
Transfer of those dealerships to the Company requires that the relevant
manufacturers' approvals be obtained. Should these not be obtained (and the
manufacturers are not obligated to give their approval), a large portion of the
proceeds of this offering would be allocated for other dealership acquisitions
by the Company. See "Use of Proceeds."
Dilution
A purchaser of the Company's Common Stock in this offering will experience
immediate and substantial dilution of $5.64 per share ($5.54 per share if the
Underwriter's over-allotment option is exercised in full) in that the offering
price exceeds the net tangible book value of the Company after giving effect to
the offering. See "Dilution."
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Underwriter's Limited Offering Experience
The Underwriter has been in business since May 1996. The Underwriter has
co-managed one other offering of securities and is currently managing one other
offering. There can be no assurance that the Underwriter's limited underwriting
experience and small size relative to other broker-dealers will not adversely
affect this offering or the subsequent development, if any, of a trading market
for the Company's Common Stock. See "Plan of Distribution."
Arbitrary Offering Price
The offering price of the Shares offered by the Company hereby was
determined by negotiation between the Company and the Underwriter and does not
necessarily bear any relationship to the assets, book value, results of
operations or other established criteria of value, and may not be indicative of
prices that will prevail in any trading market. See "Plan of Distribution."
Risks Associated with the Company's Computer Telephony and Telecommunications
Division
Rapid Technological Change
The computer and telecommunications industries are undergoing rapid
technological changes. The success of the Company's Computer Telephony and
Telecommunications division will depend upon its ability to understand and
utilize changing technology to keep its products competitive. Failure to develop
and introduce new products or enhancements to its existing products in a timely
fashion could result in product obsolescence, diminished market acceptance of
its products and a loss of business, which could have a material adverse effect
on the Company's business, financial condition and results of operations. See
"Description of Business--Computer Telephony and Telecommunications
Division--Talkie."
Competition
The products sold by the Company's Computer Telephony and
Telecommunications division presently face either limited or no direct
competition. However, the markets in which the Company's Computer Telephony and
Telecommunications division sells its products can be highly competitive. There
are at present no significant barriers to entry into such market. Many of the
producers of products that presently compete with the Company's products, as
well as companies wishing to enter the market in which the Company's products
compete, have well established reputations, customer relationships and marketing
and distribution networks. Many also have greater financial, technical,
manufacturing, management and research and development resources than those of
the Company, may be more successful than the Company in manufacturing and
marketing their products and may be able to use their greater resources and to
leverage existing relationships to obtain a competitive advantage over the
Company. There can be no assurance that the Company will continue to compete
effectively. See "Description of Business--Computer Telephony and
Telecommunications Division--Competition."
In addition, the master agents that purchase the Company's Talkie Power Web
Line Machine and resell the available telephone time may face increasing
competition as a result of deregulation in foreign countries, which could result
in competition from other service providers with large, established customer
bases, close ties to governmental authorities in their home countries and
decreased prices for direct-dialed international calls. Master agents' customers
could become unwilling to use the master agents' services, which would adversely
affect the Company's ability to sell the Talkie Power Web Line Machine and also
reduce the Company's income from its participation in its joint venture with
Nissko Telecom, L.P. described under "Description of Business--Computer
Telephony and Telecommunications Division--Talkie--Arrangements with Nissko."
Adverse Regulation
Government-owned monopolies operate the telephone systems of many of the
countries to which the Company's Talkie Power Web Line Machine is used to
provide telephone services. While the Company is not aware that any such action
is contemplated by any of these entities, there can be no assurance that in the
future one or more of them will not adopt regulations limiting or prohibiting
persons such as the Company's master agents from providing such services. The
effect of such regulation could be to reduce the Company's ability to sell the
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Talkie Power Web Line Machine and also to reduce the Company's income from its
participation in its joint venture with Nissko Telecom, L.P. described under
"Description of Business--Computer Telephony and Telecommunications
Division--Talkie--Arrangements with Nissko."
Risks Regarding International Operations
The master agents that purchase the Company's Talkie Power Web Line Machine
and purchasers of the Company's Talkie-Globe system use the Company's products
to provide services to foreign countries. These purchasers of the Company's
products will be subject to the risks associated with international operations,
including unexpected changes in legal and regulatory requirements such as those
described in the preceding paragraph, changes in tariffs, exchange rates and
other barriers, political and economic instability, difficulty in accounts
receivable collection, longer payment cycles, difficulty in maintaining and
repairing equipment abroad, possible confiscation of equipment and potentially
adverse tax consequences. The realization of these risks by purchasers of the
Company's Talkie products could adversely affect the ability of the Company to
sell its Talkie products and could reduce the Company's income from its
participation in its joint venture with Nissko Telecom, L.P. described under
"Description of Business--Computer Telephony and Telecommunications
Division--Talkie--Arrangements with Nissko."
Risks Associated with the Company's Plastics and Utility Products Division
Uncertainty of Market Acceptance
Although the Company believes that the products being developed by its
Plastics and Utility Products division offer certain advantages over competitive
products, there can be no assurance that such products will attain a sufficient
level of market acceptance for such division to become profitable. In addition,
with respect to the Company's spa and bath fixtures and related installation
method, although the Company has received indications from several manufacturers
and producers of whirlpool baths, spas and tubs that they will purchase the
Company's fixtures, they are not obligated to do so. No assurance can be given
that such manufacturers and producers will make such purchases initially, or if
they do, that they will be sufficiently satisfied with such fixtures to continue
making such purchases.
Proprietary Rights; Risk of Infringement
The success of the Company's Plastics and Utility Products division will
depend in part upon the strength of its patents and its ability to operate
without infringing the proprietary rights of others. The Company has two United
States patents and one Canadian patent application relating to the armored
conduit technology and has filed an application for a United States patent
relating to its spa and bath fixtures and related installation method. The
Company has also filed two applications relating to the spa and bath fixtures
and related installation method under the Patent Cooperation Treaty designating
Australia, Canada, China, Japan and the European Patent Office (up to 18
countries) as recipient countries. Under such treaty, the Company will have the
option to individually file separate applications in the designated countries at
an appropriate future date. There can be no assurance that the Company will
choose to file such separate applications or that any of the Company's
applications for patents will be granted. Nor can there be any assurance that
any patents that issue from such applications or the Company's issued patents
will not be challenged and, if challenged, will be upheld. Nor can there be any
assurance that issued patents will provide the Company with a significant
competitive advantage. See "Description of Business--Plastics and Utility
Products Division--Intellectual Property."
Moreover, the Company may be required to defend a claim of infringement or
to institute litigation to prevent infringement. The costs of such litigation,
even if the Company is successful, can be substantial and may be beyond the
Company's financial capability. If the Company were unsuccessful in its defense
of an infringement claim, it could be liable for substantial damages and could
be enjoined from manufacturing or selling the infringing product or required to
obtain a license which may not be available on acceptable terms or at all.
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Risks Associated with the Company's Automotive Sales Division
Dependence on Automobile Manufacturers
Like other franchised new vehicle dealers, the Company will be
significantly dependent upon its relationships with, and the success of, the
manufacturers with whom it will have entered into franchised dealerships after
the completion of the Major Auto Acquisition. The Company will also be dependent
on the manufacturers to provide it with an inventory of new vehicles. The most
popular vehicles tend to provide Major Auto with the highest profit margin and
are the most difficult to obtain from the manufacturers. In order to obtain
sufficient quantities of these vehicles, the Company may be required to purchase
a larger number of less desirable makes and models than it would otherwise
purchase. Sales of less desirable makes and models may result in lower profit
margins than sales of more popular vehicles. If the Company is unable to obtain
sufficient quantities of the most popular makes and models, its profitability
may be adversely affected.
The Company's franchise agreements with the manufacturers, like those of
other franchised new vehicle dealers, will not grant it the exclusive right to
sell that manufacturer's vehicles within a given geographical area. Accordingly,
a manufacturer could grant another dealer a franchise to start a new dealership
or permit an existing dealer to relocate to a geographic location that would be
directly competitive with the Company. Such an event could have a material
adverse effect on the Company's business, financial condition and results of
operations.
As is typical of franchised new vehicle dealers, the success of the
Company's franchises will depend to a great extent on the success of the
respective manufacturers. The Company's success will therefore be linked to the
financial condition, marketing, vehicle demand, production capabilities and
management of the manufacturers. Events such as labor strikes or negative
publicity concerning a particular manufacturer could adversely effect the
Company. The Company has attempted to lessen its dependence on any one
manufacturer by acquiring Major Auto, who has entered into franchise agreements
with multiple manufacturers covering different physical locations. In addition,
the Company expects to be less dependent on the manufacturers than some other
franchised new car dealers through its acquisition of Major Auto's fleet and
used-vehicle sales business.
Automakers' Control Over Dealerships
Historically, manufacturers have exercised significant control over
dealerships through the terms and conditions of the franchise agreements
pursuant to which the Major Auto dealerships operate. These franchise agreements
restrict dealerships to specific locations and retain for the manufacturers
approval rights over changes in the dealerships' ownership and management. The
Company's ability to expand through the acquisition of new dealerships after the
completion of the Major Auto Acquisition will require the consent of the
manufacturers. The Company has been advised by General Motors that Major Auto
does not currently meet General Motors' criteria to allow acquisition of
additional General Motors' dealerships without seeking approval for each
acquisition. The effect of this is that should the Company determine to acquire
additional General Motors' dealerships in the future, it will be required to
obtain General Motors' approval on a case-by-case basis. While Major Auto's
acquisitions to date have been approved and Major Auto has not been materially
adversely affected by other limitations imposed by the manufacturers, there can
be no assurance that the Company will in the future be able to obtain necessary
approvals on acceptable terms or that it will not be materially adversely
affected by other limitations.
The franchise agreements between Major Auto and the manufacturers are for
fixed terms with no renewal obligation on the part of the manufacturers and
permit the manufacturers to terminate the agreements for a variety of causes.
The franchise agreements between the Company and the manufacturers will have
similar provisions. Major Auto has advised the Company that it believes that it
has been and is in material compliance with the terms of its franchise
agreements. While none of the manufacturers has terminated or failed to renew
its franchise agreement with Major Auto, any such termination or failure to
renew could have a material adverse effect on the Company and its business,
financial condition and results of operations. See "Description of
Business--Automotive Sales Division--Relationships with Manufacturers."
Competition
The automobile dealership business is highly competitive. Major Auto's
competitors include automobile dealers, private sellers of used vehicles, used
vehicle dealers, other franchised dealers, service center chains and independent
service and repair shops. Gross profit margins on the sale of new vehicles have
been decreasing over
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the past two decades and the used car market faces increasing competition from
independent leasing companies and from used vehicle "superstores" that may have
inventories that are larger and more varied than Major Auto's. Some of Major
Auto's competitors may be larger, have access to greater financial resources and
be capable of operating on smaller gross margins than Major Auto. There can be
no assurance that the Company will continue to compete effectively or that
manufacturers will not modify the historical automobile franchise system in a
manner that increases competition among dealers or market and sell their
vehicles through other distribution channels. See "Description of
Business--Automotive Sales Division--Competition."
Mature Industry; Cyclical Nature of Automobile Sales; Geographic
Concentration of Operations
The United States automobile industry is generally considered to be a
mature industry in which minimal growth is expected in unit sales of new
vehicles. In addition, the market for automobiles, particularly new vehicles, is
subject to substantial cyclical variation and has experienced significant
downturns characterized by oversupply and weak demand. Many factors affect the
automobile industry, including general and local economic conditions, taxes,
consumer confidence, interest rates, credit availability, and the level of
personal discretionary income. A material decrease in vehicle sales by the
Company from the historical level of vehicle sales achieved by Major Auto would
materially adversely affect its business, financial condition and results of
operations.
In addition, all of the Major Auto dealerships to be acquired by the
Company are located in the New York metropolitan area. While the Company may
pursue acquisitions outside of the New York metropolitan area, the Company
expects that its automotive operations will be concentrated in the New York
metropolitan area for the foreseeable future. As a result, the Company's results
of operations will depend substantially on general economic conditions and
consumer spending habits and preferences in the New York metropolitan area, as
well as various other factors, such as tax rates and applicable state and local
regulation. There can be no assurance that the Company will be able to expand
geographically or that any such expansion will adequately insulate it from the
adverse effects of local or regional economic conditions. See "Description of
Business--Automotive Sales Division--Growth Strategy."
Governmental Regulation
Major Auto's operations are, and after the completion of the Major Auto
Acquisition the Company's operations will be, subject to various Federal, state
and local laws and regulations including those relating to local licensing and
consumer protection. While Major Auto has advised the Company that it believes
that it maintains all requisite licenses and permits and that it is in
substantial compliance with all applicable laws and regulations, there can be no
assurance the Company or Major Auto will be able to continue to maintain all
requisite licenses and permits or to comply with applicable laws and
regulations, and its failure to do so could have a material adverse effect on
the Company's business, financial condition and results of operations. In
addition, the adoption of any new laws or regulations and the cost to the
Company of complying therewith, could have a material adverse effect on its
business, financial condition and results of operations.
In addition, as with automobile dealerships generally, and parts and
service operations in particular, Major Auto's business involves the use,
handling and contracting for recycling or disposal of hazardous or toxic
substances or wastes, including environmentally sensitive materials such as
motor oil, waste motor oil and filters, transmission fluid, antifreeze, freon,
waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing
agents, gasoline and diesel fuels. Accordingly, Major Auto is, and after the
completion of the Major Auto Acquisition the Company will be, subject to
Federal, state and local environmental laws governing health, environmental
quality, and remediation of contamination at facilities it operates or to which
it sends hazardous or toxic substances or wastes for treatment, recycling or
disposal. Major Auto has advised the Company that it believes that it is in
material compliance with all environmental laws and that such compliance will
not have a material adverse effect on its business, financial condition or
results of operations. However, environmental laws are complex and subject to
frequent change. There can be no assurance that compliance with amended, new or
more stringent laws, stricter interpretations of existing laws or the future
discovery of environmentally hazardous conditions will not require material
expenditures by the Company. See "Description of Business--Automotive Sales
Division--Governmental Regulation."
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PLANNED ACQUISITION
The Company and its wholly-owned subsidiary Major Acquisition Corp. have
entered into a merger agreement with Major Auto and its sole stockholder, Bruce
Bendell, who is the Company's Chairman and the beneficial owner of approximately
39.7% of the Company's outstanding Common Stock. Bruce Bendell owns all of the
issued and outstanding shares of common stock of Major Chevrolet and Major
Subaru and 50% of the issued and outstanding shares of common stock of Major
Dodge and Major Chrysler, Plymouth, Jeep Eagle, which, collectively, operate
five franchised automobile dealerships. See "Risk Factors--Risks Associated with
the Company Generally--Conflicts of Interest."
Pursuant to the merger agreement, Bruce Bendell will contribute to Major
Auto all of his shares of common stock of Major Chevrolet, Major Subaru, Major
Dodge and Major Chrysler, Plymouth, Jeep Eagle. Major Acquisition Corp. will
then acquire from Bruce Bendell all of the issued and outstanding shares of
common stock of Major Auto in exchange for shares of a new class of the
Company's preferred stock. Harold Bendell, Bruce Bendell's brother, owns the
remaining 50% of the issued and outstanding shares of common stock of Major
Dodge and Major Chrysler, Plymouth, Jeep Eagle. Major Acquisition Corp. will
purchase Harold Bendell's shares for $4 million in cash under a stock purchase
agreement. See "Use of Proceeds."
The preferred stock to be issued to Bruce Bendell will be called the
"1997-MAJOR Series of Convertible Preferred Stock." It will have voting rights
and will be convertible into the Company's Common Stock. The number of shares of
Common Stock into which the new class will be convertible is the greater of (i)
1.8 million shares and (ii) that number of shares that have a market value of
$6,000,000. The market value per share for this purpose will be the mean between
the closing bid and ask prices for the Common Stock over the 20 trading days
immediately prior to the date of issuance of the preferred stock. See
"Description of Securities--Preferred Stock."
The merger agreement allocates the value of the consideration payable to
Bruce Bendell as follows: (i) 61% to Major Chevrolet; (ii) 5.8% to Major Subaru;
(iii) 16.6% to Major Dodge; and (iv) 16.6% to Major Chrysler, Plymouth, Jeep
Eagle. The stock purchase agreement allocates the value of the consideration
payable to Harold Bendell 50% to each of Major Dodge and Major Chrysler,
Plymouth, Jeep Eagle. The Major Auto dealership were valued for purposes of the
proposed merger at eight times adjusted earnings before interest and taxes for
their respective 1996 fiscal years. Adjusted earnings includes officers'
salaries, expenses not directly related to operations, non-recurring legal
expenses and LIFO adjustments. The Company believes that the eight times
earnings multiple is a relatively common pricing/valuation convention in the
automobile industry.
The closing of the Major Auto Acquisition is presently scheduled for March
20, 1998. The parties have the right to agree to an earlier date. A condition to
the closing is that all manufacturers' approvals have been obtained. If this
condition remains unsatisfied on the scheduled closing date, the merger
agreement and the stock purchase agreement provide three alternatives: (i) the
Company can elect not to close, (ii) the parties may agree to extend the closing
date to provide additional time to obtain such approvals or (iii) the Company
may elect to consummate the Major Auto Acquisition with Major Auto owning, and
Harold Bendell selling, only those dealerships with respect to which the
manufacturers' approvals have been obtained. In the latter case, the number of
shares issuable to Bruce Bendell and the monetary amount payable to Harold
Bendell will be reduced in accordance with the value allocations described
above, but the parties are obligated to use their best efforts during the 90-day
period following the closing to obtain the missing approvals so that the
non-included dealership subsidiaries can be transferred to the Company at a
later time. To date, Subaru Distributors Corp. has consented to the change in
ownership of the Subaru dealership and General Motors Corporation has consented
to the change in ownership of the Chevrolet dealership. The Company and Major
Auto are still awaiting the consent of Chrysler Corporation to the change in
ownership of the Dodge and/or its Chrysler, Plymouth, Jeep and Eagle franchises.
If the consent of Chrysler Corporation is not obtained, the Company expects to
pursue other dealership acquisitions using the $2,000,000 or $4,000,000 of
dealerships proceeds of this offering that would be otherwise unapplied in that
event.
16
<PAGE>
POTENTIAL ACQUISITION
The Company has signed a Letter of Intent (the "Lichtenberg Letter of
Intent") with the shareholders of Lichtenberg Robbins Buick, Inc., d/b/a
Lichtenberg Buick, and Lichtenberg Motors, Inc., d/b/a Lichtenberg Mazda,
looking towards the acquisition by the Company or one of its wholly-owned
subsidiaries of all of the issued and outstanding common stock of Lichtenberg
Buick and Lichtenberg Mazda. The Lichtenberg Letter of Intent contemplates that
the parties will negotiate definitive documentation that will provide for such
acquisition for an aggregate purchase price equal to the pro forma after-tax
earnings of Lichtenberg Buick and Lichtenberg Mazda for the twelve months ending
December 31, 1996 multiplied by eight. Twenty-five percent of the purchase price
(but in no event less than $500,000) is to be payable in cash and the balance is
to be payable in Common Stock of the Company. Either party will have the right
to terminate the transactions contemplated by the Lichtenberg Letter of Intent
if, among other things, lower-than-expected earnings result in a purchase price
of less than $1.8 million. The definitive documentation is also expected to
provide that Peter Lichtenberg, who presently manages Lichtenberg Buick and
Lichtenberg Mazda, would continue to manage such dealerships after such
acquisition. The Company and the shareholders of Lichtenberg Buick and
Lichtenberg Mazda, including Peter Lichtenberg, are presently negotiating the
terms of a purchase contract relating to such acquisition. Based upon
preliminary financial and other information in the Company's possession relating
to the business and operations of Lichtenberg Buick and Lichtenberg Mazda, the
Company does not believe that such acquisition, if consummated, would have a
material impact on the financial position of the Company. In connection with the
proposed Major Auto Acquisition, the Company has been advised by General Motors
that Major Auto does not currently meet General Motors' criteria to allow
acquisition of additional General Motors' dealerships without seeking approval
for each acquisition. The effect of this is that should the Company determine to
acquire Lichtenberg Buick or other additional General Motors' dealerships in the
future, it will be required to obtain General Motors' approval on a case-by-case
basis.
The foregoing transaction is in the preliminary stages and is subject to
significant further negotiation and due diligence as part of the preparation and
execution of definitive agreements. There can be no assurance that this
transaction will occur.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,150,000 shares of Common
Stock offered by the Company hereby, assuming an initial public offering price
of $6.00 per share, are estimated to be approximately $5,775,000 ($6,706,500 if
the Underwriter's over-allotment option is exercised in full) after deducting
the estimated underwriting discounts and commissions and other offering expenses
payable by the Company. The Company currently intends to use the estimated net
proceeds of this offering as follows:
<TABLE>
<CAPTION>
Approximate
Anticipated Use of Net Proceeds Amount Percentage
- ------------------------------- ------------ -----------
<S> <C> <C>
To finance the acquisition from Harold Bendell of 50% of the common stock of
Major Dodge and Major Chrysler, Plymouth, Jeep Eagle ........................... $4,000,000 69.3%
To finance continued research in the Company's Plastics and Utility Products divi-
sion, the development and testing of prototypes of spa and bath fixtures, com-
mercial production of such fixtures and establishment of office facilities........ $ 533,000 9.2%
To finance continued research and development activities of its Computer Tele-
phony and Telecommunications division and for the general corporate and work-
ing capital needs of that division's research and development subsidiary $ 384,000 6.6%
To commence operations by the service subsidiary in the Company's Computer
Telephony and Telecommunications division ....................................... $ 75,000 1.3%
For working capital and general corporate purposes of the Company(1) ............ $ 783,000 13.6%
---------- ----
Total ........................................................................... $5,775,000 100%
========== ====
</TABLE>
- ---------------------
(1) In the event that the acquisition contemplated by the Lichtenberg Letter of
Intent is consummated, the Company intends to use substantially all of the
amounts designated for the Company's working capital and general corporate
purposes to finance the cash portion of such acquisition.
17
<PAGE>
The foregoing represents the Company's best estimate of the allocation of
the net proceeds of this offering, based upon the current status of its
operations and anticipated business plans. It is possible, however, that the net
proceeds of this offering will be reapportioned among the above categories or to
new categories, in response to, among other things, changes in the economic
climate or unanticipated complications, delays or expenses. In particular, in
the event that Chrysler Corporation does not approve the transfer to the Company
of Major Auto's Dodge franchise and/or its Chrysler, Plymouth and Jeep Eagle
franchises in connection with the Major Auto Acquisition and the Company
nevertheless elects to consummate the Major Auto Acquisition without acquiring
such franchises, the Company would allocate $2 million or $4 million of the net
proceeds of this offering to other purposes. In the event all or any portion of
the Major Auto Acquisition is not consummated, the Company expects to pursue
other dealership acquisitions using the proceeds of this offering that would be
otherwise unapplied in that event. The Company currently estimates that the net
proceeds of this offering, together with the Company's existing capital
resources, will be sufficient to meet the Company's liquidity and working
capital requirements for a period of at least twenty-four months from the
completion of this offering. The amount and timing of expenditures will be made
in the discretion of the Company's Board of Directors. Pending the application
of such proceeds, the Company will invest the net proceeds of this offering in
short-term, interest bearing securities.
DILUTION
The net tangible book value of the Company at September 30, 1997 was
$1,142,600 or $0.17 per share of Common Stock. Net tangible book value per share
represents the amount of total tangible assets of the Company less total
liabilities of the Company and the liquidation preference of outstanding
Preferred Stock, divided by the number of shares of outstanding Common Stock.
After giving effect to (i) the receipt and application of the estimated net
proceeds from the sale by the Company of 1,150,000 shares of Common Stock at an
assumed initial public offering price of $6.00 per share (after deducting
underwriting discounts and commissions and estimated offering expenses payable
by the Company); (ii) the receipt by the Company of proceeds from the exercise
of the Selling Shareholders' Warrants; and (iii) the consummation of the Major
Auto Acquisition, the net tangible book value of the Company at September 30,
1997 would have been approximately $3,005,063 or $0.36 per share of Common
Stock, representing an immediate increase in net tangible book value of $0.19
per share of Common Stock to the Company's existing shareholders and an
immediate dilution of $5.64 per share of Common Stock to investors in the
Offering. "Dilution" is determined by subtracting net tangible book value per
share after the offering from the offering price to investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share ....................................... $ 6.00
Net tangible book value per share, before this offering ................................. $ 0.17
Increase in net tangible book value per share attributable to new investors and the clos-
ing of the Major Auto Acquisition 0.19
Pro forma net tangible book value after this offering and the closing of the Major Auto -----
Acquisition ........................................................................... 0.36
------
Dilution per share to new investors ................................................... $ 5.64
======
</TABLE>
If the Underwriter's over-allotment option is exercised in full, the pro
forma net tangible book value per share of Common Stock after this offering
would be $0.46 per share, which would result in dilution to new investors of
$5.54 per share of Common Stock.
The foregoing dilution discussion assumes no exercise of warrants or
options and no conversion of shares of the 1997-MAJOR Series of Convertible
Preferred Stock into Common Stock or the 1996-MAJOR Series of Convertible
Preferred Stock into Common Stock after September 30, 1997, except for the
exercise of the Selling Shareholders' Warrants and the conversion of 125,000
shares of the 1996-MAJOR Series of Convertible Preferred Stock into 250,000
shares of Common Stock in connection with this offering. As of September 30,
1997, there were outstanding warrants to purchase an aggregate of 1,237,000
shares of Common Stock and the 1996-MAJOR Series of Convertible Preferred Stock
which is convertible into at least 500,000 shares of Common Stock. To the extent
additional outstanding warrants or options are exercised or additional shares of
the 1996-MAJOR Series of Convertible Preferred Stock are converted into Common
Stock, there will be further dilution to new investors.
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997 and as adjusted to give effect to (i) the sale of 1,150,000
shares of Common Stock offered hereby at an assumed public offering price of
$6.00 and after deducting underwriting discounts and commissions and estimated
offering expenses and the application of the estimated net proceeds of
$5,775,000 therefrom as described in "Use of Proceeds" and (ii) the consummation
of the Major Auto Acquisition. This table should be read in conjunction with
"Management's Discussion and Analysis" and the Financial Statements and Notes to
Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
At September 30, 1997
---------------------------
(in thousands, except share data)
Actual As Adjusted
---------- --------------
<S> <C> <C>
Shareholders' equity:
Shares of Preferred Stock, authorized, 2,000,000 shares of $.01 par value;
250,000 shares issued and outstanding (1,025,100 as adjusted) (1)
1996-MAJOR Series of Convertible Preferred Stock ..................... $ 2.5 $ 1.25
1997-MAJOR Series of Convertible Preferred Stock ..................... 0.0 9.00
1997A-MAJOR AUTOMOTIVE GROUP Series of Convertible
Preferred Stock ................................................... 0.0 0.00(2)
-------- -------------
Total Preferred Stock ............................................. 2.5 10.25
Shares of Common Stock; authorized, 50,000,000 shares of $.01 par
value; issued and outstanding, 6,877,700 shares at September 30,
1997 (8,327,700 shares, as adjusted) (3) .............................. 68.8 83.28
Additional paid-in capital ............................................. 5,240.4 17,055.72
Cumulative translation adjustment ....................................... 0.2 0.22
Retained earnings ...................................................... 1,228.6 1,228.59
-------- -------------
Total shareholders' equity and total capitalization ............... $6,540.5 $18,377.96
======== =============
</TABLE>
- ------------
(1) Includes the issuance of 900,000 shares of the 1997-MAJOR Series of
Convertible Preferred Stock and 100 shares of the 1997A-MAJOR AUTOMOTIVE
GROUP Series of Preferred Stock in connection with the Major Auto
Acquisition and the conversion of 125,000 shares of the 1996-MAJOR Series of
Convertible Preferred Stock into 250,000 shares of Common Stock in
connection with this offering.
(2) Includes the issuance of 100 shares of the 1997A-MAJOR AUTOMOTIVE GROUP
Series of Preferred Stock.
(3) Adjusted number of shares includes shares offered by the Company and the
Selling Shareholders in this offering. It does not include (i) an aggregate
of 1,237,000 of the 1,287,000 shares of Common Stock issuable upon the
exercise of options and warrants outstanding as of September 30, 1997, (ii)
495,800 shares of Common Stock reserved for issuance under the Company's
Employees Performance Recognition Plan, (iii) an aggregate of at least
250,000 shares of Common Stock issuable upon conversion of the Company's
1996-MAJOR Series of Convertible Preferred Stock, (iv) an aggregate of at
least 1,800,000 shares of Common Stock issuable upon conversion of the
Company's 1997-MAJOR Series of Convertible Preferred Stock, (v) 115,000
shares of Common Stock issuable upon exercise of the Underwriter's Warrant
and (vi) 172,500 shares of Common Stock issuable upon exercise of the
Underwriter's over-allotment option.
(4) Includes the receipt by the Company of $62,500 upon the exercise of the
Selling Shareholders' Warrants to acquire 50,000 shares of Common Stock for
$1.25 per share.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion of the operations, financial condition, liquidity
and capital resources of the Company and of Major Auto should be read in
conjunction with the Company's audited Consolidated Financial Statements and
related notes thereto, and with the Major Auto's audited Combined Financial
Statements and related notes thereto, included elsewhere in this prospectus.
This Prospectus also contains, in addition to historical information,
forward-looking statements that involve risks and uncertainty. The Company's
and/or Major Auto's actual results could differ significantly from the results
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include those discussed in "Risk Factors" as well
as those discussed elsewhere in this Prospectus.
Overview
The Company
The Company is a holding company whose primary purpose is the consolidation
of the retail automotive industry and the acquisition and development of
synergistic technological businesses to enhance its ability to sell automotive
and related products. Through its planned acquisition of Major Auto, the Company
will become one of the largest-volume retailers in New York City of new and used
vehicles.
The Company was incorporated in November, 1995. Its first full year of
operations was 1996. This was a year of growth which resulted from its
acquisition of several companies and from their subsequent activities.
Presently, the Company has three divisions: (i) Computer Telephony and
Telecommunications; (ii) Leasing; and (iii) Plastics and Utility Products. The
proposed Major Auto Acquisition will add a fourth, Automotive Sales.
Through its Computer Telephony and Telecommunications division, the Company
provides a broad range of telecommunications services. Included in its
telecommunications product lines are (i) its proprietary software which enables
consumers to place long-distance telephone calls at discounted rates and (ii)
its variety of sophisticated interactive voice response applications. This
division also developed, manufactures, markets and sells a proprietary computer
software system that provides multi-lingual accounting and business management
applications.
The Company's Plastics and Utility Products division currently consists of
a development-stage company which was acquired in 1996. Its proprietary products
include a line of spa and bath fixtures for use in whirlpool baths, spas, tubs
and swimming pools and a light-weight, structurally strong, prefabricated
conduit for underground electrical cables. As this division's products are still
under development, no commercial sales have as yet been made.
The operations of the Company's Leasing division consist of providing
leases and other financing. Such activities are directed primarily toward the
automotive vehicle market and are to be expanded to the purchasers of the
Company's telecommunications hardware products.
Major Auto
Major Auto is one of the largest-volume retailers in New York City of new
and used vehicles. It has the following five dealerships located in Queens, New
York: (i) Chevrolet; (ii) Chrysler and Plymouth; (iii) Dodge; (iv) Jeep and
Eagle; and (v) Subaru. Major Chevrolet was founded in 1957, and its President,
Bruce Bendell and brother, Harold Bendell, took control in 1985. Thereafter,
they acquired additional dealerships and began operating Major Chevrolet and its
affiliates as the Major Automotive Group.
Major Auto offers a broad range of products and services through its
dealerships. In addition to the sale of new and used cars and light trucks,
Major Auto provides vehicle financing, insurance, replacement parts and service
at each of its dealerships.
Major Auto's management's philosophy is to increase customer traffic by
offering new and used vehicles and a variety of complementary products at each
of its locations. It believes that offering numerous vehicle brands appeals to a
variety of customers, minimizes its dependence on any one manufacturer and
reduces its exposure to supply problems and product cycles.
20
<PAGE>
In addition, Major Auto has historically been a technological innovator in
its approach to selling cars. It has always been quick to understand and
implement new technology in order to enhance its relationships with customers.
Major Auto was one of the first dealerships to offer its customers a toll-free
number to call and to provide price quotes by facsimile. Similarly, it has been
a pioneer in using the World Wide Web to sell cars. Currently, Major Auto has
been using the Company's interactive voice response system (Talkie AutoCom) to
automatically allow customers to obtain and request information via the
telephone. Talkie AutoCom is currently being programmed for directions,
automated sales, product and order information and it will also be utilized to
maintain a list of parts on back order, and to schedule and confirm maintenance
appointments.
Major Auto has focused its efforts on increasing its market share in the
New York metropolitan area by: (i) generating customer loyalty by catering to
their specific needs for automotive products or services and (ii) increasing
vehicle sales volume by providing competitive sales prices. This has resulted in
significant volume increases in 1996.
Results of Operations -- Fiscal Year Ended December 31, 1996 and
Fiscal Year Ended December 31, 1995
The Company
Revenues. Inasmuch as 1996 was the first full year of operations for the
Company, all revenue increases resulted from the commencement of previously
planned activities and from companies acquired during that year.
Revenues from operating divisions are as follows:
Computer Telephony and Telecommunications................. $3,175,528
Leasing................................................... $ 258,947
Included in the Computer Telephony and Telecommunications division's sales
were $2,637,873 from the sale of hardware and $537,635 from the sale of
software.
Cost of sales. Cost of sales, aggregating $965,792 for the year ended
December 31, 1996 includes the direct costs of materials, labor and overhead
included in the Company's products sold through its Computer Telephony and
Telecommunications division.
Gross profit. The year 1996 was the first full year of operations for the
Company's Computer Telephony and Telecommunications division. Gross profit
for that division for the year ended December 31, 1996 aggregated $2,209,736
or 70.0% of sales. The Company anticipates that, over time, annual sales will
increase and greater operating efficiencies will be achieved through
experience, training and economies of scale. Management believes that as a
result, gross profit for the Company's Computer Telephone and
Telecommunications division will increase in terms of both dollars and
percentage of sales.
Selling, general and administrative expense. Selling, general and
administrative expenses, which amounted to $1,126,901 in 1996 ($2,042 in
1995), include payroll and related expense attributable to senior management
(although Mr. Bendell, Chairman, and Mr. Cohen, Chief Executive Officer,
President and Treasurer of Company waived compensation from the Company in
1996), finance, systems, sales, marketing and office administration,
personnel, facilities costs and general office expenses pertaining to these
functions, as well as outside professional fees. The increase in such
expenses between 1996 and 1995, which were $933,487 for the Computer
Telephony and Telecommunications division and $191,372 for the Leasing
division are attributable to the commencement of planned activities for the
former and the acquisition in October 1996 of the latter.
Interest expense. The increase in interest expense of $19,757 to $24,132
in 1996 from $4,375 in 1995 relates primarily to the debt used to finance the
vehicles and equipment leased by the Company's Leasing division which was
acquired in October 1996 and, to a lesser extent, to interest on debt due
from the acquisition of the Company's Computer Telephony and
Telecommunications division in April 1996.
Loss on joint venture. In March 1996, the Company's Computer Telephony
and Telecommunications division formed a joint venture (the "Nissko Joint
Venture") named Nissko Telecom, L.P., a limited partnership. The general
partner of Nissko Telecom, L.P. is one of the Company's master agents. The
Company
21
<PAGE>
has a 45% interest in the Nissko Joint Venture, whose purpose is to market
and sell the available telephone time generated by the Company's Talkie Power
Web Line Machines purchased by this master agent. Because 1996 was the
start-up year, the Nissko Joint Venture incurred expenses disproportionate to
its revenue generation and suffered from start-up inefficiencies. This
resulted in a loss to the Company of $32,410. Management of the Company
expects that, with the initial costs and start-up issues behind them, the
Nissko Joint Venture will become profitable for the Company.
Major Auto
Revenues. Combined total sales for all of the Major Auto dealerships in
1996 increased $26.2 million to $144.7 million or 22.1% from its 1995 sales
of $118.5 million. Total sales include new and used car sales, sales of parts
and accessories, automotive repairs and fees from finance and insurance
sales.
During 1996 Major Auto added its Subaru dealership to its combined
financial statements which accounted for approximately $5.6 million or 21.4%
of the total sales increase. The balance of the sales increase came from same
store sales which increased by approximately $20.6 million or 17.3%. The same
store sales increases for (i) Chevrolet, (ii) Dodge and (iii) Chrysler,
Plymouth, Jeep and Eagle ("CPJ/E") were $10.6 million, $4.2 million and $5.8
million, respectively, representing 52%, 20% and 28%, respectively, of the
total same store sales increase. Individually, the same store sales increases
represented an approximate 15%, 20% and 23% increase over prior years sales
for Chevrolet, Dodge and CPJ/E, respectively.
Cost of Sales. Cost of sales includes the dealers' cost for new vehicles
(on the LIFO basis) and used vehicles (on the specific identification basis).
Cost of sales also includes the costs of parts and materials used in repairs,
as well as the related direct labor and direct overhead costs. Major Auto's
cost of sales and profitability are also affected by the allocations of new
vehicles which its dealerships receive from automakers. When Major Auto does
not receive allocations of new vehicles adequate to meet customer demand, it
purchases additional vehicles from other dealers at a premium to the
manufacturers' invoice, reducing the gross margin realized on the sales of
such vehicles. In addition, Major Auto follows a disciplined approach in
selling vehicles to other dealers and wholesalers when the vehicles have been
in the Major Auto inventory longer than the guidelines set by Major Auto.
Such sales are frequently at or below cost and, therefore, affect Major
Auto's overall gross margin on vehicle sales.
The cost of sales for all of the Major Auto dealerships, aggregating
$129.4 million, increased by $24.6 million, or 24%, in 1996 over the
comparable 1995 costs of $104.7 million. The combining of the Subaru
dealership in 1996 accounted for $5.2 million or 21% of the increase. The
balance of the increase in cost of sales, $19.4 million, came from previously
combined stores. The same store cost of sales increase for Chevrolet, Dodge
and CPJ/E were approximately $10.1 million, $3.8 million and $5.5 million,
representing 52%, 20% and 28% of the total same store cost of sales increase,
respectively. Individually, the same store cost of sales increases were 16%,
21% and 25% for Chevrolet, Dodge and CPJ/E, respectively.
Gross profit. The resulting combined gross profit for all dealerships of
$15.3 million shows an increase of approximately $1.6 million, or 11.7%, in
1996 over the comparable 1995 amount of $13.7 million. Excluding the almost
$385,000 gross profit of the Subaru dealership, the combined same store gross
profit increased by approximately $1.2 million. The same store gross profit
increases generated by Chevrolet, Dodge and CPJ/E were approximately
$502,000, $328,000 and $353,000, respectively, representing 42%, 28% and 30%
of the same store total increase. Individually, the same store gross profit
increases were approximately 6%, 11% and 13% for Chevrolet, Dodge and CPJ/E,
respectively.
Gross profit as a percentage of sales for the combined group in 1996 was
10.6%, which represents a decrease of 1.0% from the combined gross profit
percentage of 11.6% in 1995. Excluding Subaru's gross profit, the same store
gross profit percentage for 1996 was 10.7%. On an individual dealership
basis, gross profits (and gross profit as a percentage of sales) for the
Chevrolet, Dodge and CPJ/E dealerships were $9.03 million (10.84%), $2.8
million (11.2%) and $3.1 million (10.1%). These amounts represent increases
of gross profit amounts for the individual dealerships as shown in the
preceding paragraph, but decreases in gross profit percentages of .88%, .69%
and .90% for the Chevrolet, Dodge and CPJ/E operations, respectively.
22
<PAGE>
According to the National Automobile Dealers Association, in 1996, the
average dealership's gross profit as a percentage of sales was 12.9%. The
lower-than-average margins shown by Major Auto in 1996 is reflective of three
primary factors: (i) the costs of doing business in New York City, especially
labor costs and operating expenses, are higher than most other places in the
country; (ii) New York City is among the most competitive areas; and (iii)
Major Auto's policy has been to lower sales prices to increase market share
and to convert as many vehicle purchases to leases in order to secure future
profits on renewals and used car purchases.
Operating expenses. Operating expenses consist of all selling, general
and administrative expenses incurred in operating automotive dealerships.
This encompasses all executive, sales and administrative salaries and
commissions as well as advertising, facilities costs and outside professional
fees. The executive compensation includes incentives and discretionary bonus
paid to the owners, significant portions of which were paid in lieu of S
Corporation distributions to enable stockholders to meet their income tax
obligations.
Operating expenses increased by $1.9 million or 16.6% in 1996 to $13.3
million from the 1995 amount of $11.4 million. Of this increase,
approximately $400,000, representing about 21% of the increase, related to
the inclusion of the Subaru dealership in 1996. On a same store basis,
operating expenses increased by $1.5 million in 1996 to $12.9 million or
13.1%. As a percentage of revenue, on a same store basis, operating costs
declined from 9.7% to 9.3%. The decrease of operating costs as a percentage
of revenue between 1995 and 1996 is reflective of management's efforts to
maintain appropriate overhead levels while increasing market share by
emphasizing greater sales volume at lower prices.
Interest expense. Interest expense relates primarily to amounts paid on
floor plan borrowings, i.e., the monies borrowed to finance new car
inventories. Interest expense declined by almost $225,000 or 11.8% to
approximately $1.68 million in 1996 from $1.90 million in 1995. This
reduction is primarily attributable to management's policy of reducing
inventory levels, thereby minimizing the need for financing such assets.
Income before income taxes. The decline in income before income taxes
from $517,000 in 1995 to almost $422,000 in 1996, a decrease of $95,000 or
18.5%, is attributable to Major Auto's efforts to build market share while
temporarily sacrificing profit margins. Management carefully monitors profit
margins as well as market factors, industry developments, general economic
conditions and interest rates. It believes that it has the ability to control
Major Auto's rate of growth and move profit margins to appropriate levels to
adjust to changing conditions. As such, management is confident that Major
Auto's margins can be restored to satisfactory levels.
A new centralized computer system for all dealerships was installed in
December 1996. This is expected to result in increased earnings before income
taxes by giving all managers access to and control of inventories and
documents and to eliminate duplicate labor costs.
As Major Auto grows through acquisitions and internally, it is
anticipated that economies and efficiencies of scale, the ability to order in
economically advantageous quantities, and leverage with suppliers through
volume purchases will result in reduced expenses. Additionally, executive
compensation levels, as discussed above (see "Operating expenses"), are
expected to decrease as a result of Major Auto's acquisition by the Company.
Income taxes. Major Auto has elected to be taxed as an S Corporation
under provisions of the Internal Revenue Code and New York State Franchise
Tax Law. The stockholders are required to report Major Auto's taxable income
or loss on their personal tax returns. Accordingly, such taxes are not
reflected in Major Auto's financial statements. The taxes included in the
financial statements relate to New York State and New York City. The former
imposes a tax on the difference between the state corporate rates and the
state's individual rates and the latter does not recognize S Corporation
status.
23
<PAGE>
Results of Operations -- Nine-Month Period Ended September 30, 1997 and
Nine-Month Period Ended September 30, 1996
The Company
Revenues. Revenue for the nine-month period in 1997 increased by
$2,384,132 to $3,528,927. Revenue for the comparable period in 1996 was
$1,144,795. The sources for such increase were:
Computer Telephony and Telecommunications................. $1,607,461
Leasing................................................... $ 776,671
The 1997 amounts reflect a full nine months of operations for both divisions,
whereas in 1996 the Computer Telephony and Telecommunications division only
began operations during the second quarter and the Leasing division was not
acquired until the beginning of the fourth quarter.
Cost of sales. Cost of sales for the nine months ended September 30,
1997, all of which relates to the Computer Telephony and Telecommunications
division, was $622,398 compared with $434,802 in the 1996 period. This is an
increase of $187,596 or 43.2% and is reflective of nine full months of
operations in 1997 compared with operations which commenced in the second
quarter of 1996.
Gross profit. Gross profit for the Computer Telephony and
Telecommunications division in the 1997 period was $2,129,858 which
represented an increase of $1,419,865, or 200%, over the prior comparable
period's gross profit of $709,993. Additionally, gross profit as a percentage
of the related revenue increased to 77.4% in the 1997 period over the 62.0%
gross profit percentage in the comparable 1996 period. Both the dollar
increase and the gross profit percentage of revenues increases are reflective
of the significantly larger volume of sales and the concomitant reduction of
costs as a percentage of sales based on savings from economies of scale,
volume discounts and operating efficiencies.
Selling, general and administrative expense. Selling, general and
administrative expenses ("SG&A") increased a total of $945,264 to $1,805,210
in the 1997 period from $859,946 for the first nine months of 1996. Of this
increase $416,611 relates to the Computer Telephony and Telecommunications
division and $528,653 is from the Leasing division. SG&A for the Computer
Telephony and Telecommunications division increased from $859,946 for the
first nine months of 1996 (this division commenced operations in the second
quarter of 1996) to $1,276,567 for the first nine months of 1997, a 48.5%
increase. This increase is reflective of a full level of normal activity in
1997 compared with the start-up activities in 1996. The increase in selling,
general and administrative expense for the Leasing division in 1997 is the
result of a full nine months of activity in this division which was not
acquired until the fourth quarter of 1996.
Interest expense. Interest expense was $105,505 for the nine months ended
September 30, 1997 compared with $25,950 for the comparable period in 1996.
The increase of $79,555 relates primarily to the debt incurred to finance the
vehicles and equipment leased by the Company's Leasing division during the
current period. There was no comparable amount in the prior period.
Income on joint venture. Income from the Nissko Joint Venture was $53,668
for the nine months ended September 30, 1997. In the comparable prior period,
operations of this joint venture had not yet commenced.
Major Auto
Revenues. Combined total sales for all of the Major Auto dealerships in
the nine months ended September 30, 1997 increased $13.8 million to $123.3
million or 12.6% from their comparable 1996 sales of $109.5 million.
During the 1997 period, Major Auto included its Subaru dealership in its
combined financial statements for nine months. In 1996, this dealership was
included in the combined results beginning in the third quarter. The Subaru
dealership accounted for approximately $2.6 million of the total net sales
increase. The same store sales resulted in a net increase of $11.2 million,
with Chevrolet and increasing $11.2 million or 17.7% and CPJ/E increasing $.5
million, offset by a decrease of like amount in the Dodge dealership.
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Cost of sales. The cost of sales for all of the Major Auto dealerships,
in the period ended September 1997, aggregating $109.0 million, increased
$11.1 million, or $11.3%, over the comparable 1996 costs of $97.9 million.
The effect of the Subaru dealership for the full 1997 period accounted for
$2.4 million of the net increase. The same store cost of sales increase
(decrease) for Chevrolet, Dodge and CPJ/E were approximately ($8.3 million),
($500,000) and $830,000, respectively.
Gross profit. The resulting combined gross profit for all dealerships of
$14.3 million increased approximately $2.7 million, or 23.7%, in the 1997
period over the comparable 1996 amount of $11.5 million. $1.4 million of the
increase was due to the reduction in the LIFO inventory reserve. The
inclusion of the Subaru dealership for the entire nine-month period in 1997
contributed $182,000 to the gross profit increase. The balance of the gross
profit increase was comprised of a $2.9 million increase from the Chevrolet
dealership, partially offset by an aggregate decrease of ($310,000) from
Dodge and CPJ/E.
Gross profit as a percentage of sales for the combined group in the 1997
period was 11.57%, which represents an increase of 1.03% from the combined
gross profit percentage of 10.54% in the comparable 1996 period. Excluding
Subaru's gross profit the same store gross profit percentage for the nine
months ended September 30, 1997 was 11.84%. On an individual dealership
basis, gross profits (and gross profit as a percentage of sales) for the
Chevrolet, Dodge and CPJ/E dealerships were $9.1 million (12.29%), $2.32
million (12.71%) and $2.38 million (9.81%). These amounts represent increases
or (decreases) of gross profit amounts for the individual dealerships as
shown in the preceding paragraph and increases (decreases) in gross profit as
a percentage of sales of 2.36%, ($.30%) and (1.50%) for the Chevrolet, Dodge
and CPJ/E operations, respectively.
Operating expenses. Operating expenses increased by $1,191,036 or 11.87%
in the nine months ended September 30, 1997 to $11.2 million from the
comparable 1996 amount of $10.0 million. Of this increase, approximately
$90,000, representing approximately 7.65% of the increase, related to the
inclusion of the Subaru dealership in the full 1997 period. On a same store
basis, operating expenses increased by a net $1,100,874 in the 1997 period to
$10.8 million or 11.3%. As a percentage of revenue, on a same store basis,
operating expenses increased from 9.2% to 9.3%.
Interest expense. Interest expense declined approximately a net $50,000
or 3.8% to approximately $1.23 million for the nine months ended September
30, 1997 from $1.28 million in the comparable 1996 period. On a same store
basis, the decline in interest expense was approximately $68,000 or 5.4%,
from the comparable period the prior year.
Income before income taxes. The increase in income before income taxes
from $290,000 in the nine months ended September 30, 1996 to $1.91 million in
the 1997 period, represents a total increase of $1.63 million or 556% from
the prior year's nine months. $1.4 million (85%) of the increase was due to
the reduction in the LIFO inventory reserve. Excluding Subaru, income before
income taxes increased by $1.54 million or 475% from the comparable period in
the prior year.
Liquidity and Capital Resources -- December 31, 1996
The Company
After its initial investor financing during the first quarter of 1996, the
Company's primary source of liquidity was its cash flow from operations. Net
cash provided by operating activities in 1996 was $137,442 on net income of
$675,967 (net of non-cash charges of $725,433), offset by changes in working
capital of $1,263,958. Such changes in working capital are principally
attributable to (i) increases, by the Leasing division, in net financing leases
of $1,612,675 and (ii) increases, by the Computer Telephony and
Telecommunications division, in inventories, amounting to $1,173,082. These
increases were offset, in part, by the increase in amounts due to affiliates of
$1,184,177.
Net cash used in investing activities in 1996 was $815,962 and related,
primarily, to the acquisition of the Company's Computer Telephony and
Telecommunications division.
Cash flow generated from financing activities in 1996 aggregated
$1,213,679. The net proceeds from the issuance of common stock and the exercise
of warrants accounted for $984,000 of this amount.
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The Company, through its Leasing division, has arrangements with various
banks and automotive lenders to finance leased vehicles and equipment.
The Company believes that the funds generated from operations, together
with existing cash, available credit from banks and other lenders and the net
proceeds of this offering will be sufficient to finance its current operations,
planned expansion and internal growth for at least the next 24 months.
Major Auto
Major Auto's primary source of cash flow is from its operations. Cash from
operating activities in 1996 was $11.2 million compared with a net usage of cash
in operations of ($15.3) million the prior year. This turnaround in cash
provided by operating activities is primarily attributable to the significant
reduction in inventories from the excessively high level of $31.6 million in
1995 to $25.3 million in 1996 and, to a lesser extent, to the reduction in trade
receivables of approximately $3 million and the increase in customer deposits of
approximately $1.1 million.
Cash flow from investing activities in 1996 was approximately $161,000 and
related primarily to the decrease in the amount of lease and rental vehicles.
Financing activities used approximately $11.7 million in 1996. This was
primarily the result of the reduction of floor plan notes by $11.4 million which
is directly attributable to the decrease in inventory levels.
Major Auto's working capital deficit as of December 31, 1996 was
approximately ($2.9 million) compared with approximately ($3.8 million) at the
end of 1995.
Major Auto's significant need for funding is for the acquisition of
inventory. Chrysler Credit Corp. has historically provided such funding and is
expected to continue as the primary source for all of the makes and models of
vehicles sold by Major Auto.
Major Auto believes that the cash generated from operations, together with
existing cash and the availability of floor planning and other credit
availability from its current lenders will be sufficient to fund its expected
short-term and long-term cash requirements. The shareholders of Major Auto have
entered into a merger agreement providing for Major to be acquired by the
Company.
Liquidity and Capital Resources -- September 30, 1997
The Company
The Company's primary source of liquidity for the nine months ended
September 30, 1997 was $1,112,618 from its net income of $559,038, as adjusted
by net non-cash charges, which aggregated $553,590. This net increase in cash
was more than offset by (a) the net decrease in assets of $7,301 (resulting
primarily from an increase in accounts receivable of $1,138,502, primarily
attributable to the Computer Telephony and Telecommunications division as a
result of increased sales by that division, offset by a decrease in inventories
of $991,509 resulting primarily from sales of vehicles coming off lease in the
Leasing division) and (b) a net decrease in liabilities amounting to $1,444,987
(primarily attributable to decreases in due to affiliates of $1,277,704 and
accrued expenses of $405,362, partially offset by an increase in accrued income
taxes of $336,622). The net result was a use of cash in operating activities of
$339,660.
The Company's investing activities, i.e., additions to property and
equipment, primarily cars and trucks purchased for the Leasing division, used
cash of $465,644 which was significantly offset by $417,632 provided by the
Company's financing activities $653,750 from the proceeds from the exercise of
warrants to purchase common stock, offset by payments of $236,118 on long-term
debt.
The foregoing activities, i.e., operating, investing and financing,
resulted in a net cash decrease of $387,672 for the nine months ended September
30, 1997.
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Major Auto
In the nine months ended September 30, 1997, Major Auto's cash from its
operating activities was $7.2 million compared with a net increase of cash from
operations of $10.7 million for the comparable period in prior year. This
decrease in cash provided by operating activities is primarily attributable to
the increase in trade receivables and decrease in customer deposits in the 1997
period.
Cash flow from investing activities in the nine month 1997 period was
approximately $3.1 million compared with a net usage of $1.6 million in the
comparable 1996 period. This resulted primarily from the increase in lease and
rental vehicles.
Financing activities used approximately $10.6 million in cash in the
nine-month period ended September 30, 1997 compared with a use of cash of $8.9
million n the comparable prior period. This was primarily the result of the
decrease in the amounts due on floor plan notes, $10.6 million of which is
directly attributable to the increase in inventory levels.
Major Auto's working capital at September 30, 1997 was approximately $2.1
million compared with a working capital deficiency of almost ($2.9 million) at
September 30, 1996.
DESCRIPTION OF BUSINESS
Introduction
The Company was incorporated in Nevada on November 7, 1995. The Company is
a holding company, which means it has no operations and derives revenues from
operating subsidiaries. The operating subsidiaries of the Company are grouped
into three divisions: (i) Computer Telephony and Telecommunications; (ii)
Leasing; and (iii) Plastics and Utility Products. The proposed Major Auto
Acquisition will add a fourth, Automotive Sales. Unless otherwise indicated, all
references to the Company include reference to subsidiaries of the Company.
Automotive Sales Division
General
Major Auto, which the Company proposes to acquire (see "Planned
Acquisition"), is one of the largest-volume automobile retailers in New York
City. Major Auto owns and operates the following five franchised automobile
dealerships in the New York metropolitan area: (i) Chevrolet; (ii) Chrysler and
Plymouth; (iii) Dodge; (iv) Jeep and Eagle; and (v) Subaru. Major Auto also
distributes General Motors vehicles in Russia. Through its dealerships, Major
Auto sells new and used automobiles, provides related financing, sells
replacement parts and provides vehicle repair service and maintenance.
Major Auto's President, Bruce Bendell, has approximately 25 years
experience in the automobile industry. He began selling and leasing used
vehicles in 1972 and has owned and managed franchised automobile dealerships
since he acquired Major Auto's Chevrolet dealership in 1985. Under Mr. Bendell's
leadership, Major Auto has expanded from a single-franchise dealership having
approximately $10 million in revenues and 25 employees in 1985 to a
five-franchise dealership group having approximately $144 million in revenues
and 170 employees in 1996.
Industry Background
Automobile manufacturers distribute their new vehicles through franchised
dealerships. According to industry data from the National Association of
Automobile Dealers ("NADA data"), in 1996, total dollar sales, consisting of the
sale of all new and used vehicles and service and parts, of all franchised
new-car dealerships increased 8% to a record high of $491 billion. Franchised
dealerships located in the New York State had an average total dollar sales of
$17.2 million.
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According to NADA data, on average, new vehicle sales constitute 58.1% of a
franchised dealerships' total sales. Unit sales of new vehicles rose 3% in 1996
to a total of 15.1 million units sold. At an average retail selling price of
$21,750 per vehicle, new vehicle sales totaled approximately $328 billion in
1996. From 1992 to 1996 sales revenue from the sale of new vehicles increased
approximately 48.4%. The annual net profit of the typical United States
franchised dealer's new vehicle department is estimated to be $37,626.
According to NADA data, on average, used vehicle sales constitute 29.5% of
a franchised dealerships' total sales. In 1996, franchised new vehicle dealers
sold 11.8 million retail used vehicles. At an average selling price of $11,600
per vehicle, used vehicle sales totaled in approximately $170 billion in 1996.
From 1992 to 1996 sales revenue from the retail sale of used vehicles increased
approximately 77.2% and the combined sales revenue from the retail and wholesale
sale of used vehicles increased approximately 71.6%. The annual net profit of
the typical United States franchised dealer's used vehicle department is
estimated be $101,889.
The NADA data just cited shows that for all United States dealerships, the
net profit from sales of used vehicles is approximately three times the net
profit from the sales of new vehicles.
The following table sets forth information regarding vehicle sales by
franchised new vehicle dealerships for the periods indicated:
UNITED STATES FRANCHISED DEALER'S VEHICLES SALES
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(Units in millions; dollars in billions)
<S> <C> <C> <C> <C> <C>
New vehicle unit sales ..................... 12.9 13.9 15.1 14.8 15.1
New vehicle sales revenue(1) ............... $221.0 $253.0 $ 290.0 $ 303.0 $328.0
Used vehicle unit sales -- retail ......... 9.3 9.9 10.9 11.4 11.9
Used vehicle retail sales revenue ......... $ 77.3 $ 90.4 $ 111.0 $ 126.0 $137.0
Used vehicle unit sales -- wholesale ...... 5.8 6.4 6.8 7.0 7.2
Used vehicle wholesale sales revenue ...... $ 22.0 $ 24.0 $ 27.7 $ 30.3 $ 33.4
</TABLE>
- ----------
(1) Sales revenue figures were generated by multiplying the total unit sales by
the average retail selling price of the vehicle for the given year.
Source: National Association of Auto Dealers Data 1997
In addition to revenues from the sale of new and used vehicles, automotive
dealerships derive revenues from repair and warranty work, sale of replacement
parts, financing and credit insurance and the sale of extended warranty
coverage. According to NADA data, revenues resulting from service and parts
sales increased approximately 8% in 1996 for franchised dealerships, a portion
of which is accounted for by the increase in the amount of used vehicle
reconditioning. Revenue from parts and services constitutes, on average,
approximately 12.4% of a franchised dealerships total sales and generates an
annual net profit of $158,900.
Automotive dealerships' profits vary widely and depend in part upon the
effective management of inventory, marketing, quality control and responsiveness
to customers. According to NADA data, in 1996, total franchised dealership gross
profits were, on average, $2.7 million with an average net profit of $323,801.
To reduce the costs of owning a new vehicle automobile manufacturers in
recent years have offered favorable short-term lease terms. This has attracted
consumers to short-term leases and has resulted in consumers returning to the
new vehicle market sooner than if they had purchased a new vehicle with
longer-term financing. In addition, this has provided new car dealerships with a
continuing source of off-lease vehicles and has also enabled dealerships' parts
and service departments to provide repair service under factory warranty for the
lease term.
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The automotive dealership industry has been consolidating in recent years.
Until the 1960s, automotive dealerships were typically owned and operated by a
single individual who controlled a single franchise. However, because of
competitive and economic pressures in the 1970s and 1980s, particularly the oil
embargo of 1973 and the subsequent loss of market share experienced by United
States automobile manufacturers to imported vehicles, many automotive
dealerships were forced to close or to sell to better-capitalized dealer groups.
Continued competitive and economic pressure faced by automotive dealers and an
easing of restrictions imposed by automobile manufacturers on multiple-dealer
ownership have led to further consolidation. According to NADA data, the number
of franchised dealerships has declined from 36,336 in 1960 to 22,700 at the
beginning of 1997.
Major Auto believes that franchised automobile dealerships will continue to
consolidate because the capital required to operate dealerships continues to
increase, many dealership owners are approaching retirement age and certain
automobile manufacturers want to consolidate their franchised dealerships to
strengthen their brand identity. For example, General Motors Corporation is
implementing a strategy to reduce its franchised dealerships by 1,500 from 8,400
by the year 2000. Major Auto believes that dealership groups that have
significant equity capital and experience in acquiring and running dealerships
will have an opportunity to acquire additional franchised dealerships.
Operating Strategy
Major Auto's operating strategy is to increase customer satisfaction and
loyalty and to increase operating efficiencies. The Company intends to pursue
the same operating strategy as Major Auto after completion of the Major Auto
Acquisition. Key elements of this operating strategy are as follows:
Use of Technology. Major Auto believes that it has achieved a competitive
advantage through the use of technology. Major Auto was one of the first
dealership groups to provide its customers with a 1-800 telephone number and
price quotations via facsimile. During the past several years, Major Auto has
sold approximately 25-50 vehicles per month from leads provided by electronic
media, such as Bloomberg (since 1994) and the Internet (since 1995). Major Auto
presently enables its customers to obtain credit approvals over the telephone
via its proprietary Talkie-AutoCom, a customized application of the Company's
"Talkie" telephone interactive voice response system, that operates 24 hours per
day, seven days per week and in nine different languages. Major Auto is
presently expanding its use of Talkie-AutoCom to permit customers to obtain
answers to the most frequently asked questions, obtain price quotes, place
orders, schedule and confirm service appointments, obtain directions to the
dealership and request faxes of product and price information. Major Auto is
also intending to expand its use of Talkie AutoCom to call its customers
automatically to notify them of required maintenance, sales and promotions and
to solicit customer satisfaction information. In addition, Major Auto intends to
explore new ways to use technology to provide better customer service. Major
Auto has developed and is in the process of beta-testing an Internet-based
marketing system called MajorAuction.Com to provide electronically, visual and
textual information regarding vehicles sold by Major Auto and enable customers
to (i) purchase a new or used vehicle on-line, (ii) participate in a real-time
auction for a specific vehicle, and (iii) arrange for the related financing. See
"Computer Telephony and Telecommunications Division--Talkie."
Leverage the Sale of International Calling Time. Major Auto will offer
customers pre-paid international telephone calling time in connection with the
purchase or lease of its automobiles. To accomplish this, Major Auto will
utilize the Company's proprietary Talkie technology, which is able to provide
users with international calling time at sharply discounted rates. Because Major
Auto will purchase telephone time from the Company or one its master agents at
below-market rates, the cost to Major Auto of implementing this program will be
minimal compared with the savings to be realized by its customers. Major Auto's
primary market, the New York metropolitan area, is home to many diverse ethnic
groups who have family and friends whom they call frequently in their native
countries. By offering pre-paid international telephone calling time with the
purchase or lease of a vehicle, Major Auto believes that it can add value to its
customers and thereby increase customer satisfaction and loyalty. See "Computer
Telephony and Telecommunications Division--Talkie."
Focus on Used Vehicle Sales. A key element of Major Auto's operating
strategy is to focus on the sale of used vehicles. In 1996, approximately 20
million used cars were sold by dealers, double the number of such sales in 1980.
Sales of used vehicles are generally more profitable than sales of new vehicles.
The New York metropolitan area is one of the largest markets for used car sales
in the United States and Major Auto sells more used
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cars in the New York metropolitan area than any other automobile dealership or
dealership group. Major Auto strives to attract customers and enhance buyer
satisfaction by offering multiple financing and leasing options and competitive
warranty products on every used vehicle it sells. Major Auto believes that a
well-managed used vehicle operation affords it an opportunity to (i) generate
additional customer traffic from a wide variety of prospective buyers, (ii)
increase new and used vehicle sales by aggressively pursuing customer trade-ins,
(iii) generate incremental revenues from customers financially unable or
unwilling to purchase a new vehicle and (iv) increase ancillary product sales to
improve overall profitability. To maintain a broad selection of high-quality
used vehicles and to meet local demand preferences, Major Auto acquires used
vehicles from trade-ins and a variety of sources nationwide, including direct
purchases from individuals and fleets, and manufacturers' and independent
auctions. Major Auto believes that the price at which it acquires used vehicles
is the most significant factor contributing to the profitability of its used
vehicle operations. Major Auto believes that, because of the large volume of
used vehicles that it sells each month and the over 25 years of experience in
the used vehicle business of its President, Bruce Bendell, it is able to
identify quality used vehicles, assess their value and purchase them for a
favorable price.
Emphasize Sales of Higher Margin Products and Services. Major Auto
generates substantial incremental revenue and achieves increased profitability
through the sale of certain ancillary products and services such as financing,
extended service contracts and vehicle maintenance. Major Auto provides its
employees with special training and compensates them, in part, with commissions
based on their sales of such products and services. Major Auto believes that
these ancillary products and services enhance the value of purchased or leased
vehicles and increase customer satisfaction.
Provide a Broad Range of Products and Services. Major Auto offers a broad
range of products and services, including a wide range of new and used cars and
light trucks, vehicle financing, replacement parts and service. At its four
locations, Major Auto offers, collectively, seven makes of new vehicles,
including Chevrolet, Chrysler, Plymouth, Dodge, Jeep, Eagle and Subaru. In
addition, Major Auto sells a wide variety of used vehicles at a wide range of
prices. Major Auto believes that offering numerous makes and models of vehicles,
both new and used, appeals to a wide variety of customers, minimizes dependence
on any one automobile manufacture and reduces its exposure to supply problems
and product cycles.
Operate Multiple Dealerships in Target Market. Major Auto intends to become
the leading automotive dealer in its target market by operating multiple
dealerships in that market. To accomplish this, Major Auto intends to acquire
new franchises in its existing market and to expand its existing franchises to
new markets. This enables Major Auto to achieve economies of scale in
advertising, inventory management, management information systems and corporate
overhead.
Target Sales to Ethnic Groups. Because the New York metropolitan area,
Major Auto's primary market, is ethnically diverse, Major Auto targets its
selling efforts to a broad range of ethnic groups. In addition to offering
pre-paid international telephone calling time, Major Auto employs a
multi-lingual sales force and intends to expand its electronic media to
accommodate multiple languages.
Employ Professional Management Techniques. Major Auto employs professional
management techniques in all aspects of its operations, including information
technology, employee training, profit-based compensation and cash management.
Each of Major Auto's four dealership locations, its centralized used vehicle
operation, and its two service and parts operations is managed by a trained and
experienced general manager who is primarily responsible for decisions relating
to inventory, advertising, pricing and personnel. Major Auto compensates its
general managers based, in part, on the profitability of the operations they
control rather than on sales volume. Major Auto's senior management meets weekly
with its general managers and utilizes computer-based management information
systems to monitor each dealership's sales, profitability and inventory on a
daily basis and to identify areas requiring improvement. Major Auto believes
that the application of its professional management techniques provides it with
a competitive advantage over other dealerships and dealership groups and enables
it to increase its profitability.
Growth Strategy
The Company intends to expand its business by acquiring additional
dealerships and improving their performance and profitability by implementing
its operating strategy. As part of its growth strategy, the Company intends to
focus its efforts on dealerships or dealer groups that, among other criteria,
possess either the sole franchise of a major automobile manufacturer or a
significant share of new vehicle sales in each targeted market and
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that it believes are underperforming. In evaluating potential acquisition
candidates, the Company will also consider the dealership's or dealer group's
profitability, customer base, reputation with customers, strength of management
and location (e.g., along a major thoroughfare or interstate highway), and the
possibility that the Company will be able to acquire additional franchises in
that market to achieve larger market share. Major Auto believes that the most
attractive acquisition candidates can be found in the New York metropolitan
area, but the Company may consider acquisitions in other markets. The Company's
financing of such acquisitions may involve spending cash, incurring debt or
issuing equity securities, which could have a dilutive effect on the then
outstanding capital stock of the Company. The Company has been advised by
General Motors that Major Auto does not currently meet General Motors' criteria
to allow acquisition of additional General Motors' dealerships without seeking
approval for each acquisition. The effect of this is that should the Company
determine to acquire additional General Motors' dealerships in the future,
including its potential acquisition of Lichtenberg Buick, it will be required to
obtain General Motors' approval on a case-by-case basis. See "Potential
Acquisitions."
Upon completing an acquisition, the Company intends to implement its
operating strategy, which includes selling more new and used vehicles,
increasing finance revenues, enhancing employee training, lowering purchasing
costs for used car inventories, supplies and outside vendor expenses. The
Company also intends to install its management information system in acquired
dealerships as soon as possible after the acquisition, which will allow its
senior management to carefully monitor each aspect of the dealership's
operations and performance. Whenever possible, the Company intends to implement
its strategies and operation procedures prior to the closing of an acquisition
to enable it to accelerate the implementation of its operating strategy after
closing. See "--Operating Strategy."
The Company believes that Major Auto's management team has considerable
experience in evaluating potential acquisition candidates, determining whether a
particular dealership can be successfully integrated into Major Auto's existing
operations and implementing its operating strategy to improve their performance
and profitability following the acquisition. For example, Bruce Bendell, Major
Auto's President, acquired a Nissan dealership in Oyster Bay, New York in
January 1997. The Nissan dealership is not owned or operated by Major Auto, but
is majority-owned by Mr. Bendell and minority-owned by another individual
otherwise unaffiliated with the Company or Mr. Bendell. Upon Mr. Bendell's
acquisition of the Nissan dealership, it was selling 90 new and 20 used vehicles
per month and was not generating any profits from such sales. Under Mr.
Bendell's leadership, the dealership has expanded its sales to over 200 new and
used vehicles per month. The Company also believes that an increasing number of
acquisition opportunities will become available to it. See "Industry
Background." The Company and Mr. Bendell are currently negotiating a letter of
intent concerning the Company's acquisition of Oyster Bay Nissan. The
acquisition would be subject to the completion of the Major Auto Acquisition.
There can be no assurance that the Company and Mr. Bendell will agree on
acceptable terms. Based upon preliminary financial and other information in the
Company's possession relating to the business and operations of Oyster Bay
Nissan, the Company does not believe that such acquisition, if consummated,
would have a material impact on the financial position of the Company. However,
if the purchase price for such acquisition were to have a significant cash
component, the Company would likely be required to raise additional capital,
either by incurring debt or issuing equity, to finance the consummation of such
acquisition.
With the exception of the Major Auto Acquisition, the negotiations with
respect to Oyster Bay Nissan described above and the transaction described under
"Potential Acquisition" above, the Company does not presently have any other
material plans, proposals, arrangements or understandings with respect to
potential acquisitions.
Dealership Operations
Major Auto owns and operates five automobile dealerships at four locations
in Long Island City, New York. Major Auto conducts its parts and service
business and its used vehicle business from three additional locations in Long
Island City. Major Auto offers the following seven makes of new vehicles:
Chevrolet, Chrysler, Plymouth, Dodge, Jeep, Eagle and Subaru. Each location is
run by a separate general manager who is responsible for overseeing all aspects
of the business conducted at that location. Each of the parts and service
locations has two general managers, one for parts and one for service. Each
general manager meets with Major Auto's senior management, including Bruce and
Harold Bendell, on a weekly basis.
Following the acquisition of Major Auto by the Company, Bruce and Harold
Bendell will continue to be responsible for senior-level management of the
dealerships. The Bendell brothers and the Company expect that
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this prospective continuity of senior management will facilitate obtaining the
manufacturers' consents to the transfer of the dealerships to the Company. The
Bendell brothers' management control will be accomplished through (i) their
ownership of 100 shares of the Company's 1997A-MAJOR AUTOMOTIVE GROUP Series of
Preferred Stock (of which shares Bruce Bendell has a proxy to vote the 50 shares
of the 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock owned by Harold
Bendell for a seven-year period commencing on January 7, 1998) which carries
voting rights allowing them to elect a majority of the Board of Directors of
Major Auto, and through (ii) a related management agreement. See "Description of
Securities--Preferred Stock--1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred
Stock" and "Certain Relationships and Related Transactions" below. Should either
of the Bendell brothers cease managing the dealerships, the management agreement
provides that ownership of his 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred
Stock shares and his management rights under the management agreement will be
automatically transferred to the other, and should both brothers cease managing
the dealerships for any reason, the shares and management rights will be
automatically transferred to a successor manager designated in a successor
addendum to each dealership agreement or, failing such designation, to a
successor manager designated by the Company (subject to approval by the
applicable manufacturers).
New Vehicle Sales. Major Auto sells the complete product line of cars,
sport utility vehicles, minivans and light trucks manufactured by Chevrolet,
Chrysler, Plymouth, Dodge, Jeep, Eagle and Subaru. In 1996, Major Auto's
dealerships sold 5,062 new vehicles generating total sales of approximately
$109,100,000, which constituted approximately 76% of Major Auto's total
revenues. Major Auto's gross profit margin on new vehicle sales in 1996 was
approximately 7.3% as compared with the industry average for 1996 of 6.4%. The
relative percentages of Major Auto's new vehicle sales among makes of vehicles
in 1996 was as follows:
1996 Percentage of
Manufacturer New Vehicle Sales
------------ -------------------
Chevrolet 51%
Chrysler, Plymouth, Jeep and Eagle 19%
Dodge 25%
Subaru 5%
The following table sets forth, for the periods shown, information with
respect to Major Auto's new vehicle sales:
NEW VEHICLE SALES
(dollars in thousands)
1994 1995 1996
---- ---- ----
Unit sales ............... 5,185 4,375 5,062
Sales revenue ............ $ 96,300 $ 90,000 $ 109,000
Gross Profit ............ $ 7,200 $ 7,200 $ 8,000
Gross Profit Margin ...... 7.5% 8.0% 7.3%
Major Auto purchases substantially all of its new vehicle inventory
directly from the respective manufacturers who allocate new vehicles to
dealerships based upon the amount of vehicles sold by the dealership and the
dealership's market area. As required by law, Major Auto posts the
manufacturer's suggested retail price on all new vehicles, but the final sales
price of a new vehicle is typically determined by negotiation between the
dealership and the purchaser.
In addition to its dealership operations, Major Auto has a distributorship
agreement with General Motors Corporation ("General Motors") pursuant to which
Major Auto distributes in Russia new vehicles manufactured by General Motors.
Major Auto has realized revenues of approximately $300,000, $2,890,000 and
$9,400,000 during its 1994, 1995 and 1996 fiscal years, respectively, from its
distribution of General Motors vehicles in Russia. Major Auto's gross profits
from such sales were approximately $17,000, $178,000 and $572,000, for its 1994,
1995 and 1996 fiscal years, respectively. Under its distributorship arrangement,
Major Auto accepts orders from General Motors' automobile dealers in Russia for
both standard and custom General Motors vehicles. Major Auto generally receives
a deposit on the purchase price of the vehicle from the Russian dealer and
releases the vehicle to the dealer upon full payment of the balance of the
wholesale purchase price plus a percentage of the dealer's profit on the sale.
Major Auto intends to expand its distributorship operation in the future to
include the sale of used vehicles.
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Approximately 30% of Major Auto's unit sales of new vehicles are fleet
sales, which are generally sales to commercial customers that register ten or
more vehicles in a given year, and include taxi cab companies, police
departments and small businesses. Major Auto has advised the Company that it
believes that its fleet sales, and its service of fleet vehicles, protect it
from some of the fluctuations in the retail automobile buying market, provide a
source of off-fleet vehicles for its used vehicle operations and enhance its
reputation and customer satisfaction. Fleet sales are generally awarded to a
dealership on the basis of a blind competitive bidding process.
Used Vehicle Sales. Major Auto offers a wide variety of makes and models of
used vehicles for sale. In 1996, Major Auto sold 2,231 used vehicles generating
total sales of approximately $22,840,000, which constituted approximately 16% of
Major Auto's total revenues. Major Auto's gross profit margin on used vehicle
sales in 1996 was approximately 14.4% as compared with the industry average for
1996 of 11%. Major Auto is the largest seller of used vehicles (based on unit
sales and sales revenue) in the New York metropolitan area.
Major Auto has consolidated its used vehicle operations for its various
dealerships at a single site. Major Auto acquires the used vehicles it sells
through customer trade-ins, at "closed" auctions which may be attended by only
new vehicle dealers and which offer off-lease, rental and fleet vehicles, and at
"open" auctions which offer repossessed vehicles and vehicles being sold by
other dealers.
Major Auto has advised the Company that it believes that the market for
used vehicles is driven by the escalating purchase price of new vehicles and the
increase in the quality and selection of used vehicles primar-ily due to an
increase in the number of popular cars coming off short-term leases.
The following table sets forth, for the periods shown, information with
respect to Major Auto's used vehicle sales:
USED VEHICLE SALES
(dollars in thousands)
1994 1995 1996
---- ---- ----
Unit sales ............... 2,050 2,145 2,231
Sales revenue ............ $ 12,670 $ 17,520 $ 22,840
Gross Profit ............ $ 2,330 $ 2,730 $ 3,300
Gross Profit Margin ...... 18.4% 15.6% 14.4%
Parts and Service. Major Auto provides parts and service primarily for the
makes of new vehicles that it sells, but also services other makes of vehicles.
In 1996, Major Auto's parts and service operations generated total revenues of
approximately $12,150,000, which constituted approximately 8% of Major Auto's
total revenues at a gross profit margin of approximately 26.9%.
The increased use of electronics and computers in vehicles has made it
difficult for independent repair shops to retain the expertise to perform major
or technical repairs. In addition, because motor vehicles are increasingly more
complex and there are longer warranty periods, Major Auto has advised the
Company that it believes that repair work will increasingly be performed at
dealerships, which have the sophisticated equipment and skilled personnel
necessary to perform the repairs.
Major Auto has advised the Company that it considers its parts and service
department to be an integral part of its customer service efforts and a valuable
opportunity to strengthen customer relations and deepen customer loyalty. Major
Auto attempts to notify owners of vehicles purchased at its dealerships when
their vehicles are due for periodic service, thereby encouraging preventative
maintenance rather than post-breakdown repairs.
Major Auto's parts and service business provides a stable, recurring
revenue stream to its dealerships. In addition, Major Auto has advised the
Company that it believes that, to a limited extent, these revenues are
countercyclical to new vehicle sales, since vehicle owners may repair their
existing vehicles rather than purchasing new vehicles. Major Auto has advised
the Company that it believes that this helps mitigate the effects of a downturn
in the new-vehicle sales cycle.
Major Auto does not operate a body shop, but instead contracts with third
parties for body repair work.
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The following table sets forth, for the periods shown, information with
respect to Major Auto's sales of parts and services:
SALES OF PARTS AND SERVICES
(dollars in thousands)
1994 1995 1996
---- ---- ----
Sales revenue ............ $ 10,990 $ 11,070 $ 12,150
Gross Profit ............ $ 3,400 $ 3,450 $ 3,270
Gross Profit Margin ...... 30.9% 31.2% 26.9%
Vehicle Financing. Major Auto provides a wide variety of financing and
leasing alternatives for its customers. Major Auto has advised the Company that
it believes that its customers' ability to obtain financing at its dealerships
significantly enhances Major Auto's ability to sell new and used vehicles. Major
Auto has advised the Company that it believes that its ability to provide its
customers with a variety of financing options provides it with a competitive
advantage over many of its competitors, particularly smaller competitors that do
not have sufficient sales volumes to attract the diversity of financing sources
available to Major Auto.
In most instances, Major Auto assigns its vehicle finance contracts and
leases to third parties, instead of directly financing vehicle sales or leases,
which minimizes the credit risk to which Major Auto is exposed. Major Auto
typically receives a finance fee or commission from the third party who provides
the financing. In certain limited instances in which Major Auto determines that
its credit risk is manageable, estimated by Major Auto to be approximately 5% of
its vehicles sales and leases, Major Auto directly finances the purchase or
lease of a vehicle. In such instances, Major Auto will bear the credit risk that
the customer will default, but will have the right to repossess the vehicle upon
default. Major Auto maintains relationships with a wide variety of financing
sources, including commercial banks, automobile finance companies, other
financial institutions and the Company's subsidiary Major Fleet. Major Fleet
purchases less than 10% of Major Auto's leases, and none of Major Auto's finance
contracts.
Sales and Marketing
Major Auto has advised the Company that it believes that marketing and
advertising are significant to its operations. As is typical in its industry,
Major Auto receives a subsidy for a portion of its expenses from the automobile
manufacturers with whom Major Auto has franchise agreements. The automobile
manufacturers also assist Major Auto to develop its own advertising by providing
it with market research.
Major Auto's marketing effort is conducted over most forms of media
including television, newspaper, direct mail, billboards and the Internet. Major
Auto's advertising seeks to promote its image as a reputable dealer offering
quality products at affordable prices and with attractive financing options.
Each of Major Auto's dealerships periodically offer price discounts or other
promotions to attract additional customers. The individual dealerships'
promotions are coordinated by Major Auto and, because Major Auto owns and
operates several dealerships in the New York City market, it realizes cost
savings through volume discounts and other media concessions.
Major Auto's operations have been enhanced by its ability to achieve
economies of scale with respect to its marketing and advertising. Nationwide,
the average cost of marketing and advertising per new vehicle sold in 1996 was
approximately $335. Notwithstanding that advertising costs in the New York
metropolitan area are generally higher than the national average, Major Auto's
cost of marketing and advertising per vehicle sold have consistently been less
than the national average. These lower costs result from the fact that Major
Auto (i) has favorable contracts with four major area daily newspapers, (ii)
advertises in lower-cost niche markets (such as local ethnic markets, employee
purchase programs, and discount buying services) and (iii) utilizes telephonic
marketing and electronic marketing via services such as the Internet and
Bloomberg.
Relationships with Manufacturers
Each of Major Auto's dealerships operates under a separate franchise or
dealer agreement which governs the relationship between the dealership and the
relevant manufacturer. In general, each dealer agreement specifies the location
of the dealership for the sale of vehicles and for the performance of certain
approved services
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in the specified market area. The designation of such areas, the allocation of
such areas and the allocation of new vehicles among dealerships is discretionary
with the relevant manufacturer. Dealer agreements do not generally provide a
dealer with an exclusive franchise in the designated market area. A dealer
agreement generally requires that a dealer meet specified standards regarding
showrooms, the facilities and equipment for servicing vehicles, the maintenance
of inventories, the maintenance of minimum net working capital, personnel
training and other aspects of the dealer's business. The dealer agreement also
gives the relevant manufacturer the right to approve the dealer's general
manager and any material change in management or ownership of the dealership.
The dealer agreement provides the relevant manufacturer with the right to
terminate the dealer agreement under certain circumstances, such as (i) a change
in control of the dealership without the consent of the relevant manufacturer,
(ii) the impairment of the financial condition or reputation of the dealership,
(iii) the death, removal or withdrawal of the dealership's general manager,
(iii) the conviction of the dealership or the dealership's general manager of
certain crimes, (iv) the dealer's failure to adequately operate the dealership
or to maintain wholesale financing arrangements, (v) the bankruptcy or
insolvency of the dealership or (vi) the dealer's or dealership's material
breach of other provisions of the dealer agreement. Many of the dealership
agreements require the consent of the relevant manufacturer to the dealer's
acquisition of additional dealerships. In addition Major Auto's dealership
agreement with General Motors, with respect to its Chevrolet dealership, gives
General Motors a right of first refusal to purchase such dealership, which means
that whenever Major Auto proposes to sell its Chevrolet dealership, it must
first offer General Motors the opportunity to purchase that dealership.
The dealership agreement that the Company will enter into with General
Motors upon completion of the Major Auto Acquisition will impose several
additional restrictions on the Company. Following the completion of the Major
Auto Acquisition, the Company's Chevrolet franchise, and any other General
Motors' franchises that the Company may subsequently acquire, could be at risk
if (i) any person or entity acquires more than 20% of the Company's voting stock
with the intention of acquiring additional shares or effecting a material change
in the Company's business or corporate structure, or (ii) if the Company takes
any corporate action that would result (a) in any person or entity owning more
than 20% of the Company's voting stock for a purpose other than passive
investment, (b) an extraordinary corporate transaction such as a merger,
reorganization, liquidation or transfer of assets, (c) a change in the control
of the Company's Board of Directors within a rolling one-year period, or (d) the
acquisition of more than 20% of the Company's voting stock by another automobile
dealer or such dealer's affiliates. If General Motors determines that any of the
actions described in the preceding sentence could have a material or adverse
effect on its image or reputation in the General Motors' dealerships or be
materially incompatible with General Motors' interests, the Company must either
(x) transfer the assets of the General Motors' dealerships to General Motors or
a third party acceptable to General Motors for fair market value or (y)
demonstrate that the person or entity will not own 20% of the Company' voting
stock or that the actions in question will not occur.
In addition, the General Motors dealer agreement will require that the
Company comply with General Motors' Network 2000 Channel Strategy ("Project
2000"). Project 2000 includes a plan to eliminate 1,500 General Motors
dealerships by the year 2000, primarily through dealership buybacks and approval
by General Motors of inter-dealership acquisitions, and encourages dealers to
align General Motors divisions' brands as may requested by General Motors. The
dealer agreement will require that the Company bring any General Motors
dealership into compliance with the Project 2000 plan within one year of the
acquisition. Failure to achieve such compliance may result in termination of the
dealer agreement and a buyback of the related dealership assets at book value by
General Motors. The Company believes that Major Auto's Chevrolet dealership
currently complies with the Project 2000 guidelines.
The Company has also agreed that its dealerships offering new vehicles
manufactured by General Motors will not attempt to sell new vehicles of other
manufacturers.
New York law, and many other states' laws, limit manufacturers' control
over dealerships. In addition to various other restrictions imposed upon
manufacturers, New York law provides that notwithstanding the terms of the
dealer agreement with the relevant manufacturer, the manufacturer may not (i)
except in certain limited instances, terminate or refuse to renew a dealership
agreement except for due cause and with prior written notice, (ii) attempt to
prevent a change in the dealer's capital structure or the means by which the
dealer finances dealership operations or (iii) unreasonably withhold its consent
to a dealer's transfer of its interest in the dealership or fail to give notice
to the dealer detailing its reasons for not consenting.
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In connection with this offering, Major Auto has solicited the consents of
the relevant manufacturers to the Major Auto Acquisition and the change of
control of the respective dealerships to result therefrom. To date, Major Auto
has received the consent of Subaru Distributors Corp., with respect to the
Subaru dealership, and General Motors, with respect to the Chevrolet dealership,
and is awaiting the consent of Chrysler Corporation, with respect to the
Chrysler, Plymouth, Dodge, Jeep and Eagle dealerships.
Competition
The market for new and used vehicle sales in the New York metropolitan area
is one of the most competitive in the nation. In the sale of new vehicles, Major
Auto competes with other new automobile dealers that operate in the New York
metropolitan area. Some competing dealerships offer some of the same makes as
Major Auto's dealerships and other competing dealerships offer other
manufacturer's vehicles. Some competing new vehicle dealers are local,
single-franchise dealerships, while others are multi-franchise dealership
groups. In the sale of used vehicles, Major Auto competes with other used
vehicle dealerships and with new vehicle dealerships which also sell used cars
that operate in the New York metropolitan area. In addition, Major Auto competes
with used car "superstores" that have inventories that are larger and more
varied than Major Auto's.
Major Auto has advised the Company that it believes that the principal
competitive factors in vehicle sales are the marketing campaigns conducted by
automobile manufacturers, the ability of dealerships to offer a wide selection
of popular vehicles, pricing (including manufacturers' rebates and other special
offers), the location of dealerships, the quality of customer service,
warranties and customer preference for particular makes of vehicles. Major Auto
believes that its dealerships are competitive in all of these areas.
In addition, Major Auto, due to the size and number of automobile
dealerships it owns and operates, is larger than the independent operators with
which it competes. Major Auto's size has historically permitted it to attract
experienced and professional sales and service personnel and has provided it the
resources to compete effectively. However, as the Company enters other markets,
it may face competitors that are larger and that have access to greater
resources.
Major Auto has advised the Company that it believes that its principal
competitors within the New York metropolitan area are United Auto Group, a
publicly traded company, and Potamkin Auto Group, Burn's Auto Group and
Auto-Land, each of which is privately held.
Governmental Regulation
Automobile dealers and manufacturers are subject to various Federal and
state laws established to protect consumers, including the so-called "Lemon
Laws" which require a dealer or manufacturer to replace a new vehicle or accept
it for a full refund within a specified period of time, generally one year,
after the initial purchase if the vehicle does not conform to the manufacturer's
express warranties and the dealer or manufacturer, after a reasonable number of
attempts, is unable to correct or repair the defect. Federal laws require that
certain written disclosures be provided on new vehicles, including mileage and
pricing information. In addition, Major Auto's financing activities are subject
to certain statutes governing credit reporting and debt collection.
The imported automobiles purchased by Major Auto are subject to United
States custom duties and, in the ordinary course of its business, Major Auto may
from time to time be subject to claims for duties, penalties, liquidated damages
or other charges. Currently, United States customs duties are generally assessed
at 2.5% of the customs value of the automobiles imported, as classified pursuant
to the Harmonized Tariff Schedule of the United States.
As with automobile dealerships generally, and parts and service operations
in particular, Major Auto's business involves the use, handling and contracting
for recycling or disposal of hazardous or toxic substances or wastes, including
environmentally sensitive materials such as motor oil, waste motor oil and
filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner,
batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels.
Accordingly, Major Auto is subject to Federal, state and local environmental
laws governing health, environmental quality, and remediation of contamination
at facilities it operates or to which it sends hazardous or toxic substances or
wastes for treatment, recycling or disposal. Major Auto has advised the Company
that it believes that it is in material compliance with all environmental laws
and that such compliance will not have a material adverse effect on its
business, financial condition or results of operations.
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Computer Telephony and Telecommunications Division
The Company, through Computer Business Sciences, Inc., a New York
corporation ("Computer Business Sciences"), 786710 Ontario Limited, an Ontario
corporation doing business as Info Systems, Inc. ("Info Systems"), C.B.S.
Computer Business Sciences Ltd., an Israeli corporation ("Computer Business
Sciences (Israel)"), and Reynard Service Bureau, Inc., a Florida corporation
("Reynard"), the four wholly-owned subsidiaries comprising its Computer
Telephony and Telecommunications division, currently develops, manufactures,
markets, sells and services two product lines. The first product line utilizes
"Talkie" technology, which consists of proprietary computer software and
hardware that (i) permits end users of the technology to place long-distance
international telephone calls at discounted rates and (ii) offers end users a
broad range of interactive voice-response applications such as voice-mail,
automatic receptionist, automated order entry, conference calling and faxing.
The second product line, "Business Control Software," is a proprietary computer
software system that provides multi-lingual general accounting and business
management applications.
The Company acquired the technology for its telecommunications products in
April 1996 through its acquisition from Dr. Zvi Barak and Sarah Barak of all of
the issued and outstanding stock of Info Systems. A portion of the purchase
price for such stock consists of twenty monthly installment payments of $15,000
from the Company to the Baraks. In order to secure such installment payments,
the Company has granted a security interest to the Baraks in the stock of Info
Systems and the other assets purchased by the Company from the Baraks. The
monthly installment payments commenced in September 1996 and are scheduled to
continue through June 1998. To date, the Company has withheld $85,000 of such
installment payments as collateral for the Baraks' obligation to make certain
indemnification payments to the Company. The Company has agreed to pay the
Baraks the $85,000 by July 1998.
Talkie
"Talkie" is the trademark for, and the name used by the Company to
describe, the technology relating to the Company's telephonic and interactive
voice response software applications. The Company has three products that use
Talkie technology. The first product, the "Talkie Power Web Line Machine," is a
computer-based telephone "switch" that enables small or start-up telephone
companies to purchase blocks of international telephone calling time from
suppliers such as AT&T and MCI and resell the time in smaller units to callers
at discounted rates. The second product is a group of related telephonic and
interactive voice response software programs, such as voice-mail, automatic
receptionist, automated order entry, conference calling and faxing. The third
product, called "Talkie-Globe," is an international call-back, debit card and
long-distance reselling system.
The Talkie Power Web Line Machine is a programmable electronic telephone
switch based on personal computer technology. It consists of a proprietary
software program, and hardware components most of which are available from a
number of different sources. The machine currently contains 96 channels, but may
be expanded to carry up to 120 channels. Each channel provides 43,200 available
minutes of telephone time per 30-day month that may be sold. As is typical of
industry utilization of available telephone time, approximately 30-40% of these
available minutes are actually sold. Of the 43,200 available minutes,
approximately 10,560 are considered peak time (defined to be the 480 minutes
comprising the typical eight-hour work day in the destination country and
assuming 22 work days in the typical 30-day month) and the balance are
considered off-peak time, however the determination of actual peak minutes in a
destination country is based upon demand for calling time, which in turn is
based upon such factors as calling patterns and the differences in time zones
between the country from which a call is placed and the destination county. Peak
minutes are generally able to be sold at higher rates than off-peak minutes.
The Talkie Power Web Line Machine includes an integrated programmable
telephone call switching system known as the Talkie Web Smart Switch. The
programmability of this switching system allows the machine to handle a variety
of international telephone-based services including resale of long-distance
telephone time the Company purchases in bulk, international call-back services
(described below), telemarketing, Internet access and facsimile transmission.
The Company, through its subsidiary Computer Business Sciences, sells the
Talkie Power Web Line Machines to various service providers (known as "master
agents"). A master agent then establishes a telephone
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connection between a foreign country and the Talkie Power Web Line Machine,
which is located at the Company's offices in Kew Gardens, New York. This
connection is typically a dedicated telephone line that runs from the Talkie
Power Web Line Machine to certain equipment located in the foreign country that
is used to connect the dedicated line to the local telephone lines. The master
agent typically leases the dedicated telephone line, which has a specific
capacity for simultaneous calls, from MCI Communications Corp. or Sprint
Corporation for a fixed monthly fee. Callers in the foreign country place a
local call to connect to the dedicated telephone line and are provided a United
States dial tone by the Talkie Power Web Line Machine. The caller then dials the
number for the desired destination and the call is carried over the dedicated
telephone line to the Talkie Power Web Line Machine and then redirected to the
desired destination. Because the Talkie Power Web Line Machine's software
program is able to process both voice and data, callers may place international
telephone calls and send facsimiles to the desired destination and may also
connect to the Internet.
The master agent generates revenues by selling the available telephone time
generated by the Talkie Power Web Line Machine to callers in the foreign
country. There are two elements to the master agent's cost of carrying a call
from the foreign country to the desired destination: the cost of the dedicated
telephone line from the Talkie Power Web Line Machine to the foreign country
(which is typically a fixed monthly cost) and the cost of the call directed from
the Talkie Power Web Line Machine to the desired destination (which is based
upon United States calling rates). The master agent charges the caller in the
foreign country some markup over the cost of the call to the desired
destination. The cost to the caller is considerably lower than the alternative
of placing the same call through the caller's own local telephone system which,
in many cases, is a state-owned monopoly. The experience of the Company's master
agents has generally been a very substantial reduction in per minute call costs.
The Company's billing records indicate that the reduction in most cases is a
factor of 15, that is, the country-to-country portion of an international call
normally costing $0.75 per minute, costs $0.05 per minute when placed through
the Talkie Power Web Line Machine. Once the master agent arranges for a certain
monthly volume of calls from a given foreign country, the master agent will
recoup the cost of the dedicated telephone line to that foreign country and will
thereafter generate profits.
The Company and Summa Four, Inc., a publicly owned communications equipment
manufacturer located in New Hampshire, have entered into a value-added reseller
agreement. Under the agreement, the parties will jointly develop an improved
version of the Talkie Power Web Line Machine and associated software, which the
Company will then purchase from Summa Four, Inc. for resale to the Company's
master agents.
Arrangements with Nissko
In March 1996, the Company's subsidiary Computer Business Sciences formed a
joint venture with Nissko Telecom, L.P. ("Nissko"). The joint venture is a
general partnership named Nissko Telecom Associates ("Associates"). Computer
Business Sciences owns 45% of the joint venture and Nissko owns 55%. Nissko is a
limited partnership the general partner of which is one of the Company's master
agents, Nissko Telecom, Ltd. (the "Agent"), and the limited partners of which
are four individuals, three of whom, including Yossi Koren, one of the Company's
directors, are shareholders of the Agent (such three individuals being
collectively referred to herein as the "Nissko Principals"). Pursuant to an
informal agreement, the Agent has granted to Associates the right to market and
sell the available telephone time generated by the Talkie Power Web Line
Machines that the Agent purchases as a master agent, in exchange for the Agent's
interest in the joint venture through its general partnership interest in
Nissko. Through its interest in Associates, Computer Business Sciences realizes
45% of the revenues generated from Associates' sale of such telephone minutes.
Since the inception of Associates, the Company has derived $19,645 in net income
after expenses and start-up costs from Computer Business Science's participation
in Associates.
Under its master agent agreement, dated March 1996, with Computer Business
Sciences, the Agent is obligated to purchase 15 Talkie Power Web Line Machines
from Computer Business Sciences and has the right to acquire 15 additional
machines, each for $125,800, and 30 machine upgrades, each for $60,000. Each
upgrade consists of an attachment module which increases the channel capacity of
the machines and the related software. The Agent has a right of first refusal to
sell the telephone time generated by the machines that it has purchased in all
geographical locations in the world. This means that whenever a master agent
other than the Agent proposes to resell telephone time in a country the other
master agent has not previously served, Computer Business Sciences must first
offer the Agent the opportunity to service that country.
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Under the terms of its master agent agreement, the Agent (i) paid Computer
Business Sciences a deposit of $629,000 at the time the agreement was executed
toward the purchase of the 15 machines that the Agent is obligated to purchase
and (ii) issued to Computer Business Sciences 45% of its then issued and
outstanding common stock. In return, (i) the Company issued to the Nissko
Principals, including Yossi Koren, who subsequently became a director of the
Company, (a) warrants, exercisable through the date that is 60 days after the
effectiveness of any public offering of the Company's securities (including this
offering), to acquire an aggregate of 750,000 shares of the Company's Common
Stock at an exercise price of $1.25 per share (the "Class A Warrants") and (b)
warrants, exercisable through March 19, 1998, to acquire an aggregate of 750,000
shares of the Company's Common Stock at an exercise price of $1.25 per share
(the "Class B Warrants") and (ii) Computer Business Sciences agreed to make a
$10,000 contribution to the capital of the Agent upon its purchase of each of
the first 15 machines. Certificates evidencing the Class A Warrants and the
Class B Warrants have not yet been issued.
Pursuant to the master agent agreement, if, by March 31, 1998, the sum of
(i) Computer Business Sciences' $10,000 contributions ("Contributions") to the
Agent's capital plus (ii) the Agent's aggregate earnings ("Earnings") before
depreciation, interest expense and taxes from the first five machines purchased
by it, does not equal or exceed the $629,000 deposit paid to Computer Business
Sciences, the Agent may, but is not obligated to, exercise one of two remedies.
First, it can terminate the master agent agreement, in which event it will be
relieved of any obligation to purchase additional machines and will retain and
operate the machines it has purchased. Second, it can declare the master agent
agreement in default, in which event the Nissko Principals will have the right
to recover the excess of $629,000 over Contributions plus Earnings. If Computer
Business Sciences pays to the Nissko Principals the full amount of such excess,
the Nissko Principals will be required to transfer to Computer Business Sciences
the remaining 55% of the issued and outstanding common stock of the Agent.
To secure the payment required in case the Agent elects the second
alternative, Bruce Bendell, the Company's Chairman, and Doron Cohen, the
Company's Chief Executive Officer, President and Treasurer, have each pledged to
the Agent 500,000 shares of the Company's Common Stock. In the event that the
sum of Contributions plus Earnings is less than $629,000 and Computer Business
Sciences does not pay the Nissko Principals the full amount of the deficit, the
Nissko Principals will have the right to foreclose on the pledged Common Stock.
If the proceeds of liquidating the pledged shares are sufficient to cover
the deficit, the Nissko Principals will be required to transfer to Mr. Bendell
and Mr. Cohen in equal shares the remaining 55% of the Agent's issued and
outstanding common stock. Messrs. Bendell and Cohen have agreed that upon
receipt of that stock, they will transfer it to the Company in exchange for
reimbursement by the Company for the market value of their shares of the
Company's Common Stock foreclosed upon by the Nissko Principals.
Restructuring of Nissko Arrangements
The Company has entered into a Memorandum of Understanding (the "MOU") with
the Agent, the Nissko Principals, and with the remaining limited partner of
Nissko, Robert L. Rimberg. The transactions contemplated by the MOU are
conditioned on the consummation of the Major Auto Acquisition. The MOU provides
that (i) Nissko will transfer to the Agent and the Agent will assume, all of the
assets and liabilities of Nissko and (ii) Computer Business Sciences will
acquire all of the issued and outstanding shares of common stock of the Agent in
a tax-free reorganization. Upon execution of the MOU, an aggregate $653,750
deposit that the Nissko Principals and Mr. Rimberg had previously paid towards
the full exercise price of the Class A Warrants was converted to a partial
exercise of the Class A Warrants. Upon such conversion, the Company issued an
aggregate of 523,000 shares of its Common Stock to the Nissko Principals and Mr.
Rimberg, 173,583 of which were issued to Yossi Koren, a director of the Company.
Resales of all these shares during the two-year period commencing on execution
of the definitive documentation referred to below will be permitted only under
an applicable exemption from the Securities Act. Permitted resales will be
expressly subject to the voting rights of Bruce Bendell who holds a proxy to
vote 500,000 of these shares during the two-year restriction period.
The MOU provides that upon execution of definitive documentation containing
the terms and conditions outlined in the MOU, (i) each of the Nissko Principals
will receive 257,500 shares of the Company's Common
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Stock and Mr. Rimberg will receive 27,500 shares of the Company's Common Stock,
resales of all of which shares will be subject to restrictions on transfer and
voting that are identical to those described immediately above, and (ii) each of
the Nissko Principals will receive warrants to acquire up to 68,917 shares of
the Company's Common Stock and Mr. Rimberg will receive warrants to acquire up
to 20,250 shares of the Company's Common Stock, in each case for $1.25 per
share, exercisable until 30 days after the effective date of the registration
statement of which this Prospectus is a part. Such warrants represent the
unexercised balance of the Class A Warrants remaining after the conversion of
the $653,750 partial payment into a partial exercise as described above.
Nissko Jewelry Trading, Inc. ("NJT"), a company 33-1/3% owned by Mr. Koren,
has entered into agreements for the Agent's benefit with MCI, Sprint and Bell
Atlantic (formerly NYNEX). These agreements provide for the purchase by NJT on
behalf of the Agent of telephone time or transmission lines. The MOU provides
that the Company will indemnify NJT against any liability it may incur under
these agreements and will place 200,000 shares of its Common Stock into an
escrow to secure this indemnification obligation.
Upon the effectiveness of the definitive documentation relating to the
transactions contemplated by the MOU, (i) the Agent's master agent agreement
will terminate, (ii) the Class B Warrants will be canceled, and the pledge by
each of Mr. Bendell and Mr. Cohen of 500,000 shares of the Company's Common
Stock, referred to above, will be released.
The second product group, interactive voice response software programs,
consists of the following applications:
Talkie-Ad: permits callers to browse through pre-recorded messages based
on their search criteria, similar to a talking classified ad.
Talkie-Attendant: automated receptionist features, including dial "O" for
operator, name directories, call blocking, call screening, music or company
messages while on hold, paging, personalized menus, call queuing and
conversation recording.
Talkie-Audio: delivers pre-recorded information in response to telephone
inquiries and can serve as a talking bulletin board.
Talkie-Conference: permits the user to schedule a conference call and then,
when the conference call is to occur, either calls the participants or permits
them to dial in, and provides the chairperson with various options during the
call.
Talkie-Dial: places a telephone call, using a user-supplied list of
telephone numbers and delivers voice information with the capability of asking
questions, accepting answers and updating the system to reflect the answers.
Talkie-Fax: permits the user to program a facsimile into the system and
transmit it to a user-supplied list of numbers and permits users to transmit to
callers upon their request written information programmed into the system such
as directions, product information, price lists or news releases.
Talkie-Form: permits the user to set up a questionnaire and collect
answers to pre-recorded questions.
Talkie-Mail: permits the user to record, send, receive and retrieve voice
messages from personal mailboxes.
Talkie-Query: responds to callers' inquiries using information stored in
the system database.
Talkie-Trans: accepts orders, issues orders (including delivery
instructions) and faxes order confirmations.
Users of the Talkie interactive voice response system can also customize
the foregoing applications to create new applications using Talkie-Gen, which is
an application generator that uses a simple programming language.
In addition to the applications listed above, users may also purchase any
of the following off-the-shelf applications:
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Talkie-Dating: permits the user to supply a dating service that will
permit the user's customers to place and browse through personal ads, register
for service and record and listen to messages.
Talkie-Follow-Me: permits the user to supply a telephone tracking service
that enables the user's customers to obtain a single telephone number that will
continually forward incoming calls to a user-defined series of telephone numbers
(such as work, cellular, home, pager and voice-mail).
Talkie-Wake-Up/Reminder: permits the user to supply a wake-up or reminder
service that will call a user-supplied number with a user-supplied message at a
specified time.
All of the Talkie interactive voice response applications operate in up to
nine languages.
Info Systems also provides customers with industry-specific and customized
applications of its interactive voice response technology. For example, Info
Systems has developed a product called Talkie AutoCom for use by automobile
dealers. See "Automotive Sales Division--Operating Strategy."
The Talkie interactive voice response software package is sold by the
Company through Info Systems, its wholly-owned Canadian subsidiary.
Talkie-Globe, the trademark for, and the name used by the Company to
describe, its third telecommunications product, is a software-based integrated
call-back, debit-card and long-distance reselling system and includes all of the
Talkie interactive voice response software programs. Typically, international
callers based in countries where the telephone system is a state-owned monopoly
must pay high per-minute rates fixed by the state-owned company. One method of
securing a lower rate is the "call-back" system offered by Info Systems'
Talkie-Globe. Using Talkie-Globe, the foreign caller first places a telephone
call from the foreign country to the United States or Canadian telephone number
where the Talkie-Globe system is located and hangs up without the call being
connected so that no charge is assessed for the call. Talkie-Globe recognizes
the telephone number from which the foreign call was placed and then places a
call to that telephone number from the location in the United States or Canada
where the Talkie-Globe system is located to the foreign caller and provides the
foreign caller with a dial tone. The foreign caller then places a telephone call
through the United States or Canada to the desired destination. The foreign
caller thus pays for two calls: (i) the call back from the Talkie-Globe system
located in the United States or Canada to the caller in the foreign market and
(ii) the call that the caller places through the United States or Canada to the
desired destination. The sum of the costs of the two calls placed from the
Talkie-Globe system located in the United States or Canada will be lower than
the cost of a single call placed directly from the applicable foreign market to
the desired destination. The Talkie-Globe system also has a debit card feature,
which permits a caller to purchase a stated value of calling time, and debits
that value as the caller uses the prepaid calling time.
Talkie-Globe is sold by the Company through Info Systems, its wholly-owned
Canadian subsidiary.
Business Control Software
The Company's business control software is an interconnected series of
accounting and business management software applications that includes the
following systems: general ledger, accounts receivable, accounts payable, sales
order, purchase order, inventory control, bills of materials, job costing and
production control. The business control software can assist users, among other
things, to define market trends, analyze sales force effectiveness, determine
the profitability of a job, department or company, or determine a geographical
sales spread. One of the software's principal features is its ability to process
information in multiple currencies. For example, a Japanese distributor
transacting business in France and Italy can use the software to maintain data
relating to sales, purchases and costs in French francs and Italian lira and to
generate reports in Japanese yen (or in several multiple currencies
simultaneously) while automatically posting currency exchange rates. In
addition, the business control software is a multi-lingual system of software
applications that permits multiple users, each selecting a different language,
to access simultaneously a common database.
Marketing and Sales
From inception through September 30, 1997, the Company has sold 21 Talkie
Power Web Line Machines to six master agents. The aggregate amount of gross
revenues resulting from these sales is $4,865,493, which accounts for
approximately 69.9% of the Company's total revenues since its inception. The
Company's gross
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profit margin on sales of the Talkie Power Web Line Machines since its inception
is 75.5%. Each master agent is required to purchase a minimum annual volume of
machines. The minimum purchase requirement is ten machines or machines having an
aggregate sales price of $1.8 million, whichever is less. "Master agents" are
smaller companies wishing to enter the international telephone time resale
market without incurring the high cost of purchasing, installing and maintaining
traditional telephone switching equipment. Although the master agents purchase
the machines, the purchase terms require that the machines be located at the
Company's premises and that all maintenance be performed by the Company (as
described below). An added benefit to master agents of housing the machines at
the Company's premises is that a Bell Atlantic Switch is located there and the
physical connection between the machines and such switch is short, as a result
of which the Company pays a relatively inexpensive charge (a component of which
is based upon the length of the connection from such switch) to connect to such
switch and experiences no connection delays resulting from the length of the
connection.
The Company's strategy with respect to the Talkie Power Web Line Machine is
threefold. First, it intends to sell additional machines through its existing
master agents as they expand their businesses by providing telephone service to
additional foreign markets. Second, as demand for the machines increases, it
intends to add additional master agents and/or replace any existing master
agents who are not complying with their master agent agreements and to enter
into strategic partnerships with such new and replacement master agents that
will permit the Company to share in the revenue generated by the master agents'
sale of telephone time. Third, it intends continually to adapt advancing
computer and telecommunications technology to improve and customize the
performance of the machines.
The Company installs, maintains and services all Talkie Power Web Line
Machines at the Company's offices in Kew Gardens, New York, where the machines
are housed. For these services, the Company receives both a fixed fee and a
volume-based fee. To date, billing arrangements have been informal, and the cost
to each master agent has been calculated by determining the aggregate
maintenance and service costs for all the machines, adding a percentage markup
and charging each master agent its ratable portion based upon the number of
machines it has purchased. The Company also customizes the performance of the
machines for the respective master agents and for use in particular countries,
for which it receives a fee that is negotiated by the Company and the applicable
master agent based upon the complexity of the customization. As noted above, all
master agents are required by contract with the Company to locate their
purchased Talkie Power Web Line Machines at the Company's principal office and
to have all required installation, service and maintenance performed by the
Company. In addition to the services it provides with respect to the Talkie
Power Web Line Machines, the Company also provides services for the various
other Talkie products and for the Business Control Software, if requested by the
users. A portion of the proceeds of this offering will be used to commence the
operation of Reynard, which will service the products sold by the Company's
Computer Telephony and Telecommunications division. See "Use of Proceeds."
The Company typically sells its interactive voice response software
programs to entrepreneurs who wish to operate a telephone-based service business
with low overhead and fixed costs. The typical interactive voice response
software package requires only a personal computer and voice card for use and
costs $715. Each of the off-the-shelf applications costs an additional $795. The
Company intends to focus its efforts with respect to its Talkie interactive
voice response software programs on the market for industry-specific and
customized applications in which it generally realizes higher profit margins. As
the Company targets a given industry, it expects to hire sales personnel
familiar with that industry and to attend trade shows to market its product. In
addition, the Company intends to expand sales of its interactive voice response
system into Europe and South America.
The Company typically sells four to five of its Talkie-Globe systems per
month to entrepreneurs who wish to provide a telephone business with low
overhead and fixed costs and to small foreign telephone companies. Users of
Talkie-Globe purchase international calling time from long-distance
telephone companies such as MCI Communications Corp. and resell such time at a
mark-up. The typical Talkie-Globe system consists of three personal computers,
proprietary software and a voice card and costs approximately $25,000.
The Company realized gross revenues of $537,655 during 1996, and $770,323
during the nine months ending on September 30, 1997, from the sale of its Talkie
interactive voice response software programs and of
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Talkie-Globe (excluding intercompany sales), which constituted approximately
15.7% and 21.8% of the Company's gross revenues for such year and period,
respectively. The Company's gross profit margin on sales of its Talkie
interactive voice response software programs was approximately 40.32% for 1996
and approximately 42.9% for the nine months ending on September 30, 1997.
The Company advertises its Talkie interactive voice response software
programs and Talkie-Globe in telephone and telecommunications industry trade
publications. In addition, Info Systems attends telephone and telecommunications
industry trade shows, which has resulted in reviews of these products in trade
publications.
The Company is not currently allocating resources to market its Business
Control Software, but performs software service contracts and provides annual
program updates to the program's users.
Research and Development
The Company's wholly-owned subsidiary Computer Business Sciences (Israel)
engages in research and development (i) to improve its existing
telecommunications software, and to adapt the software to changing personal
computer environments, (ii) to expand the software to new uses and (iii) to
develop new software, products and applications. Computer Business Sciences
(Israel) is headed by Dr. Zvi Barak, who was responsible for the development of
the Talkie technology and related Talkie products and of the business control
software.
The Company spent no money on research and development in 1995 with respect
to its Computer Telephony and Telecommunications division and estimates that it
spent approximately $332,000 on research and development in 1996 with respect to
such division. The Company estimates that approximately one-half of such amount
has been borne directly or indirectly by customers of such division.
Intellectual Property
The Company has registered the name "Talkie" as a trade-mark in Canada. The
Company has filed applications with the United States Patent and Trademark
Office to register the names "Talkie" and "Talkie-Globe" and "BCS Software" as
trademarks in the United States. As an additional method of protecting its
proprietary technology, the Company requires that all of the Talkie Power Web
Line Machines that it sells remain at the Company's offices in Kew Gardens, New
York and that all installation, service and maintenance of the machines be
performed solely by the Company. The Company also relies on trade secret
protection, confidentiality agreements and other laws to protect its technology,
but believes that these rights may not necessarily prevent third parties from
developing or using similar or related technology to compete against the
Computer Telephony and Telecommunications division's products.
Competition
The Company knows of no person or company that offers a product that is a
feature-for-feature competitor to the Talkie Power Web Line Machine. While other
companies manufacture and sell traditional telephone switching equipment, such
equipment is expensive to purchase and maintain as compared to the Talkie Power
Web Line Machine. Traditional switching equipment therefore is not a viable
alternative for the typical purchasers of the Talkie Power Web Line Machine, who
are generally smaller telephone companies wishing to enter the international
telephone time resale market and who cannot afford the high cost of purchasing,
installing and maintaining traditional telephone switching equipment. Moreover,
the proprietary nature of the Talkie Power Web Line Machine's software program
provides the Company a significant head start over a potential competitor who
wishes to develop a competing product.
Associates competes with other providers of international telephone
service. The market for international telephone service is highly competitive.
In additional to the major service providers such as AT&T, MCI and Sprint, there
are numerous smaller service providers as well as resellers, who do not own and
operate equipment but purchase telephone time from service providers at a
discount and resell that time to the public. The Company believes that a primary
competitive factor in the industry is pricing. Because Associates uses the
Talkie Power Web Line Machine, which is less costly to purchase and maintain
than traditional switching equipment, Associates is able to offer telephone
calling time at lower rates than competitors whose rate structure must account
for the higher cost of such traditional switching equipment. In addition,
because the Talkie Power Web Line Machine is able to process both data as well
as voice, Associates is able to offer Internet access, which
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relatively few of its competitors offer. However Associates and the other master
agents may face increasing competition as a result of deregulation in foreign
countries, which could result in competition from other service providers with
large, established customer bases and close ties to governmental authorities in
their home countries and decreased prices for direct-dialed international calls.
Master agents' customers may no longer be willing to use the master agents'
services, which would adversely affect the Company's ability to sell the Talkie
Power Web Line Machine and also reduce the Company's income from its
participation in Associates.
The Company's Talkie interactive voice response software programs compete
with products sold by approximately two dozen entities in North America,
including AT&T, Northern Telecom and others. However, in the more limited market
for industry-specific and custom interactive voice response applications, the
Company knows of only one direct competitor. The Company's Talkie-Globe system
competes with telephone call-back products sold by approximately 6 other
entities. Based upon 1996 sales, the Company believes that Talkie-Globe is the
market leader in the telephone call-back industry.
As a result of its reliance on the Company's proprietary software rather
than hardware components to operate, the purchase price and maintenance costs of
the Company's Talkie interactive voice response software programs and
Talkie-Globe are believed to be generally lower than those of competing
products. In addition, because software is easier to alter than hardware
components, the Company is able to customize its products or modify its products
to incorporate changing technology more quickly and at a lower cost than its
competitors.
Notwithstanding the Company's competitive advantages however, many of the
producers of products competitive with the Company's, and companies wishing to
enter the market in which the Company's products compete, have well established
reputations, customer relationships and marketing and distribution networks.
Many also have greater financial, technical, manufacturing, management and
research and development resources than those of the Company, may be more
successful than the Company in manufacturing and marketing their products and
may be able to use their greater resources and to leverage existing
relationships to obtain a competitive advantage over the Company.
Leasing Division
In October 1996, the Company acquired all of the issued and outstanding
shares of stock of Major Fleet & Leasing Corp. ("Major Fleet"). Major Fleet has
historically provided lease financing solely for motor vehicles. The Company
intends to expand the operations of Major Fleet to provide lease financing to
purchasers of the Talkie Power Web Line Machine.
Major Fleet typically arranges for sale or lease to its customers of new or
used vehicles of all makes and models. Major Fleet will purchase the desired
vehicle from an automobile dealer and either resell it to its customer for a
markup over its cost, or lease the vehicle to the customer and provide the
related lease financing. If a customer of Major Fleet wants to purchase or lease
a new vehicle that is available from one of Major Auto's dealerships, in almost
all cases, Major Fleet will acquire the vehicle from Major Auto and then resell
or lease it to its customer. Major Fleet estimates that it acquires
approximately 50% of the vehicles it sells and leases from Major Auto.
In most instances, Major Fleet will broker vehicle finance contracts for,
or assign its leases to, third parties instead of directly financing vehicle
sales or leases. This minimizes the credit risk to which Major Auto is exposed.
In these instances, Major Fleet typically receives a finance fee or commission
from the third party who provides the financing. In certain instances, Major
Fleet directly finances the lease of a vehicle. When Major Fleet provides lease
financing, it bears the credit risk that its customers will default in the
payment of the lease installments. In order to minimize its risk of loss, Major
Fleet carefully evaluates the credit of its lease customers. It also requires
that its lease customers have adequate collision and liability insurance on the
leased vehicle and that Major Fleet be named as loss payee and additional
insured on the customer's collision and liability insurance policies. Major
Fleet does not finance the purchase of the vehicles, so if a customer desires
purchase financing, the customer will need to obtain financing from a third
party, however, as discussed above, Major Fleet will broker financing contracts.
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Plastics and Utility Products Division
The Company, through its subsidiary Premo-Plast, Inc. ("Premo-Plast"),
presently the only company in its Plastics and Utility Products division, is
currently conducting research and development with respect to two products
lines: (i) a line of spa and bath fixtures for use in whirlpool baths, spas,
tubs and swimming pools and (ii) an armored conduit system for use by utility
companies.
Spa Fixtures
Premo-Plast has been engaged in research and development related to a line
of fixtures to be placed through the walls of water containers such as spa tubs.
To date, the Company has focused its research on fixtures such as the jets used
to introduce water mixed with air bubbles into a whirlpool bath, spa or tub and
has designed and developed prototypes of such fixtures.
The construction of a whirlpool bath, spa or tub is typically a large
thin-walled shell (most often fiberglass-coated plastic), through which protrude
a number of fixtures such as air and water jets. Inserting these fixtures
requires two workers. First, the "inside" worker drills a pilot hole where the
fixture is to be inserted. Then, the "outside" worker drills a much larger hole
to clear the mounting thread on the fixture, and at the same time smoothes an
area on the rough outside wall of the spa around the hole in order to allow a
tight seal to the washer that will surround the hole when the fixture is
installed. Next, the inside worker places a sealing washer on the shaft of the
fixture and inserts the shaft through the drilled hole. The outside worker
places a second washer on the outside end of the fixture and applies silicone
sealant (or, in some cases, applies silicone sealant without a second washer),
and adds a retaining nut to secure the assembly. The inside worker must steady
the fixture from the inside of the spa, while the outside worker tightens the
nut from the outside. The degree of tightness is critical, as too much
tightening will squeeze out the silicone sealant, and too little will result in
a weak seal. Either condition will cause a leak. Once the nut is tightened, the
fixture must set in place, undisturbed, for several hours to permit the silicone
to harden and form a water-tight seal.
The Company has acquired the rights to a proprietary plumbing fixture
installation method and has designed and developed a line of fixtures that
enable installation in a whirlpool bath, spa or tub in significantly less time
than is normally required to install such fixtures. One person, working from
inside the whirlpool bath, spa or tub, drills the pilot hole and final-size
hole. Next, a rubber grommet is placed in the hole. A grommet resembles a small
donut with flanges around the inside and outside; the flanges on the grommet are
placed into contact with the drilled hole. Next, the worker presses the fixture
into the grommeted hole, which can be done from either the inside or the outside
of the whirlpool bath, spa or tub. The barrel of the fixture expands the sides
of the grommet against the sides of the hole, sealing the hole (by contrast to
the traditional fixture, the seal takes place at the sides, not the front and
back, so no sealant is required). The barrel is ribbed to prevent the fixture
from being pushed back inside the whirlpool bath, spa or tub. Because there are
relatively few steps involved in the Company's installation method, there is
less risk of error. In addition, because no silicone sealant is used, the
fixture does not need to set in place, which permits immediate use and minimizes
the risk of leaks.
The Company acquired the technology for the proprietary fixture
installation method in December 1996 through its acquisition from John Pinciaro
of all of his right, title and interest therein and two United States patent
applications related thereto. The Company and Mr. Pinciaro will participate
jointly in exploitation of the fixture installation method. The Company will
form a new subsidiary, whose shares will be owned 80% by the Company's existing
subsidiary Premo-Plast and 20% by Mr. Pinciaro.
Status of Development of Spa Fixtures
Since its acquisition of the technology relating to the fixture
installation method, the Company has further developed that technology and has
designed and produced working prototypes of the various fixtures for use in
connection with such method. The Company is currently testing the prototype
fixtures and installation method. In addition, the Company expects to finalize
its design drawings during the first quarter of 1998. The Company intends to use
a portion of the proceeds of this offering to finance the acquisition of the
equipment necessary to manufacture the component parts of the fixtures and the
manufacture and production of the fixtures. See "Use of Proceeds." The Company's
management expects that, given availability of the funding, the Company will
commence commercial sales of its spa and bath fixtures by the second quarter of
1998.
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Company's Strategy with respect to Spa and Bath Fixture Technology
According to industry data, approximately 250,000 whirlpool baths and spas
are sold annually. Management of Premo-Plast estimates that each whirlpool bath
requires approximately 35-45 fixtures and that approximately 600,000 tubs are
sold annually and each tub requires approximately 4-6 fixtures.
The Company's strategy with respect to the fixture technology is to
establish its proprietary installation method and its fixtures as the industry
standard for whirlpool baths, spas and tubs. The company has a three-fold plan
to implement this strategy upon its commencement of commercial production of the
fixtures. First, the Company intends to expand its workforce by hiring
employees, most of whom have already been identified and approached by the
Company, experienced in the areas of design, production and marketing.
Second, the Company intends initially to sell its fixtures and license the
right to use its installation method to several designated regional
manufacturers and producers of whirlpool baths, spas and tubs. All of these
manufacturers and producers were consulted by John Pinciaro, from whom the
Company acquired the rights to the proprietary fixture installation method and
presently an employee of Premo-Plast, prior to and during the period of
development of such method. All of these manufacturers and producers expressed
in writing their interest in the installation method and a desire to utilize
that method and the Company's fixtures once commercially available, although
none are required to do so. Among these producers is ThermoSpas, Inc., a company
wholly-owned and operated by Mr. Pinciaro.
Third, the Company intends to publicize its installation method and
fixtures generally to the whirlpool bath, spa and tub industry and to attend
major trade shows.
Armored Conduit
In November 1995, shortly after its formation, the Company acquired from
Progressive Polymerics, Inc. two United States patents and a Canadian patent
application covering an armored conduit product. The Company is presently
involved in litigation relating to the purchase price for such patents and
patent application. See "Legal Proceedings." The primary application for the
armored conduit is protection for underground electrical distribution lines. In
many major cities electric utility companies deliver service via lines that are
run through underground conduits. The underground conduit method of distribution
is becoming increasingly common in other cities as the preferred method for
delivering electric service to newly constructed subdivisions, replacing
above-ground lines mounted on wood or metal poles.
Originally, underground conduit was made from hollow creosoted wood or
transite pipe made from a mixture of asbestos and concrete. Currently, conduit
is typically made from either (i) PVC duct encased in concrete, (ii) cement or
concrete tubing or (iii) fiberglass tubing. Each of these types of conduit has
distinct disadvantages. PVC duct becomes brittle and inflexible in cold weather,
and melts and bonds to the electric wire if there is excess heat from an
overload condition. Cement or concrete cracks easily during transportation and
installation and, unless installed at the proper depth, as a result of
above-ground vibrations and stresses. If there is a problem with a portion of a
conduit system (whether PVC duct, cement, concrete or fiberglass) once
installed, the entire system must be removed and replaced.
The product covered by the Company's armored conduit patents is assembled
underground from pre-fabricated pieces that are typically two to four feet in
length. Each piece consists of a pre-formed plastic shell that is filled with
pourable cement. Each pre-formed shell has a rectangular cross-section, with a
linear ribbed exterior and tubular interior. Each end of the pre-formed shell
has an extension that can be coupled to the next section in end-to-end fashion.
Potentially, the design of the armored conduit offers several advantages
over other types of conduit. First, because the armored conduit system is
assembled from pre-fabricated pieces, if there is a problem with a single piece,
only that piece, rather than the entire conduit system, needs to be replaced.
The problem piece will be replaced with a replacement piece that has a top and
bottom half. The bottom half of the replacement piece will first be put in place
and coupled to the pieces on either side. The wires will then be placed in the
bottom half of the interior tube. The top half of the replacement piece will
then cover the wires and be coupled to the pieces on either side. Second, the
linear ribs on the exterior of the pre-formed shells increase the structural
strength of the shells and permit them to be interlocked when stacked for
storage or shipment, thereby reducing the risk of
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damage. Third, the outer plastic shell of the armored conduit system protects it
from water, chemicals and other elements to which underground conduit systems
are exposed. As a result of all of these advantages, the armored conduit system
can be expected to be more durable than existing types of conduit.
The Company has been engaged in limited research and development activities
relating to the armored conduit, and expects, given the availability of funding,
to pursue further research and development.
Research and Development
Research and development with respect to the armored conduit technology and
the spa and bath fixture technology is conducted by the Company through its
wholly-owned subsidiary Premo-Plast.
The Company spent no money on research and development in 1995 with respect
to its Plastics and Utility Products division and estimates that it spent
approximately $3,650 on research and development in 1996 with respect to such
division. Such division currently has no customers.
Intellectual Property
The Company owns two United States patents, issued in June 1993 and May
1994, respectively, relating to the armored conduit technology and also owns a
Canadian patent application relating to such technology. In addition, the
Company has filed two applications for a United States patent relating to the
spa and bath fixtures and related installation method. The Company is presently
pursuing such application with the United States Patent and Trademark Office.
The Company has also filed an application relating to the spa and bath fixtures
and related installation method under the Patent Cooperation Treaty designating
Australia, Canada, China, Japan and the European Patent Office (up to 18
countries) as recipient countries. Under such treaty, the Company will have the
option to individually file separate applications in the designated countries at
an appropriate future date. In addition, the Company relies on confidentiality
agreements and other laws to protect its technology. The Company believes that
it may be possible for third parties to develop technology that provides the
same features as the Company's plastic products without infringing the Company's
rights or making use of its proprietary technology.
Competition
If the Company's armored conduit is developed into a commercially viable
product, it will compete with PVC duct encased in concrete, cement or concrete
tubing and metal tubing, all of which are established methods. The Company's spa
and bath fixtures will compete with existing types of such fixture. Because the
Company's fixtures and installation method permit single-person assembly rather
than the two-person assembly required by existing products and installation
methods, the Company believes that use of its fixtures will result in
significantly reduced assembly time and costs.
Many of the producers and distributors of products competitive with the
Company's spa and bath fixtures and armored conduit may have well established
reputations, customer relationships and marketing and distribution networks.
They may also have greater financial, technical, manufacturing, management and
research and development resources than those of the Company. While the Company
believes that its spa and bath fixtures and installation method and its armored
conduit will have significant advantages over existing products, the Company's
competitors may be more successful than the Company in manufacturing and
marketing their products and may be able to leverage existing relationships to
obtain a competitive advantage over the Company.
47
<PAGE>
Employees
As of September 15, 1997 the Company and its subsidiaries had 29 employees,
28 of whom are full-time employees (205 employees, 202 of whom are full-time,
after giving pro forma effect to the Major Auto Acquisition). The breakdown of
employees among the Company and its subsidiaries, respectively is as follows:
Name of Entity Number of Employees
-------------- --------------------
Fidelity Holdings, Inc. .................. 2
Computer Business Sciences ............... 16
Computer Business Sciences (Israel) ...... 1
Reynard ................................. 0
Info Systems .............................. 4
Major Fleet .............................. 4
Premo-Plast .............................. 2
Major Auto ..............................
Sales ................................. 66
Service .............................. 55
Parts ................................. 15
Administration ........................ 40
LEGAL PROCEEDINGS
On November 22, 1996, the Company and its wholly-owned subsidiaries
Computer Business Sciences and Info Systems filed an action in the New York
Supreme Court, Queens County against Michael Marom ("Marom") and M.M. Telecom,
Corp. ("MMT"). The Company and its subsidiaries are seeking damages of
$5,000,000 for breach of contract, libel, slander, disparagement, violation of
copyright laws, fraud and misrepresentation. The Company and its subsidiaries
allege in their complaint that Marom and MMT have violated the terms of a
License and Exclusivity Agreement pursuant to which MMT guaranteed the purchase
of a certain amount of Talkie-Globe Software products and was granted an
exclusive license to advertise the Talkie-Globe product, to train customers and
to provide technical support. On February 4, 1997, the defendants filed a
counterclaim against the Company and its subsidiaries seeking damages of
$50,000,000 for breach of contract and violation of the Lanham Act. The
defendants allege in their counterclaim that Computer Business Sciences
misappropriated and altered software developed by Marom in order to prevent
competition with the Company's Talkie-Globe. Both parties to the litigation have
filed responses to the counterclaims. The litigation is proceeding and the
parties are currently in the process of discovery.
On May 7, 1997, the Company and its wholly-owned subsidiary Computer
Business Sciences filed an action in the New York Supreme Court, New York
County, against Network America, Inc. ("Network"). The Company and its
subsidiary are seeking damages of $1,000,000 for breach of contract,
misrepresentation, fraud and tortious interference with the Company's business
and operations. The Company and its subsidiary allege in their complaint that
the information and representations provided to the Company by Network, on the
basis of which the Company entered into a Letter of Intent to acquire Network,
were intentionally fraudulent and misleading. On August 18, 1997, Network filed
an answer which denied the allegations and a counterclaim seeking damages of
$2,000,000 for the Company's alleged misappropriation of proprietary information
and violation of a Non-Competition Agreement entered into by the parties to the
litigation. The litigation is proceeding and the parties are currently in the
process of discovery.
The Company believes that its asserted claims have merit and that it has
substantial defenses to the asserted counterclaims, and that a judgment against
the Company and its subsidiaries with respect to either action would not have a
material adverse effect on the Company's financial condition.
The Company has received notice of a claim by Mr. Daniel Tepper, of Los
Angeles, California. Mr. Tepper had contacted the Company claiming to have
acquired, through foreclosure of a security interest, 12,000 shares of its
Common Stock originally issued to Progressive Polymerics International, Inc.
("PPYM") in a private placement. He requested that the Company issue
certificates representing the shares in question that did not bear a legend
restricting their transfer, on the basis that the shares had been held by his
predecessor in interest for a
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<PAGE>
length of time sufficient to allow their unrestricted resale in accordance with
Rule 144 promulgated under the Securities Act. The Company was advised by
counsel that it should not issue the unlegended share certificates requested by
Mr. Tepper unless he showed that he acquired the relevant shares in a
transaction allowing him to take advantage of his predecessor's holding period
for the shares in question.
The Company's legal counsel contacted Mr. Tepper in November 1997, seeking
to verify details of the claimed foreclosure in order to verify Mr. Tepper's
eligibility to take advantage of his predecessor's holding period for the
shares in question. Mr. Tepper never responded to that inquiry. Instead, on
December 23, 1997, Mr. Tepper, acting through counsel, asserted a number of
claims against the Company, including claims arising out of transactions dating
back to the 1995 acquisition by the Company of the armored conduit patents. See
"Description of Business--Plastics and Utility Products Division--Armored
Conduit."
The Company has been advised by counsel that Mr. Tepper's claims are
without merit. However, one of the allegations made by Mr. Tepper prompted an
inquiry by the Company into one of the circumstances of that transaction.
On October 15, 1996 the Company, Progressive Polymerics, Inc.
("Progressive") and PPYM signed a First Amendment to the Patent Sale and
Purchase Agreement (the "First Amendment") between them dated November 14, 1995.
The First Amendment, which was dated September 30, 1996, settled a claim by the
Company against Progressive and PPYM related to undisclosed additional
development costs related to the armored conduit patents. The Company commenced
litigation against Progressive and PPYM in which it sought a reduction in the
purchase price for the armored conduit patents. The First Amendment changed the
purchase price from $500,000 in cash to the sum of (i) $100,000 in cash, (ii)
160,000 shares of the Company's Common Stock and (iii) warrants to purchase a
further 160,000 shares of the Company's Common Stock.
The Company was advised by the President of PPYM, Terrence Davis, prior to
signing the First Amendment, that the First Amendment had been approved by a
majority of the shareholders of PPYM. However, Mr. Tepper's claim included an
assertion that the version of the First Amendment that PPYM's shareholders
approved failed to include a provision, added just prior to signing, giving the
Company the right to repurchase 80,000 of the 160,000 shares issued to PPYM.
Upon receipt of Mr. Tepper's claim, the Company contacted Mr. Davis, who
confirmed on January 5, 1998 that the version of the First Amendment approved by
PPYM's shareholders did not include the repurchase provision. The reason given
by Mr. Davis was that, as President of PPYM, he believed he had the authority to
agree to the repurchase provision on PPYM's behalf without shareholder approval.
The Company has accordingly revived its legal action that was pending
against PPYM and Progressive at the time of the First Amendment, in which it
sought modification of the purchase price due pursuant to the Patent Sale and
Purchase Agreement with PPYM. The Company has obtained an order to show cause
seeking return of the $100,000 paid at the time the First Amendment was signed
and return of the 160,000 shares, which will effectively terminate the First
Amendment.
The Company, assuming it is successful in the prosecution of the litigation
as just described, will then seek to recover damages from PPYM and Progressive
related to the misrepresentations concerning additional development expenditures
required in connection with the patents covered by the Patent Sale and Purchase
Agreement. These misrepresentations were the subject of the legal action
referred to in the preceding paragraph.
DESCRIPTION OF PROPERTY
Neither the Company nor any of its subsidiaries owns any real estate or
plants. All of the operations of the Company and its subsidiaries are conducted
from locations leased from unaffiliated third parties.
The Company leases approximately 6,800 square feet on two floors in Kew
Gardens, New York. The lease for the floor that the Company currently uses for
executive offices and to house the Talkie Power Web Line Machines consists of
approximately 2,800 square feet and expires on March 31, 2001, but the Company
has the option to extend the lease for one additional five-year term. The
current annual rent under such lease is
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<PAGE>
$69,448.50, but will be increased by 3.5% on a compounded and cumulative basis
each lease year. If the Company elects to extend such lease, the base rent for
the extension period will be the greater of the base rent on March 31, 2001 at
the termination of the original lease period or the then fair market rental of
the premises.
The lease for the other floor in Kew Gardens, New York consists of
approximately 4,000 square feet and is occupied pursuant to the terms of a
sublease between Major Fleet, as lessee, and an unrelated third party, as
lessor. The lease expires on January 14, 2000 and contains no renewal
provisions. The current annual rent under such lease is $73,992. Pursuant to an
informal arrangement, (i) Computer Business Sciences pays such rent on behalf of
Major Fleet, (ii) a portion of the leased space is used by Computer Business
Sciences for additional office space and (iii) a portion of the leased space is
used by Associates to operate the customer service division of its reselling
operations.
The Company believes that its current facilities are suitable and adequate
for its current needs, but expects to require additional facilities to
accommodate its anticipated expansion.
Computer Business Sciences (Israel) leases from an unrelated third party
approximately 1,517 square feet of office space in Raanana, Israel. The lease
expires on September 1, 1999, but Computer Business Sciences (Israel) has an
option to renew the lease for an additional two-year period. The current annual
rent under such lease is $22,620 and will increase by 6% on July 1, 1999.
Info Systems leases from an unrelated third party approximately 1,415
square feet of office space in Downsview, North York, Canada. The lease expires
on October 31, 1998, but Info Systems has an option to renew the lease for an
additional two-year period. The current annual rent under such lease is $19,810
and is not subject to escalation.
Major Subaru subleases from an unrelated third party approximately 2,500
square feet of office and automobile showroom space in Woodside, New York. This
lease expires on January 31, 1999 and contains no renewal provisions. The
current annual rent under such lease is $69,457.56. Pursuant to an informal
arrangement between Major Subaru and Major Fleet, Major Fleet occupies the space
and pays the rental payments.
In addition, upon the consummation of the Major Auto Acquisition, the
Company will have an interest in the following leases, under which Major Auto
presently pays aggregate annual rental payments of $638,000:
Major Chrysler, Plymouth, Jeep Eagle leases from an unrelated third party
approximately 17,400 square feet of office and automobile showroom and storage
space in Long Island City, New York. This lease expires on October 31, 2001, but
Major Chrysler, Plymouth, Jeep Eagle has the option to extend the lease for one
additional ten-year term.
Major Dodge leases from Bruce Bendell and Harold Bendell approximately
12,000 square feet of office and automobile showroom space in Long Island City,
New York. The lease expires on December 31, 1998 and contains no renewal
provisions.
Major Auto leases from an unrelated third party approximately 2,000 square
feet of lot space in Astoria, New York adjacent to the main Major Dodge
showroom. This lease expired on June 30, 1997 at which time the annual rent was
$30,300. Major Auto is currently renegotiating such lease and remains in
possession of the premises under an oral month-to-month lease. Major Auto does
not believe that this property is material to the operation of Major Auto.
Major Chrysler, Plymouth, Jeep Eagle, Major Dodge and Major Subaru lease
from Bendell Realty L.L.C., a company wholly owned by Bruce Bendell and Harold
Bendell, approximately 40,000 square feet in Long Island City, New York which is
used as a service facility. The lease expires on December 31, 1998 and contains
no renewal provisions.
Major Chevrolet leases from an unrelated third party two adjacent
automobile dealership facilities in Long Island City, New York, comprising
approximately 250,000 square feet. This lease expires on February 1, 2004, but
Major Chevrolet has the option to extend the lease for up to three additional
five-year terms.
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<PAGE>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and executive officers of the Company are listed on the
following table. There are no other promoters or control persons:
<TABLE>
<CAPTION>
Name Age Position, Term in Office
- ---- --- ------------------------
<S> <C> <C>
Bruce Bendell 43 Chairman of the Board
President, Chief Executive Officer, Treasurer and a
Doron Cohen 41 Director
Richard L. Feinstein 54 Chief Financial Officer
Glenn H. Bank 46 Secretary
Yossi Koren 47 Director
</TABLE>
The following is a brief description of the professional experience and
background of the directors and executive officers of the Company:
Bruce Bendell. Mr. Bendell has served as the Company's Chairman of the
Board since its incorporation in November 1995. Mr. Bendell has served as the
President and a director of Major Chevrolet and its affiliates since December
1985.
Doron Cohen. Mr. Cohen has served as the President, Chief Executive
Officer, Treasurer and a director of the Company since its incorporation in
November 1995. From 1991 to 1995, Mr. Cohen served as President and Chief
Executive Officer of Holtman Enterprises, a construction and interior design
company.
Richard L. Feinstein. Mr. Feinstein has served as the Company's Chief
Financial Officer since December 1997. From 1994 to December 1997, Mr.
Feinstein maintained his own financial and management consulting practice. From
1989 to 1994, Mr. Feinstein served as Managing Director and Chief Financial
Officer of Employee Benefit Services, Inc. From 1978 to 1989, Mr. Feinstein was
a partner in KPMG Peat Marwick and a predecessor firm.
Glenn H. Bank. Mr. Bank has served as the Secretary of the Company since
June 1997. Mr. Bank has been a practicing attorney since 1979. Mr. Bank is a
solo practitioner with an office in New York City.
Yossi Koren. Mr. Koren has served as a director of the Company since April
1996. Mr. Koren founded Nissko Jewelry Trading, Inc., a jewelry manufacturer
based in New York City, in 1983 and has served as its Chief Executive Officer
since that time.
The following persons, although not executive officers of the Company, are
regarded by management as key personnel:
Zvi Barak. Mr. Barak has served as the Director of Research and
Development of the Company's Computer Telephony and Telecommunications division
since April, 1996. From 1992 to August 1996, Mr. Barak served as President of
Info Systems.
Moise Benedid. Mr. Benedid has served as the President of the Company's
Canadian subsidiary Info Systems since August 1996. From November 1994 through
July 1996, Mr. Benedid served as Vice President in charge of marketing and
technical support for TelePower International, Inc., where he was responsible
for the sale in Canada of franchises based on the "Talkie" technology. From
December 1992 to November 1994, Mr. Benedid served as President of Powerpoint
Microsystems, Inc., and from August 1989 to December 1992, he served as
President of Computer Junction, a Toronto-based computer retail store.
Michael S. Lukin. Mr. Lukin has served as the President of the Company's
subsidiary Computer Business Sciences (Israel) since October 1996. From January
1996 to October 1996, Mr. Lukin served as a securities broker for Weiner,
Abrahms and from 1990 to January 1996 he served as a securities broker for Kern
Suslow Securities.
John Pinciaro. Mr. Pinciaro serves as Vice-President of the Company's
subsidiary Premo-Plast since January 1, 1997 and will serve as the President of
the subsidiary of the Company to be formed to exploit the Company's spa fixture
technology. Mr. Pinciaro has served as the Chief Executive Officer of
ThermoSpas, Inc., a manufacturer and distributor of spas, since it inception in
1983.
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<PAGE>
Ronald K. Premo. Mr. Premo has served as the President of the Company's
subsidiary Premo-Plast since January 1997. In 1993, Mr. Premo founded and has
since operated R.K. Premo & Associates, a manufacturer's representative agency
for the plastics industry. From 1987 to 1993, Mr. Premo was a Manufacturer's
Representative for R.W. Mitscher, Inc.
Paul Vesel. Mr. Vesel has served as the Executive Vice President for Sales
& Marketing of the Company's subsidiary Computer Business Sciences since
November 1996. From May 1995 to November 1996, Mr. Vesel was employed by MTC
Netsource, a telecommunications company, where he was responsible for product
development and from 1993 to 1995, he served as Director of European Sales and
Marketing for ATC Distributing. From November to 1993, Mr. Vesel was a Managing
Partner of Focus International, an international trade and marketing consulting
company.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information for each of the Company's fiscal
years ended December 31, 1996 and 1995 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the fiscal
year ended December 31, 1996 and (ii) each other executive officer of the
Company whose total annual salary and bonus equaled or exceeded $100,000 in the
fiscal year ended December 31, 1996:
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------------------------------------------
All Other
Name and Principal Position Year Salary ($) Bonus ($) Other ($) Compensation ($)
--------------------------- ------ ---------------- ----------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Doron Cohen 1996 200,000(1) --0-- --0-- --0--
President, Chief Executive Officer and 1995 --0-- --0-- --0-- --0--
Treasurer (since November 7, 1995)
Bruce Bendell 1996 158,640(2) --0-- --0-- 162,500(3)
Chairman (since November 7, 1995) 1995 --0-- --0-- --0-- --0--
Zvi Barak 1996 105,000 --0-- 23,000(4) --0--
Director of Research and Development 1995 --0-- --0-- --0-- --0--
(Since April 18, 1996)
</TABLE>
- ------------
(1) Mr. Cohen waived his salary from the Company for the fiscal year ended
December 31, 1996. This salary will not accrue. Mr. Cohen was paid a salary
in 1996 of $50,000 from Computer Business Sciences.
(2) Mr. Bendell waived his consultant's fee from the Company for the fiscal year
ended December 31, 1996. This fee will not accrue. Mr. Bendell received
$8,640 as a management fee from Major Fleet for management services
performed during the fourth quarter of 1996.
(3) Represents warrants to acquire 50,000 shares of Common Stock issued to Mr.
Bendell on October 2, 1996 as a signing bonus under a management agreement
with the Company to manage the operations of Major Fleet. These warrants are
valued based upon the difference between the exercise price of $1.25 per
share and the closing bid price on the OTC Bulletin Board of $4.50 per share
on the date of issuance.
(4) Includes $5,000 for life and disability insurance premiums and $18,000
annual automobile allowance.
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<PAGE>
Option Grants Table
The following table sets forth information concerning individual grants of
stock options made during the fiscal year ended December 31, 1996 to each of the
executive officer of the Company named in the Summary Compensation Table above:
<TABLE>
<CAPTION>
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Exercise Price
Name Granted (#) Fiscal Year Per Share Expiration Date
- ---- ---------------------- ------------------- --------------- ----------------------
<S> <C> <C> <C> <C>
Doron Cohen ......... --0-- 0% N/A N/A
Bruce Bendell ...... 50,000(1) 100% $1.25 60 days after the
effective date
of a registration
statement relating to
the underlying
securities
Zvi Barak ......... --0-- 0% N/A N/A
</TABLE>
- ------------
(1) Represents warrants to acquire 50,000 shares of Common Stock issued to Mr.
Bendell on October 2, 1996 as a signing bonus under a management agreement
with the Company to manage the operations of Major Fleet.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
The following table sets forth information concerning each exercise of
stock options during the fiscal year ended December 31, 1996 by each of the
executive officers named in the Summary Compensation Table above and the value
of unexercised options held by such persons as of December 31, 1996:
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options at
Options at 12/31/96 (#) 12/31/96 ($)
------------------------------- ------------------------------
Shares
Acquired on
Name Exercise (#) Value Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------------- ---------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Doron Cohen N/A N/A N/A N/A N/A N/A
Bruce Bendell --0-- --0-- 50,000 --0-- 162,500(1) N/A
Zvi Barak N/A N/A N/A N/A N/A N/A
</TABLE>
- ------------
(1) Calculated based on the excess of the closing bid price of the Common Stock
on the OTC Bulletin Board on December 31, 1996 over the exercise price per
share of Common Stock.
Compensation of Directors
Directors of the Company are not compensated for their services. The
Company reimburses directors for their expenses of attending meetings of the
Board of Directors.
As of November 7, 1995, the Company's date of incorporation, the Company
entered into a Consulting Agreement with Bruce Bendell, its Chairman, pursuant
to which he serves as a business, management and financial consultant to the
Company for a period ending on December 31, 1998, subject to successive one-year
extensions at the option of the Company. Mr. Bendell receives an annual
consulting fee as determined by the Company's Board of Directors from time to
time, but not less than $150,000. The consulting fee is subject to a yearly
cost-of-living adjustment and may also be retroactively increased based upon the
Company's profits per outstanding share of Common Stock for the applicable year.
The available percentage increase in consulting fee as a result of profits
ranges from 5% for break-even results to 150% for profits exceeding $1.00 per
share. Mr.
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<PAGE>
Bendell is also entitled to a bonus in such amounts and at such times as
determined by the Company's Board of Directors. In addition, the agreement
provides that Mr. Bendell is entitled to various fringe benefits and is entitled
to participate in any incentive, stock option, deferred compensation or pension
plans established by the Company's Board of Directors. Mr. Bendell has agreed
not to disclose confidential information relating to the Company and has agreed
not to compete with, or solicit employees or customers of, the Company during
specified periods following the breach or termination of his agreement to serve
as a consultant to the Company.
Employment Contracts and Termination of Employment, and Change in Control
Arrangements
Doron Cohen. As of November 7, 1995, the Company's date of incorporation,
the Company entered into an Employment Agreement with Doron Cohen, pursuant to
which he serves as the Company's President, Chief Executive Officer and
Treasurer for a period ending on December 31, 1998, subject to successive
one-year extensions at the option of the Company. Mr. Cohen receives an annual
base salary as determined by the Company's Board of Directors from time to time,
but not less than $150,000. The annual salary is subject to a yearly
cost-of-living adjustment and may also be retroactively increased based upon the
Company's profits per outstanding share of Common Stock for the applicable year.
The available percentage increase in salary as a result of profits ranges from
5% for break-even results to 150% for profits exceeding $1.00 per share. Mr.
Cohen is also entitled to a bonus in such amounts and at such times as
determined by the Company's Board of Directors. In addition, the agreement
provides that Mr. Cohen is entitled to various fringe benefits under the
agreement and is entitled to participate in any incentive, stock option,
deferred compensation or pension plans established by the Company's Board of
Directors. Mr. Cohen has agreed not to disclose confidential information
relating to the Company and has agreed not to compete with, or solicit employees
or customers of, the Company during specified periods following discontinuance
of his employment for any reason other than a termination for cause.
Zvi Barak. As of April 18, 1996, the Company entered into an Employment
Agreement with Zvi Barak, pursuant to which he serves as the Company's Director
of Research & Development for a period ending on April 30, 2001, subject to a
one-year extension at the option of the Company. Mr. Barak receives an annual
base salary as determined by the Company's Board of Directors from time to time,
but not less than $150,000. The annual salary is subject to a yearly
cost-of-living adjustment and may also be retroactively increased based upon the
Company's profits per outstanding share of Common Stock for the applicable year.
The available percentage increase in salary as a result of profits ranges from
5% for break-even results to 150% for profits exceeding $1.00 per share. Mr.
Barak is also entitled to a bonus in such amounts and at such times as
determined by the Company's Board of Directors and to an annual royalty
incentive in an amount equal to 2% of gross revenues received from sales of new
products developed under his direction. In addition, the agreement provides that
Mr. Barak is entitled to various fringe benefits under the agreement, including
an annual allowance of $5,000 for disability insurance and $18,000 for the
purchase or lease of an automobile, and is entitled to participate in any
incentive, stock option, deferred compensation or pension plans established by
the Company's Board of Directors. Pursuant to the agreement, the Company agreed
to establish a research and development facility in Israel and, in the event
that Mr. Barak elects to establish residence outside of Israel, the Company has
agreed to establish another research and development facility in the location
where Mr. Barak establishes his residence. The Company spent approximately
$25,000 to open the research and development facility in Israel and spends
approximately $27,600 per month to operate such facility. Mr. Barak is obligated
to pay the expenses of relocating himself to Israel and to any subsequent
residence. Mr. Barak has agreed not to disclose confidential information
relating to the Company's business and has agreed not to compete with, or
solicit employees or customers of, the Company during specified periods if he
resigns, is terminated for cause or if his employment agreement expires without
being renewed.
Indemnification of Directors and Officers
Under the Nevada General Corporation Law, as amended, a director, officer,
employee or agent of a Nevada corporation may be entitled to indemnification by
the corporation under certain circumstances against expenses, judgments, fines
and amounts paid in settlement of claims brought against them by a third person
or by or in right of the corporation.
The Company is obligated under its Articles of Incorporation to indemnify
any of its present or former directors who served at the Company's request as a
director, officer or member of another organization against
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<PAGE>
expenses, judgments, fines and amounts paid in settlement of claims brought
against them by a third person or by or in right of the corporation if such
director acted in good faith or in a manner such director reasonably believed to
be in, or not opposed to, the best interests of the Company and, with respect to
any criminal action or proceeding, if such director had no reason to believe his
or her conduct was unlawful. However with respect to any action by or in the
right of the Company, the Articles of Incorporation prohibit indemnification in
respect of any claim, issue or matter as to which such director is adjudged
liable for negligence or misconduct in the performance is his or her duties to
the Company, unless otherwise ordered by the relevant court. The Company's
Articles of Incorporation also permit it to indemnify other persons except
against gross negligence or willful misconduct.
The Company is obligated under its bylaws to indemnify its directors,
officers and other persons who have acted as representatives of the Company at
its request to the fullest extent permitted by applicable law as in effect from
time to time, except for costs, expenses or payments in relation to any matter
as to which such officer, director or representative is finally adjudged
derelict in the performance of his or her duties, unless the Company has
received an opinion from independent counsel that such person was not so
derelict.
In addition, pursuant to indemnification agreements that the Company has
entered into with each of its directors, the Company is obligated to indemnify
its directors to the fullest extent permitted by applicable corporate law and
its Articles of Incorporation. The indemnification agreements also provide that,
upon the request of a director and provided that director undertakes to repay
amounts that turn out not to be reimbursable, that director is entitled to
reimbursement of litigation expenses in advance of the final disposition of the
legal proceeding.
The Company's indemnification obligations are broad enough to permit
indemnification with respect to liabilities arising under the Securities Act.
Insofar as the Company may otherwise be permitted to indemnify its directors,
officers and controlling persons against liabilities arising under the
Securities Act or otherwise, the Company has been advised that in the opinion of
the Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The Nevada General Corporation Law, as amended, also permits a corporation
to limit the personal liability of its officers and directors for monetary
damages resulting from a breach of their fiduciary duty to the corporation and
its stockholders. The Company's Articles of Incorporation limit director
liability to the maximum extent permitted by The Nevada General Corporation Law,
which presently permits limitation of director liability except (i) for a
director's acts or omissions that involve intentional misconduct, fraud or a
knowing violation of law and (ii) for a director's willful or grossly negligent
violation of a Nevada statutory provision that imposes personal liability on
directors for improper distributions to stockholders. As a result of the
inclusion in the Company's Articles of Incorporation of this provision, the
Company's stockholders may be unable to recover monetary damages against
directors as a result of their breach of their fiduciary duty to the Company and
its stockholders. This provision does not, however, affect the availability of
equitable remedies, such as injunctions or rescission based upon a breach of
fiduciary duty by a director.
The Company does not maintain any liability insurance for the benefit of
its officers or directors and has no present plans to obtain such insurance.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "Executive Compensation--Employment Contracts and Termination of
Employment, and Change in Control Arrangements" for a description of (i) the
Employment Agreement between the Company and Doron Cohen, its President, Chief
Executive Officer and Treasurer and one of its directors, and (ii) the
Employment Agreement between the Company and Zvi Barak, its Director of Research
and Development.
See "Executive Compensation--Compensation of Directors" for a description
of the Consulting Agreement between the Company and Bruce Bendell, its Chairman.
See "Executive Compensation--Indemnification of Directors and Officers" for
a description of indemnification agreements between the Company and each of its
directors.
55
<PAGE>
In October 1996, the Company acquired from Bruce Bendell, the Company's
Chairman, and his brother Harold Bendell all of the issued and outstanding stock
of Major Fleet. In exchange for their shares of the common stock of Major Fleet,
each of the Bendells received (i) 125,000 shares of the Company's 1996-MAJOR
Series of Convertible Preferred Stock and (ii) as a result of Major Fleet's
financial performance prior to the closing of the exchange, 50,000 shares of the
Company's Common Stock. See "Description of Securities--Preferred Stock."
In connection with the Company's acquisition of Major Fleet, the Bendells
and the Company entered into a management agreement pursuant to which the
Bendells have the exclusive right and obligation to manage the motor vehicle
leasing activities of Major Fleet. The management agreement is for a term ending
on December 31, 2001. In connection with the management agreement, the Company
issued to each of the Bendells warrants to purchase 50,000 shares of the
Company's Common Stock for $1.25 per share. The management agreement also
provides that the Bendells will receive a management fee annually in an amount
equal to the balance remaining after deducting from the annual gross revenues of
the motor vehicle leasing activities of Major Fleet the following: (i) Major
Fleet's costs of financing and operating its vehicle leasing activities, (ii) a
corporate management fee in an amount equal to 15% of Major Fleet's net income
to cover overhead costs of the Company allocable to Major Fleet and (iii) income
derived from the leases to which Major Fleet was a party on the date of closing
of the Company's acquisition of Major Fleet.
Following the planned acquisition of Major Auto by the Company, Bruce and
Harold Bendell will continue to be responsible for senior-level management of
the dealerships. The Bendell brothers and the Company expect that this
continuity of senior management will facilitate obtaining the manufacturers'
consents to the transfer of the dealerships to the Company. The Bendell
brothers' management control will be accomplished through (i) their ownership of
100 shares of the Company's 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred
Stock (of which shares Bruce Bendell has a proxy to vote the 50 shares of the
1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock owned by Harold Bendell
for a seven-year period commencing on January 7, 1998) which carries voting
rights allowing them to elect a majority of the Board of Directors of Major
Auto, and through (ii) a related management agreement, discussed immediately
below. See "Description of Securities--Preferred Stock--1997A-MAJOR AUTOMOTIVE
GROUP Series of Preferred Stock" below.
To further facilitate obtaining the required manufacturers' consents, the
Bendells and the Company have entered into a management agreement pursuant to
which the Bendells will have the exclusive right and obligation to manage the
automobile dealerships acquired by the Company in connection with the Major Auto
Acquisition and any additional automobile dealerships that the Company may
acquire in the future. The management agreement is for a term ending on December
31, 2002 and may not be earlier terminated unilaterally by the Company. If the
Company continues to own automobile dealerships at the end of the term, the
management agreement may be unilaterally extended by the Bendell brothers in
order to maintain the level of management control that will avoid the need to
seek further manufacturer consents. Should either of the Bendell brothers cease
managing the dealerships, the management agreement provides that ownership of
his 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock shares and his
management rights under the management agreement will be automatically
transferred to the other, and should both brothers cease managing the
dealerships for any reason, the shares and management rights will be
automatically transferred to a successor manager designated in a successor
addendum to each dealership agreement or, failing such designation, to a
successor manager designated by the Company (subject to approval by the
applicable manufacturers). As noted in the prior paragraph, Bruce and Harold
Bendell will retain the right to elect a majority of the directors of Major Auto
(and possibly other affiliates in the future) in order to facilitate obtaining
the required manufacturers' consents. Should the Boards of Directors of Major
Auto and the Company disagree as to a particular course of action, Major Auto
would nonetheless be able to take the action in question, except that the
management agreement prohibits certain actions without the prior approval by the
Company's Board of Directors. Those actions are (i) disposing of any of the
Major Auto dealerships, (ii) acquiring new dealerships, and (iii) the Company
incurring liability for Major Auto indebtedness.
As compensation for their performance under the management agreement, the
management agreement provides that the Bendells are entitled to receive
initially the same compensation that they theretofore received from the
dealerships to be acquired as part of the Major Auto Acquisition. As
compensation from such dealerships in
56
<PAGE>
1996, Bruce Bendell received a salary of $104,000 and a bonus of $300,000, and
Harold Bendell received a salary of $104,000 and a bonus of $180,000. Such
compensation will be increased in a manner to be negotiated upon expansion of
the operations of those dealerships or the Company's acquisition of new
dealerships. The compensation that Bruce Bendell is entitled to receive under
the management agreement is in addition to any other compensation that he is
entitled to receive as Chairman of the Company. In connection with the execution
of the Management Agreement in March 1997, the Company is required to issue to
the Bendells 100 shares of the 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred
Stock (of which shares Bruce Bendell has a proxy to vote the 50 shares of the
1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock owned by Harold Bendell
for a seven-year period commencing on January 7, 1998).
See "Planned Acquisition" for a description of the proposed Major Auto
Acquisition.
In April 1996, the Company acquired from Zvi Barak, then a director of the
Company, and Sarah Barak, his wife, all of the issued and outstanding stock of
Info Systems. Mr. Barak resigned his directorship on July 7, 1997. Pursuant to
the agreement between the Company and the Baraks, the Company acquired all of
the issued and outstanding shares of common stock of Info Systems. In exchange,
the agreement provides that the Baraks will receive $750,000, $300,000 of which
consists of twenty monthly installment payments of $15,000 from the Company to
the Baraks. The monthly installment payments commenced in September 1996 and are
scheduled to continue through June 1998. In order to secure such installment
payments, the Company has granted a security interest to the Baraks in the stock
of Info Systems and the other assets owned by Info Systems. To date, the Company
has withheld $85,000 of such installment payments as collateral for the Baraks'
obligation to make certain indemnification payments to the Company. The Company
has agreed to pay the Baraks the $85,000 by July 1998. In addition to monetary
compensation, each of the Baraks were issued 125,000 shares of the Company's
Common Stock, which vest (i) in the case of Sarah Barak, 25,000 shares on
December 31, 1997, 50,000 shares on each of December 31, 1998 and 1999 and (ii)
in the case of Zvi Barak, 25,000 shares per year on the last day of February
commencing on February 28, 1997 and continuing through February 28, 2002.
In March 1996, the Company's subsidiary Computer Business Sciences formed
a joint venture with Nissko Telecom, L.P., of which Yossi Koren, a director of
the Company is a limited partner. Mr. Koren is also a shareholder in Nissko
Telecom, Ltd. Nissko Telecom, Ltd. is the general partner of Nissko Telecom,
L.P. and also one of the Company's master agents. The joint venture arrangement
and the master agent arrangement are described above under "Description of
Business--Computer Telephony and Telecommunications Division--Talkie--
Arrangements with Nissko."
The Company has entered into a Memorandum of Understanding (the "MOU") with
the Agent, the Nissko Principals, and with the remaining limited partner of
Nissko, Robert L. Rimberg. The MOU looks toward restructuring the Nissko
arrangements as described above under "Description of Business--Computer
Telephony and Telecommunications Division--Talkie--Restructuring of Nissko
Arrangements."
The Company has made a loan to its President and Chief Executive Officer,
Doron Cohen, in the principal amount of $140,000, bearing interest at 5.77% per
annum, uncompounded. The loan is evidenced by a promissory note dated December
31, 1996. The promissory note provides that the full principal amount of, and
all accrued interest on, the loan is due and payable in a single installment on
December 31, 1998.
Nissko Telecom Associates, the joint venture between Computer Business
Sciences and Nissko Telecom, L.P., of which Yossi Koren, one of the Company's
directors is a limited partner, occupies space free of charge at the Company's
principal office in Kew Gardens, New York, pursuant to an informal arrangement.
Bruce Bendell, and Major Chevrolet, Major Dodge and Major Chrysler Plymouth
Jeep Eagle, all of which are wholly-owned by Bruce Bendell and/or his brother
Harold Bendell, have guaranteed the obligations of Major Fleet under a
$5,000,000 line of credit with Marine Midland Bank. In addition, Bruce Bendell
and Major Fleet have guaranteed the obligations of Major Auto's subsidiaries
under certain of their agreements with various financial institutions pursuant
to which such subsidiaries sell their vehicle finance contracts and leases.
Major Fleet has pledged its assets to such financial institutions to secure its
guarantee. In addition, such subsidiaries have cross-guaranteed and
cross-collateralized their respective agreements with such financial
institutions.
57
<PAGE>
See "Description of Business--Automotive Sales Division--Dealership
Operations--Vehicle Financing" and "--Leasing Division" for a description of
certain transactions between Major Auto and Major Fleet.
Major Subaru subleases from an unrelated third party approximately 2,500
square feet of office and automobile showroom space in Woodside, New York. This
lease expires on January 31, 1998 and contains no renewal provisions. The
current annual rent under such lease is $69,457.56. Pursuant to an informal
arrangement between Major Subaru and Major Fleet, Major Fleet occupies the space
and pays the rental payments.
Major Dodge leases from Bruce Bendell and Harold Bendell approximately
12,000 square feet of office and automobile showroom space in Long Island City,
New York. The lease expires on December 31, 1998 and contains no renewal
provisions. The current annual rent under such lease is $114,000.
Major Chrysler, Plymouth, Jeep Eagle, Major Dodge and Major Subaru lease
from Bendell Realty L.L.C., a company wholly owned by Bruce Bendell and Harold
Bendell, approximately 40,000 square feet in Long Island City, New York which is
used as a service facility. The lease expires on December 31, 1997 and contains
no renewal provisions. The current annual rent under such lease is $132,000.
Major Fleet is a guarantor of a mortgage held by Chrysler Realty on the
property owned by Bendell Realty L.L.C., located in Long Island City which Major
Auto operates as a service center for Major Dodge, Major Subaru, and Major
Chrysler, Plymouth, Jeep Eagle. As of June 30, 1997 the outstanding mortgage
balance was $861,265.51.
The promoters of the Company are Bruce Bendell and Doron Cohen. In
addition to the other transactions with Mr. Bendell and Mr. Cohen described or
referred to above under the heading "Certain Relationships and Related
Transactions," each of Mr. Bendell and Mr. Cohen received 2,500,000 shares of
the Company's Common Stock upon its incorporation in exchange for $25,000 or
$.01 per share.
58
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables sets forth information with respect to the beneficial
ownership of each class of the Company's securities as of September 30, 1997,
before and after giving effect to the sale of Common Stock offered hereby,
respectively, by (i) each director of the Company, (ii) each executive officer
of the Company, (iii) all directors and executive officers of the Company as a
group and (iv) each person known to the Company to own more than 5% of any class
of it securities:
BEFORE THE OFFERING(1)
<TABLE>
<CAPTION>
Common Stock
-----------------------------
Name and Address(3) Number Percent
------------------ ------------------ ---------
<S> <C> <C>
Bruce Bendell 2,850,010(4) 39.7%
Doron Cohen 2,500,000(6) 36.3%
Glenn H. Bank 1,400 *
Yossi Koren 504,108(7) 7.0%
Zvi Barak 250,000(8) 3.6%
Richard L. Feinstein -- *
All directors and execu-
tive officers as a group 6,105,518(9) 81.4%
Avraham Nissanian 506,329(10) 7.0%
Chmuel Livian 502,759(11) 7.0%
Harold Bendell 350,000(12) 4.9%
1997A-Major
1996-Major Series of 1997-Major Series of Automotive Group
Convertible Preferred Convertible Series of Preferred
Stock(2) Preferred Stock Stock
----------------------------- ------------------- ------------------
Name and Address(3) Number Percent Number Percent Number Percent
------------------- ------------------ --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Bruce Bendell 125,000(5) 50% -- -- -- --
Doron Cohen -- -- -- -- -- --
Glenn H. Bank -- -- -- -- -- --
Yossi Koren -- -- -- -- -- --
Zvi Barak -- -- -- -- -- --
Richard L. Feinstein -- -- -- -- -- --
All directors and execu-
tive officers as a group -- -- -- -- -- --
Avraham Nissanian -- -- -- -- -- --
Chmuel Livian -- -- -- -- -- --
Harold Bendell 125,000(13) 50% -- -- -- --
</TABLE>
- ------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Based on 6,877,700 shares of Common Stock outstanding on September 30, 1997.
(2) Based on 250,000 shares of the 1996-MAJOR Series of Convertible Preferred
Stock outstanding on September 30, 1997.
<PAGE>
(3) The address for each beneficial owner is c/o Fidelity Holdings, Inc., 80-02
Kew Gardens Rd., Suite 5000, Kew Gardens, NY 11415.
(4) Includes (i) 10 shares of Common Stock owned by Bruce Bendell's wife and the
following shares of Common Stock which Bruce Bendell has the right to
acquire within 60 days: (a) 250,000 shares of Common Stock, the minimum
number of shares of Common Stock into which the 125,000 shares of the
1996-MAJOR Series of Convertible Preferred Stock beneficially owned by Bruce
Bendell are convertible and (b) 50,000 shares of Common Stock which Bruce
Bendell has the right to acquire upon the exercise of warrants. Does not
reflect a proxy giving Mr. Bendell the sole right to vote an additional
500,000 shares of Common Stock issued pursuant to the MOU for a period of
two years. See "Description of Business--Computer Telephony and
Telecommunications Division--Talkie--Restructuring of Nissko Arrangements."
Does not reflect Mr. Cohen's agreement to give Bruce Bendell a proxy to vote
750,000 of Mr. Cohen's shares during the two-year period commencing on
October 14, 1997.
(5) All of such shares of the 1996-MAJOR Series of Convertible Preferred Stock
are held in an asset protection trust created under the law of Gibraltar.
Bruce Bendell is the principal beneficiary of such trust.
(6) Does not reflect Mr. Cohen's agreement to give Bruce Bendell a proxy to vote
750,000 of Mr. Cohen's shares during the two-year period commencing on
October 14, 1997.
(7) Includes (i) 1,350 shares of Common Stock owned by members of Mr. Koren's
immediate family, (ii) 3,508 shares of Common Stock representing one-third
of the 10,526 shares of Common Stock owned by Nissko Jewelry Trading, Inc.,
a company 33-1/3% owned by Mr. Koren, and (iii) 325,667 shares of Common
Stock representing approximately one-third of the 977,000 shares of Common
Stock that the Nissko Principals have the right to acquire within 60 days
upon the exercise of the Class A and Class B Warrants. The MOU provides that
upon execution of the definitive documentation, Mr. Koren will receive (i)
257,500 shares of
59
<PAGE>
the Company's Common Stock, transfer of which will be restricted for two
years as described under "Description of Business--Computer Telephony and
Telecommunications Division--Talkie--Restructuring of Nissko Arrangements,"
and (ii) warrants to acquire up to 68,917 shares of Common Stock which will
be exercisable within 60 days. Such warrants represent a portion of the
unexercised balance of the Class A Warrants. Upon the effectiveness of the
definitive documentation relating to the transactions contemplated by the
MOU, the Class B Warrants (exercisable for 750,000 shares of Common Stock
in the aggregate) will be canceled. See "Description of Business--Computer
Telephony and Telecommunications Division--Talkie--Restructuring of Nissko
Arrangements."
(8) Includes 125,000 shares of Common Stock owned by Mr. Barak's wife.
(9) Includes (i) 126,360 shares of Common Stock owned by immediate family
members of directors and executive officers as a group, (ii) 3,508 shares
of Common Stock representing one-third of the 10,526 shares of Common Stock
owned by Nissko Jewelry Trading, Inc., a company 33-1/3% owned by Mr.
Koren, and (iii) 625,667 shares of Common Stock that the directors and
executive officers as a group have the right to acquire within 60 days.
(10) Includes (i) 3,360 shares of Common Stock owned by members of Mr.
Nissanian's immediate family, (ii) 3,508 shares of Common Stock
representing one-third of the 10,526 shares of Common Stock owned by Nissko
Jewelry Trading, Inc., a company 33-1/3% owned by Mr. Nissanian, and (iii)
325,667 shares of Common Stock representing approximately one-third of the
977,000 shares of Common Stock that the Nissko Principals have the right to
acquire within 60 days upon the exercise of the Class A and Class B
Warrants. The MOU provides that upon execution of the definitive
documentation, Mr. Nissanian will receive (i) 257,500 shares of the
Company's Common Stock, transfer of which will be restricted for two years
as described under "Description of Business--Computer Telephony and
Telecommunications Division--Talkie--Restructuring of Nissko Arrangements,"
and (ii) warrants to acquire up to 68,917 shares of Common Stock which will
be exercisable within 60 days. Such warrants represent a portion of the
unexercised balance of the Class A Warrants. Upon the effectiveness of the
definitive documentation relating to the transactions contemplated by the
MOU, the Class B Warrants (exercisable for 750,000 shares of Common Stock
in the aggregate) will be canceled. See "Description of Business--Computer
Telephony and Telecommunications Division--Talkie--Restructuring of Nissko
Arrangements."
(11) Includes (i) 3,508 shares of Common Stock representing one-third of the
10,526 shares of Common Stock owned by Nissko Jewelry Trading, Inc., a
company 33-1/3% owned by Mr. Livian, and (ii) 325,667 shares of Common
Stock representing approximately one-third of the 977,000 shares of Common
Stock that the Nissko Principals have the right to acquire within 60 days
upon the exercise of the Class A and Class B Warrants. The MOU provides
that upon execution of the definitive documentation, Mr. Livian will
receive (i) 257,500 shares of the Company's Common Stock, transfer of which
will be restricted for two years as described under "Description of
Business--Computer Telephony and Telecommunications Division--
Talkie--Restructuring of Nissko Arrangements," and (ii) warrants to acquire
up to 68,917 shares of Common Stock which will be exercisable within 60
days. Such warrants represent a portion of the unexercised balance of the
Class A Warrants. Upon the effectiveness of the definitive documentation
relating to the transactions contemplated by the MOU, the Class B Warrants
(exercisable for 750,000 shares of Common Stock in the aggregate) will be
canceled. See "Description of Business--Computer Telephony and
Telecommunications Division--Talkie--Restructuring of Nissko Arrangements."
(12) Includes the following shares of Common Stock which Harold Bendell has the
right to acquire within 60 days: (i) 250,000 shares of Common Stock, the
minimum number of shares of Common Stock into which the 125,000 shares of
the 1996-MAJOR Series of Convertible Preferred Stock beneficially owned by
Harold Bendell are convertible and (ii) 50,000 shares of Common Stock which
Harold Bendell has the right to acquire upon the exercise of warrants.
(13) All of such shares of the 1996-MAJOR Series of Convertible Preferred Stock
are held in an asset protection trust created under the law of Gibraltar.
Harold Bendell is the principal beneficiary of such trust.
60
<PAGE>
AFTER THE OFFERING(1)
<TABLE>
<CAPTION>
1996-Major Series of
Convertible Preferred
Common Stock Stock(2)
------------------------------- ---------------------------
Name and Address(3) Number Percent Number Percent
------------------- -------------------- --------- ---------------- ---------
<S> <C> <C> <C> <C>
Bruce Bendell 4,650,010(5) 44.6% 125,000(6) 100%
Doron Cohen 2,500,000(7) 30.0% -- --
Glenn H. Bank 1,400 * -- --
Yossi Koren 504,108(8) 5.8% -- --
Zvi Barak 250,000(9) 3.0% -- --
Richard L. Feinstein -- * -- --
All directors and execu-
tive officers as a group 7,905,518(10) 73.5% 125,000 100%
Avraham Nissanian 506,329(11) 5.9% -- --
Chmuel Livian 502,759(12) 5.8% -- --
Harold Bendell 50,000 * -- --
1997A-Major
1997-Major Series of Automotive Group
Convertible Series of Preferred
Preferred Stock(3) Stock(4)
-------------------- ------------------
Name and Address(3) Number Percent Number Percent
------------------- --------- --------- -------- --------
<S> <C> <C> <C> <C>
Bruce Bendell 900,000 100% 50(13) 50%
Doron Cohen -- -- -- --
Glenn H. Bank -- -- -- --
Yossi Koren -- -- -- --
Zvi Barak -- -- -- --
Richard L. Feinstein -- -- -- --
All directors and execu-
tive officers as a group 900,000 100% 50(13) 50%
Avraham Nissanian -- -- -- --
Chmuel Livian -- -- -- --
Harold Bendell -- -- 50(13) 50%
</TABLE>
- ------------
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Based on 8,327,700 shares of Common Stock outstanding, assuming all
1,450,000 shares of Common Stock offered hereby are sold to third parties.
(2) Based on 250,000 shares of the 1996-MAJOR Series of Convertible Preferred
Stock outstanding on
September 30, 1997.
(3) Based on 900,000 shares of the 1997-MAJOR Series of Convertible Preferred
Stock to be outstanding upon the effectiveness of this offering and the
consummation of the Major Auto Acquisition.
(4) Based on 100 shares of the 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred
Stock to be outstanding upon the effectiveness of this offering and the
consummation of the Major Auto Acquisition.
<PAGE>
(5) Includes (i) 10 shares of Common Stock owned by Bruce Bendell's wife and
the following shares of Common Stock which Bruce Bendell has the right to
acquire within 60 days: (a) 250,000 shares of Common Stock, the minimum
number of shares of Common Stock into which the 125,000 shares of the
1996-MAJOR Series of Convertible Preferred Stock beneficially owned by
Bruce Bendell are convertible, (b) 50,000 shares of Common Stock which
Bruce Bendell has the right to acquire upon the exercise of warrants, and
(c) 1,800,000 shares of Common Stock, the minimum number of shares of
Common Stock into which the 900,000 shares of the 1997-MAJOR Series of
Convertible Preferred Stock owned by Bruce Bendell will be convertible,
assuming issuance of such shares upon the consummation of the Major Auto
Acquisition. Does not reflect a proxy giving Mr. Bendell the sole right to
vote an additional 500,000 shares of Common Stock issued pursuant to the
MOU for a period of two years. See "Description of Business--Computer
Telephony and Telecommunications Division--Talkie--Restructuring of Nissko
Arrangements." Does not reflect Mr. Cohen's agreement to give Bruce Bendell
a proxy to vote 750,000 of Mr. Cohen's shares during the two-year period
commencing on October 14, 1997.
(6) All of such shares of the 1996-MAJOR Series of Convertible Preferred Stock
are held in an asset protection trust created under the law of Gibraltar.
Bruce Bendell is the principal beneficiary of such trust.
(7) Does not reflect Mr. Cohen's agreement to give Bruce Bendell a proxy to
vote 750,000 of Mr. Cohen's shares during the two-year period commencing on
October 14, 1997.
(8) Includes (i) 1,350 shares of Common Stock owned by members of Mr. Koren's
immediate family, (ii) 3,508 shares of Common Stock representing one-third
of the 10,526 shares of Common Stock owned by Nissko Jewelry Trading, Inc.,
a company 33-1/3% owned by Mr. Koren, and (iii) 325,667 shares of Common
Stock representing approximately one-third of the 977,000 shares of Common
Stock that the Nissko Principals have the right to acquire within 60 days
upon the exercise of the Class A and Class B Warrants. The MOU
61
<PAGE>
provides that upon execution of the definitive documentation, Mr. Koren
will receive (i) 257,500 shares of the Company's Common Stock, transfer of
which will be restricted for two years as described under "Description of
Business--Computer Telephony and Telecommunications
Division--Talkie--Restructuring of Nissko Arrangements," and (ii) warrants
to acquire up to 68,917 shares of Common Stock which will be exercisable
within 60 days. Such warrants represent a portion of the unexercised
balance of the Class A Warrants. Upon the effectiveness of the definitive
documentation relating to the transactions contemplated by the MOU, the
Class B Warrants (exercisable for 750,000 shares of Common Stock in the
aggregate) will be canceled. See "Description of Business--Computer
Telephony and Telecommunications Division--Talkie--Restructuring of Nissko
Arrangements."
(9) Includes 125,000 shares of Common Stock owned by Mr. Barak's wife.
(10) Includes (i) 126,360 shares of Common Stock owned by immediate family
members of directors and executive officers as a group, (ii) 3,508 shares
of Common Stock representing one-third of the 10,526 shares of Common Stock
owned by Nissko Jewelry Trading, Inc., a company 33-1/3% owned by Mr.
Koren, and (iii) 2,425,667 shares of Common Stock that the directors and
executive officers as a group have the right to acquire within 60 days.
(11) Includes (i) 3,360 shares of Common Stock owned by members of Mr.
Nissanian's immediate family, (ii) 3,508 shares of Common Stock
representing one-third of the 10,526 shares of Common Stock owned by Nissko
Jewelry Trading, Inc., a company 33-1/3% owned by Mr. Nissanian, and (iii)
325,667 shares of Common Stock representing approximately one-third of the
977,000 shares of Common Stock that the Nissko Principals have the right to
acquire within 60 days upon the exercise of the Class A and Class B
Warrants. The MOU provides that upon execution of the definitive
documentation, Mr. Nissanian will receive (i) 257,500 shares of the
Company's Common Stock, transfer of which will be restricted for two years
as described under "Description of Business--Computer Telephony and
Telecommunications Division--Talkie--Restructuring of Nissko Arrangements,"
and (ii) warrants to acquire up to 68,917 shares of Common Stock which will
be exercisable within 60 days. Such warrants represent a portion of the
unexercised balance of the Class A Warrants. Upon the effectiveness of the
definitive documentation relating to the transactions contemplated by the
MOU, the Class B Warrants (exercisable for 750,000 shares of Common Stock
in the aggregate) will be canceled. See "Description of Business--Computer
Telephony and Telecommunications Division--Talkie--Restructuring of Nissko
Arrangements."
(12) Includes (i) 3,508 shares of Common Stock representing one-third of the
10,526 shares of Common Stock owned by Nissko Jewelry Trading, Inc., a
company 33-1/3% owned by Mr. Livian, and (ii) 325,667 shares of Common
Stock representing approximately one-third of the 977,000 shares of Common
Stock that the Nissko Principals have the right to acquire within 60 days
upon the exercise of the Class A and Class B Warrants. The MOU provides
that upon execution of the definitive documentation, Mr. Livian will
receive (i) 257,500 shares of the Company's Common Stock, transfer of which
will be restricted for two years as described under "Description of
Business--Computer Telephony and Telecommunications Division--
Talkie--Restructuring of Nissko Arrangements," and (ii) warrants to acquire
up to 68,917 shares of Common Stock which will be exercisable within 60
days. Such warrants represent a portion of the unexercised balance of the
Class A Warrants. Upon the effectiveness of the definitive documentation
relating to the transactions contemplated by the MOU, the Class B Warrants
(exercisable for 750,000 shares of Common Stock in the aggregate) will be
canceled. See "Description of Business--Computer Telephony and
Telecommunications Division--Talkie--Restructuring of Nissko Arrangements."
(13) Does not reflect a proxy giving Bruce Bendell the right to vote 50 shares
of the 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock owned by
Harold Bendell for a seven-year period commencing on January 7, 1998.
62
<PAGE>
DESCRIPTION OF SECURITIES
General
The authorized capital stock of the Company consists of 50,000,000 shares
of Common Stock, par value $.01 per share ("Common Stock"), and 2,000,000 shares
of Preferred Stock, par value $.01 per share ("Preferred Stock"). As of
September 30, 1997, 6,877,700 shares of Common Stock and 250,000 shares of
Preferred Stock were outstanding.
Common Stock
Holders of Common Stock are entitled to one vote per share on each matter
submitted to the stockholders. Holders of Common Stock do not have cumulative
voting rights, which means that the holders of a majority of the Company's
Common Stock and voting Preferred Stock are able to elect all of the Company's
directors. Holders of Common Stock share equally in dividends and distributions
that may be declared by the Company's Board of Directors out of funds legally
available for that purpose after dividends and distributions have been paid in
full to the holders of any series of Preferred Stock that the Company's Board of
Directors has determined shall have a preference in the payment of dividends and
distributions. Upon liquidation or dissolution of the Company, holders of Common
Stock will share equally in the assets of the Company remaining after the
payment of the Company's debts and liabilities and of the liquidation preference
of, and accrued dividends on, any series of Preferred Stock. The Common Stock is
not convertible or redeemable and holders of Common Stock do not have
subscription rights or preemptive rights. The shares of Common Stock currently
outstanding are, and the shares to be issued in connection with this offering
will be, duly authorized, validly issued, fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue up to 2,000,000 shares of Preferred
Stock in one or more series. The Company's Board of Directors is authorized to
designate one or more series of Preferred Stock and to determine the number of
shares, price, preferences, rights and limitations of each series of Preferred
Stock, without any action by the Company's stockholders. The issuance of
Preferred Stock or the issuance of rights to acquire Preferred Stock, may have
the effect of delaying or preventing a change in control of the Company or an
unsolicited takeover bid.
1996-MAJOR Series of Convertible Preferred Stock
The Company's Board of Directors has designated 250,000 shares of Preferred
Stock as the 1996-MAJOR Series of Convertible Preferred Stock (the "1996-Major
Series"). All shares of the 1996-Major Series were issued equally to Bruce
Bendell (the Chairman of the Company's Board of Directors) and his brother
Harold Bendell in connection with the Company's acquisition from them of the
common stock of Major Fleet.
Commencing December 31, 1996, each share of the 1996-Major Series became
convertible into that number of shares of Common Stock having a value of $10.00.
For purposes of conversion, each share of Common Stock is valued at the lesser
of (a) $5.00 and (b) if available, the average of the bid and ask closing prices
for the twenty consecutive trading days ending on the day prior to conversion.
Therefore, each share of the 1996-Major Series will be convertible into at least
two shares of Common Stock. Accrued and unpaid dividends on the 1996-Major
Series may at the holder's option be used to purchase shares of Common Stock
valued the same way as in the case of conversion.
Shares of the 1996-Major Series have voting rights. Holders of shares of
the 1996-Major Series vote with the holders of Common Stock, rather than as a
separate class, and are entitled to two votes per share on each matter submitted
to the stockholders.
Holders of shares of the 1996-Major Series share in dividends and
distributions that may be declared by the Company's Board of Directors with
respect to the Common Stock out of funds legally available for that purpose,
except that each share of the 1996-Major Series is entitled to twice the
dividend or distribution that is paid to the holders of Common Stock.
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Upon liquidation or dissolution of the Company, holders of shares of the
1996-Major Series will receive $10.00 per share plus accrued and unpaid
dividends out of the assets of the Company remaining after the payment of (i)
the Company's debts and liabilities and (ii) the liquidation preference of, and
accrued and unpaid dividends on, any other series of Preferred Stock to which
the Company's Board of Directors assigns a higher preference than the 1996-Major
Series. In the event that such remaining assets are insufficient to pay the full
liquidation value of the 1996-Major Series, the 1997-Major Series (described
below) and the 1997A-Major Series (described below), the available assets will
be allocated among the holders of such series pro rata in accordance with their
respective liquidation values. The liquidation preference on all series of the
Company's Preferred Stock must be paid in full before the holders of Common
Stock are entitled to any distribution.
The Company has the unrestricted right beginning January 1, 2002 to redeem
all or part of the shares of the 1996-Major Series for a redemption price of
$15.87 per share, plus accrued and unpaid dividends.
The holder of the 125,000 shares of the 1996-Major Series originally issued
to Harold Bendell is offering for sale by this Prospectus 250,000 shares of
Common Stock into which such shares of the 1996-Major Series are convertible.
See "Selling Shareholders." Holders of the remaining 125,000 shares of the
1996-Major Series have unlimited demand and piggyback registration rights with
respect to the shares of Common Stock into which such shares are convertible.
These rights allow the holders to require the Company to register such shares of
Common Stock in a registration statement under the Securities Act and to include
such shares of Common Stock in any registration of the Company's securities in a
registration statement under the Securities Act (excluding the registration
statement of which this Prospectus is a part), subject to specified limitations.
Holders of shares of the 1996-Major Series do not have subscription rights
or preemptive rights. The shares of the 1996-Major Series are duly authorized,
validly issued, fully paid and non-assessable.
1997-MAJOR Series of Convertible Preferred Stock
The Company's Board of Directors has designated 900,000 shares of Preferred
Stock as the 1997-MAJOR Series of Convertible Preferred Stock (the "1997-Major
Series"). None of the shares of the 1997-Major Series have been issued, but all
of such shares will be issued to Bruce Bendell (the Chairman of the Company's
Board of Directors) upon the consummation of the Major Auto Acquisition.
The 900,000 shares of the 1997-Major Series are convertible into the
Company's Common Stock. The number of shares of Common Stock into which the
1997-Major Series is convertible will be based upon the market value of the
Common Stock on the date of issuance (the "1997-Major Issue Date") of the
1997-Major Series. If the market value of 1,800,000 shares of Common Stock on
the 1997-Major Issue Date is at least $6,000,000, then the 900,000 shares of the
1997-Major Series will be convertible into 1,800,000 shares of Common Stock. If
the market value of 1,800,000 shares of Common Stock on the 1997-Major Issue
Date is less than $6,000,000, then the 900,000 shares of the 1997-Major Series
will be convertible into that number of shares of Common Stock that have a
market value on the 1997-Major Issue Date of $6,000,000. The market value per
share of the Common Stock on the 1997-Major Issue Date will be the mean between
the closing bid and ask prices for the Common Stock over the 20 trading days
immediately prior to the 1997-Major Issue Date.
Shares of the 1997-Major Series have voting rights. Holders of shares of
the 1997-Major Series vote with the holders of Common Stock, rather than as a
separate class, and are entitled to two votes per share on each matter submitted
to the stockholders.
Holders of shares of the 1997-Major Series share in dividends and
distributions that may be declared by the Company's Board of Directors with
respect to the Common Stock out of funds legally available for that purpose,
except that each share of the 1997-Major Series is entitled to twice the
dividend or distribution that is paid to the holders of Common Stock.
Upon liquidation or dissolution of the Company, holders of shares of the
1997-Major Series will receive $4.00 per share plus accrued and unpaid dividends
out of the assets of the Company remaining after the payment of (i) the
Company's debts and liabilities and (ii) the liquidation preference of, and
accrued and unpaid dividends on, any other series of Preferred Stock to which
the Company's Board of Directors assigns a higher preference than the 1997-Major
Series. In the event that such remaining assets are insufficient to pay the full
liquidation value of the 1996-Major Series, the 1997-Major Series and the
1997A-Major Series (described
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below), the available assets will be allocated among the holders of such series
pro rata in accordance with their respective liquidation values. The liquidation
preference on all series of the Company's Preferred Stock must be paid in full
before the holders of Common Stock are entitled to any distribution.
The shares of the 1997-Major Series are not redeemable.
Holders of the shares of the 1997-Major Series will have unlimited
piggyback registration rights with respect to the shares of Common Stock into
which such shares are convertible. These rights allow the holders to include
their shares of Common Stock in any registration of the Company's securities in
a registration statement under the Securities Act, subject to specified
limitations.
Holders of shares of the 1997-Major Series do not have subscription rights
or preemptive rights. The shares of the 1997-Major Series are duly authorized,
validly issued, fully paid and non-assessable.
1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock
The Company's Board of Directors has designated 100 shares of Preferred
Stock as the 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock (the
"1997A-Major Series"). None of the shares of the 1997A-Major Series have been
issued, but 50 of such shares will be issued to each of Bruce Bendell (the
Chairman of the Company's Board of Directors) and his brother Harold Bendell
upon the consummation of the Major Auto Acquisition.
Shares of the 1997A-Major Series will have limited voting rights.
Holders of shares of the 1997A-Major Series will vote as a separate class
to elect a majority of the Board of Directors of Major Auto and any other
subsidiaries and affiliates of the Company that are engaged in the operation of
motor vehicle dealerships. Holders of the shares of the 1997A-Major Series will
have no other voting rights. The reason for these special rights is to
facilitate obtaining the manufacturers' consents to the transfer to the Company
of the several automobile dealerships contemplated by the Major Auto
acquisition. For the same reason, the ownership of the 1997A-Major Series shares
is automatically transferred to Bruce or Harold Bendell should the other cease
managing the dealerships for any reason, and to a successor manager should both
cease doing so.
Holders of shares of the 1997A-Major Series will not be entitled to share
in any dividends or distributions that may be declared by the Company's Board of
Directors.
Upon liquidation or dissolution of the Company, holders of shares of the
1997A-Major Series will receive $1.00 per share out of the assets of the Company
remaining after the payment of (i) the Company's debts and liabilities and (ii)
the liquidation preference of, and accrued and unpaid dividends on, any other
series of Preferred Stock to which the Company's Board of Directors assigns a
higher preference than the 1997A-Major Series. In the event that such remaining
assets are insufficient to pay the full liquidation value of the 1996-Major
Series, the 1997-Major Series and the 1997A-Major Series, the available assets
will be allocated among the holders of such series pro rata in accordance with
their respective liquidation values. The liquidation preference on all series of
the Company's Preferred Stock must be paid in full before the holders of Common
Stock are entitled to any distribution.
The Company will have the right to redeem the shares of the 1997A-Major
Series under any of the following circumstances:
(i) It disposes of its Automotive Sales division and has no further motor
vehicle operations subject to the control of the holders of shares of the
1997A-Major Series.
(ii) The management agreement between the Company and Bruce and Harold
Bendell, relating to their management of the Company's motor vehicle
dealerships, reaches its scheduled expiration on December 31, 2002 and the
Bendell brothers do not decide to renew it, or it is earlier terminated by
mutual agreement of the parties.
(iii) The Company issues another series or class of security to effect
control over the Company's motor vehicle operations and the redemption of the
1997A-Major Series is approved by the automobile manufacturers with whom the
Company has franchise agreements at the time of such redemption.
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Holders of shares of the 1997A-Major Series do not have subscription rights
or preemptive rights and are not convertible into any other securities. When
issued, the shares of the 1997A-Major Series will be duly authorized, validly
issued, fully paid and non-assessable.
Bruce Bendell has a proxy to vote the 50 shares of the 1997A-Major Series
owned by Harold Bendell for a seven-year period commencing on January 7, 1998.
Warrants
The Company has issued and outstanding warrants to purchase an aggregate of
1,077,000 shares of Common Stock as follows:
In connection with the agreement of the Agent to purchase Talkie Power Web
Line Machines, on March 26, 1996, the Company issued to the Nissko Principals,
including Yossi Koren, who subsequently became a director of the Company, (a)
Class A Warrants, exercisable through the date that is 60 days after the
effectiveness of any public offering of the Company's securities (including this
offering), to acquire 750,000 shares of Common Stock at an exercise price of
$1.25 per share and (b) Class B Warrants, exercisable through March 19, 1998, to
acquire 750,000 shares of Common Stock at an exercise price of $1.25 per share.
Certificates evidencing the Class A Warrants and the Class B Warrants have not
yet been issued. Upon execution of the MOU, an aggregate $653,750 deposit that
the Nissko Principals and Robert L. Rimberg had previously paid towards the full
exercise price of the Class A Warrants was converted to a partial exercise of
the Class A Warrants. Upon such conversion, the Company issued an aggregate of
523,000 shares of its Common Stock to the Nissko Principals and Mr. Rimberg.
In connection with the acquisition by the Company from Bruce Bendell and
Harold Bendell of all of the shares of Major Fleet, on October 2, 1996, the
Company issued to each of Bruce Bendell and Harold Bendell warrants to acquire
up to 50,000 shares of Common Stock at an exercise price of $1.25 per share.
Harold Bendell's warrants are sometimes referred to herein as the "Selling
Shareholders' Warrants." Such warrants are exercisable during the period from
January 1, 1997 until the date six months after the effectiveness of the
registration statement relating to the Common Stock underlying such warrants.
Bruce Bendell's warrants have unlimited demand and piggyback registration rights
with respect to the shares 50,000 shares of Common Stock issuable upon exercise
of such warrants. These rights allow the holder of the warrants to require the
Company to register such shares of Common Stock in a registration statement
under the Securities Act and to include such shares of Common Stock in any
registration of the Company's securities in a registration statement under the
Securities Act (excluding the registration statement of which this Prospectus is
a part), subject to specified limitations.
All of the foregoing warrants have been issued pursuant to warrant
agreements that contain anti-dilutive provisions providing for adjustment of the
exercise price and the number and type of securities issuable upon exercise of
the warrants should any one or more of certain specified events occur.
Anti-Takeover Provisions
The Company's by-laws provide that directors may not be removed without
cause, which limits the ability of stockholders to effect a change in control of
the Company.
Sections 78.378 through 78.3793 of the Nevada General Corporation Law may
affect attempts to acquire control of the Company. In general under those
sections, an entity that acquires "control shares" of an "issuing corporation"
may vote the control shares only if approved by the holders of a majority of the
voting power of the issuing corporation, excluding (i) the acquirer of the
control shares, (ii) officers of the issuing corporation and (iii) those
directors of the issuing corporation who are also employees of the issuing
corporation. An issuing corporation is a corporation that is organized in
Nevada, does business in Nevada, directly or through a subsidiary, and has at
least 200 stockholders, at least 100 of whom are Nevada residents. As of
September 30, 1997, fewer than 100 of the Company's stockholders were Nevada
residents. Control shares are shares that when added to shares already owned by
an entity, would give that entity voting power in the election of directors of
any of three thresholds: one-fifth, one-third and a majority. The effect of
these sections is to condition the acquisition
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of voting control of a corporation on the approval of a majority of the
pre-existing disinterested stockholders. An issuing corporation may exclude
itself from the coverage of these sections by inserting a provision to that
effect in its articles of incorporation or by-laws on or before the tenth day
after the relevant acquisition is made.
Sections 78.411 through 78.444 of the Nevada General Corporation Law may
also affect attempts to acquire control of the Company. In general those
sections restrict "business combinations" (defined to include, among other
transactions, mergers, disposition of assets or shares and recapitalizations)
between a Nevada corporation having at least 200 stockholders and an "interested
stockholder" (defined as a stockholder who is the beneficial owner of 10% or
more of the voting power of the covered corporation's outstanding securities).
If occurring within three years from when a stockholder becomes an interested
stockholder, a business combination between that corporation and that interested
stockholder may be consummated only if either the business combination or the
purchase of shares that caused that stockholder to become an interested
stockholder has been approved by the Board of Directors of that corporation
prior to the date of such purchase. If occurring more than three years after
that stockholder becomes an interested stockholder, a business combination
between that corporation and that interested stockholder may be consummated only
if certain statutory requirements concerning the compensation to be received by
that corporation's stockholders are satisfied or if the business combination is
made in accordance with that corporation's articles of incorporation and either
(i) the business combination or the purchase of shares that caused that
stockholder to become an interested stockholder has been approved by that
corporation's Board of Directors prior to the date of such purchase or (ii) the
business combination has been approved by the vote of holders of stock
representing a majority of the voting power not beneficially owned by the
interested stockholder at a meeting called for that purpose not earlier than
three years after the date of the purchase of shares that caused that
stockholder to become an interested stockholder. A corporation may elect in its
original articles of incorporation not to be subject to these sections or the
stockholders representing a majority of the voting power not beneficially owned
by the interested stockholder may adopt an amendment to the corporation's
articles of incorporation to make that election, but the amendment will take
effect 18 months after the stockholder vote and will not apply to any
combination with an interested stockholder who was such on the effective date of
the amendment.
The issuance to Bruce Bendell of the 1997-MAJOR Series of Convertible
Preferred Stock in connection with the Major Auto Acquisition would be a
"business combination" as defined under the Nevada Business Corporation Law, but
would not, however, be prohibited because the Company's Board of Directors
approved in advance the issuance to Mr. Bendell in November 1995 of the
2,500,000 share of Common Stock that caused him to become an "interested
stockholder."
Registration Rights
See "--Preferred Stock--1996-MAJOR Series of Convertible Preferred Stock,"
"--1997-MAJOR Series of Convertible Preferred Stock" and "--Warrants" for a
description of certain demand and/or piggyback registration rights.
In consideration for certain consulting services, the Company has issued to
Ronald Shapss 50,000 shares of Common Stock and options, exercisable until May,
2002, to acquire 50,000 shares of Common Stock for $4.50 per share. All of such
issued shares and all of the shares underlying such options have unlimited
piggyback registration rights. Mr. Shapss has waived such piggyback registration
rights in connection with this offering.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Olde Monmouth
Stock Transfer Co., Inc., situated at 77 Memorial Highway, Suite 101, Atlantic
Highlands, New Jersey 08401.
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MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Information
On April 2, 1996, the Company's Common Stock was approved for trading on
the OTC Bulletin Board. From the time of the listing through September 30, 1997,
the high bid price was $6.375 and the low bid price was $3.50; quarter-end high
and low bids were (as reported by Nasdaq Trading & Market Services) which
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission, and may not reflect actual transactions:
Quarter Ended High Bid Low Bid
------------- -------- -------
September 30, 1997 $4.375 $3.50
June 30, 1997 $5.50 $4.00
March 31, 1997 $6.375 $3.625
December 31, 1996 $4.875 $3.75
September 30, 1996 $4.75 $3.50
June 30, 1996 $5.00 $4.00
Shareholders
As of September 30, 1997, there were 355 holders of record of the Company's
Common Stock.
Dividends
The Company has never declared dividends on any class of its securities and
has no present intention to declare any dividends on any class of its securities
in the future.
Options, Warrants and Securities Convertible into Common Stock
As of September 30, 1997, the Company had outstanding warrants to purchase
an aggregate of 1,237,000 shares of Common Stock. See "Description of
Securities--Warrants." As of September 30, 1997, the Company had outstanding
options to acquire 50,000 shares of Common Stock. See "Description of
Securities--Registration Rights." The Company has issued 250,000 shares of the
1996-MAJOR Series of Convertible Preferred Stock, which are convertible into at
least 500,000 shares of Common Stock and, in connection with the consummation of
the Major Auto Acquisition, will issue 900,000 shares of the 1997-MAJOR Series
of Convertible Preferred Stock, which will be convertible into at least
1,800,000 shares of Common Stock. See "Description of Securities--Preferred
Stock."
Shares Eligible for Future Sale
Immediately following this offering, there will be an aggregate of
8,327,700 shares of Common Stock outstanding (8,500,200 shares if the
Underwriter's over-allotment option is exercised in full). A minimum of (i) an
additional 2,050,000 shares of Common Stock will be issuable in the event of the
conversion of the unconverted balance of the Company's 1996-MAJOR Series of
Convertible Preferred Stock and 1997-MAJOR Series of Convertible Preferred Stock
and (ii) 1,007,000 shares of Common Stock will be issuable upon the exercise of
the Company's outstanding options and warrants. Of these shares, the 1,450,000
shares of Common Stock (1,622,500 if the Underwriter's over-allotment option is
exercised in full) will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are held by an
"affiliate" of the Company, as that term is defined in Rule 144 under the
Securities Act ("Affiliate"). The remaining 6,877,700 shares were or will be
sold by the Company in reliance on exemptions from the registration requirements
of the Securities Act and are "restricted" securities within the meaning of Rule
144 under the Securities Act (the "Restricted Shares").
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The Company and its officers and directors have agreed not to sell, offer
to sell, issue, distribute or otherwise dispose of any of their Restricted
Shares for a period of one year from the date of this Prospectus (subject to
certain limited exceptions) without the prior written consent of the
Underwriter. Following such one-year period, such Restricted Shares will be
eligible for sale in the public market, subject to the conditions and
restrictions of Rule 144 and other applicable laws.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
shares for at least a one-year period (as computed under Rule 144) is entitled
to sell within any three-month period a number of shares that does not exceed
the greater of (i) 1% of the then outstanding shares of Common Stock and (ii)
the average weekly trading volume in the Company's Common Stock during the four
calendar weeks immediately preceding the date on which the notice of sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
provisions relating to the manner and notice of sale and the availability of
current public information about the Company. A person (or persons whose shares
are aggregated) who is not deemed an Affiliate of the Company at any time during
the 90 days immediately preceding a sale, and who has beneficially owned shares
for at least a two-year period (as computed under Rule 144), would be entitled
to sell such shares under Rule 144(k) without regard to the volume, manner of
sale, notice and public information restrictions of Rule 144 described above.
SELLING SHAREHOLDERS
Up to 300,000 shares of Common Stock (the "Selling Shareholders' Shares")
may be offered and sold pursuant to this Prospectus by Castle Trust and
Management Services Limited, as Trustee under the Millenium Second Trust created
under that certain Deed of Settlement dated October 2, 1996 (the "Trustee") and
Harold Bendell (collectively, the "Selling Shareholders"). Of such 300,000
shares, 250,000 shares may be offered and sold by the Trustee. Such 250,000
shares of Common Stock are the minimum number of shares issuable upon the
conversion of 125,000 shares of the Company's 1996-MAJOR Series of Convertible
Preferred Stock. See "Description of Securities--Preferred Stock." As the
settlor and principal beneficiary of such trust, Harold Bendell has beneficial
ownership of such stock. The remaining 50,000 shares may be offered and sold by
Harold Bendell, individually, upon exercise of the Selling Shareholders'
Warrants. See "Description of Securities--Warrants."
The Company has agreed to register the public offering of the Selling
Shareholders' Shares under the Securities Act concurrently with this offering
and to pay all expenses in connection therewith. The Selling Shareholders'
Shares have been included in the registration statement of which this Prospectus
is a part. None of the Selling Shareholders' Shares may be sold by the Selling
Shareholders prior to the 91st day after the date of this Prospectus, without
the prior written consent of the Underwriter. There are no current plans,
proposals, arrangements or understandings of the Underwriter with respect to
modifying, shortening or waiving the 90-day lock-up period (the "Selling
Shareholder Lock-Up Period").
Harold Bendell is the brother of Bruce Bendell, the Chairman of the
Company's Board of Directors, and has a management agreement with the Company to
manage, with Bruce Bendell, the operation of the Company's subsidiary Major
Fleet. In addition, upon the consummation of the Major Auto Acquisition, Harold
Bendell will have a management agreement with the Company to manage, with Bruce
Bendell, the operations of the Company's automobile dealerships. The Company
will not receive any of the proceeds from the sale of the Selling Shareholders'
Shares.
Prior to this offering, the Trustee has legal ownership of 250,000 shares
of the Common Stock (assuming the Trustee converts 125,000 shares of the
Company's 1996-MAJOR Series of Convertible Preferred Stock at a time when the
Common Stock has a value equal to or greater than $5.00 per share), which
represents approximately 3.5% of the 6,877,700 shares of Common Stock
outstanding as of September 30, 1997. After giving effect to this offering and
assuming that the Trustee does not purchase any of the shares of Common Stock
offered hereby, the Trustee will own no Common Stock.
Prior to this offering, Harold Bendell has beneficial ownership of 350,000
shares of the Common Stock (which includes (i) the 250,000 shares of Common
Stock referred to in the immediately preceding paragraph and
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(ii) the Selling Shareholders Warrants), which represents approximately 4.9% of
the 6,877,700 shares of Common Stock outstanding as of September 30, 1997. After
giving effect to this offering and assuming that the Mr. Bendell does not
purchase any of the shares of Common Stock offered hereby, Mr. Bendell will own
50,000 shares of Common Stock.
The Selling Shareholders' Shares may be offered and sold from time to time
during the period commencing on the 91st day and ending on the 120th day after
the date of this Prospectus as market conditions permit in the over-the-counter
market, or otherwise, at prices related to the then-current market price, or in
negotiated transactions. The Selling Shareholders' Shares may be sold by one or
more of the following methods, without limitation: (i) a block trade in which a
broker or dealer so engaged will attempt to sell the Selling Shareholders'
Shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction; (ii) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account pursuant to this Prospectus;
(iii) ordinary brokerage transactions and transactions in which the broker
solicits purchases; and (iv) face-to-face transaction between the sellers and
purchasers without a broker or dealer. In effecting sales, brokers or dealers
engaged by the Selling Shareholders may arrange for other brokers or dealers to
participate. Such brokers or dealers may receive commissions or discounts from
the Selling Shareholders in amounts to be negotiated. Such brokers, dealers and
any other participating brokers or dealers may be deemed to be "underwriters"
within the meaning of the Securities Act in connection with such sales. From
time to time, either of the Selling Shareholders may pledge, hypothecate or
grant a security interest in some or all of the Selling Shares owned by it and
the pledgees, secured parties or person to whom such security interests have
been hypothecated shall, upon foreclosure in the event of default, be deemed to
be Selling Shareholders for purposes hereof.
If any of the following occurs: (i) the securities are sold at a fixed
price or by option at a price other than the prevailing market price, (ii) the
securities are sold in block transactions and the purchaser takes the securities
with the intent to resell; or (iii) the compensation paid to broker-dealers is
other than usual and customary discounts, this Prospectus must be amended to
include additional disclosure relating to such price, arrangements and
compensation terms before offers and sales of the Selling Shareholders' Shares
may be made.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to Hobbs Melville
Securities Corp. (the "Underwriter") and the Underwriter has agreed to purchase
from the Company 1,150,000 shares of Common Stock.
The Underwriting Agreement provides that the obligation of the Underwriter
to purchase the shares of Common Stock offered hereby is subject to approval of
certain legal matters by its counsel and to certain other conditions. The
Underwriter is obligated to take and pay for all shares of Common Stock offered
hereby (other than those covered by the over-allotment option described below)
if any of such shares are purchased.
The Underwriter proposes to offer part of the shares of Common Stock
directly to the public at the public offering price set forth of the cover page
of this Prospectus and part of the shares of Common Stock to certain dealers at
such public offering price less a concession not to exceed $0.60 per share. The
Underwriter may allow, and such dealers may reallow, a concession to certain
other dealers not to exceed $0.10 per share. The offering price of the shares of
Common Stock offered hereby was determined by negotiation between the Company
and the Underwriter and does not necessarily bear any relationship to the
assets, book value, results of operations or other established criteria of
value, and may not be indicative of prices that will prevail in any trading
market.
The Company has granted to the Underwriter an option, exercisable for 45
days from the date of this Prospectus, to purchase up to 172,500 additional
shares of Common Stock to cover over-allotments, if any, at the public offering
price, less underwriting discounts and commissions, as set forth on the cover
page of this Prospectus. If the Underwriter exercises this option, it will be
obligated, subject to certain conditions, to purchase that number of shares with
respect to which it exercised its option. The Underwriter may exercise such
option, in whole or in part, only to cover over-allotments made in connection
with the sale of the Common Shares offered hereby.
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The Company and its officers and directors have agreed not to sell, offer
to sell, distribute or otherwise dispose of any shares of Common Stock for a
period of one year from the date of this Prospectus (subject to certain limited
exceptions) without the prior written consent of the Underwriter. The
Underwriter has agreed not to withhold such consent unreasonably.
In connection with the offering made hereby, the Company has agreed to sell
to the Underwriter, for nominal consideration, the Underwriter's Warrants to
purchase 115,000 shares of Common Stock from the Company (10% of the number of
shares offered by the Company in this offering). The Underwriter's Warrants are
exercisable, in whole or in part, at an exercise price equal to 125% of the
public offering price set forth on the cover page of this Prospectus at any time
during the four-year period commencing one year after the effective date of the
registration statement of which this Prospectus is a part. The warrant agreement
pursuant to which the Underwriter's Warrants will be issued will contain
provisions providing for adjustment of the exercise price and the number and
type of securities issuable upon exercise of the Underwriter's Warrants should
any one or more of certain specified events occur.
The Company has agreed to reimburse the Underwriter for up to $207,000
(which represents 3% of the aggregate public offering price set forth on the
cover page of this Prospectus (without regard to the Underwriter's
over-allotment option)) of the Underwriter's out-of-pocket expenses (including
fees of its counsel) in connection with the sale of Common Stock offered hereby.
The Company has already paid $25,000 of such amount. The Company has also agreed
to indemnify the Underwriter or contribute to losses arising out of certain
liabilities that may be incurred in connection with this offering, including
liabilities under the Securities Act.
In connection with this offering, the Underwriter may engage in
stabilizing, syndicate short covering transactions, penalty bids or other
transactions during the offering that may stabilize, maintain or otherwise
affect the market price of the Common Stock at a level above that which might
otherwise prevail in the open market. Stabilizing transactions are bids for and
purchases of the Common Stock for the purpose of preventing or retarding a
decline in the market price of the Common Stock to facilitate the offering.
Syndicate short covering transactions are bids to purchase and actual purchases
of Common Stock on behalf of the Underwriter to provide it with enough shares of
Common Stock to deliver to those purchasing shares of Common Stock in this
offering. A penalty bid is an arrangement that permits the Underwriter to
reclaim a selling concession when the shares of Common Stock originally sold by
the Underwriter are purchased in a covering transaction. Such stabilizing,
syndicate short covering transactions, penalty bids and other transactions, if
commenced, may be discontinued at any time.
The Underwriter has been in existence since May 1996. The Underwriter was
originally named Sun Coast Capital Corp., changed its name to SouthWall Capital
Corp. in October 1997 and changed its name to Hobbs Melville Securities Corp. in
December 1997. The Underwriter has co-managed one other offering of securities
and is currently managing one other offering. There are no material
relationships between the Underwriter and Doron Cohen or Bruce Bendell, the
promoters of the Company.
EXPERTS AND COUNSEL
The financial statements included in this Prospectus, have been audited by
(i) Nemiroff, Cosmas & Co., CPA's, independent auditors, with respect to the
Company for the 1995 fiscal year, (ii) Peter C. Cosmas Co., CPA's, independent
auditors, with respect to the Company for the 1996 fiscal year, (iii) Doane
Raymond, Chartered Accountants, independent auditors, with respect to Info
Systems for the 1996 fiscal year, (iv) Marcum & Kliegman LLP, independent
accountants, with respect to Major Fleet for the 1995 and 1996 fiscal years, and
(v) BDO Seidman, LLP, independent auditors, with respect to Major Auto for the
1995 and 1996 fiscal years, in each case as stated in their respective reports
appearing herein and have been so included herein in reliance upon the reports
of such firms given upon their authority as experts in accounting and auditing.
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Piper & Marbury L.L.P., New York, New York. Certain
legal matters will be passed upon for the Underwriter by Dolgenos Newman &
Cronin LLP, New York, New York.
71
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company's auditor for the fiscal year ended December 31, 1995 was
Nemiroff, Cosmas & Co., CPA's ("Nemiroff"). The Company's auditor for the fiscal
year ended December 31, 1996 was Peter C. Cosmas Co., CPA's ("Cosmas"). In
December 1996, Peter C. Cosmas, previously a principal in Nemiroff, left
Nemiroff and opened a separate practice. The Company has elected to retain
Cosmas as its auditor in lieu of Nemiroff. The auditor's reports on the
Company's financial statements for the past two fiscal years of the Company did
not contain any adverse opinion, or disclaimer of opinion, and was not modified
as to uncertainty, audit scope or accounting principles. The decision to change
auditors was not recommended or approved by the Company's Board of Directors or
any committee thereof, as no disagreement was involved. There have been no
disagreements with respect to accounting and financial disclosure.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports, proxy and information statements
and other information filed by the Company can be inspected and copied at the
public reference facilities maintained by the Commission in Washington, D.C. at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
Commission's regional offices in New York (7 World Trade Center, Suite 1300, New
York, New York 10048). Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the Commission at 1-800-SEC-0330 for
further information on the operation of the public reference rooms. The
Company's Exchange Act filings are also available to the public on the
Commission's Internet site (http://www.sec.gov).
This Prospectus, which constitutes part of a registration statement on Form
SB-2 filed with the Commission under the Securities Act of 1933, as amended (the
"Securities Act"), by the Company, omits certain of the information contained in
the registration statement. Reference is hereby made to the registration
statement and to the exhibits to the registration statement for further
information about the Company and the Common Stock. Statements in this
Prospectus concerning provisions of documents are materially complete summaries
of such documents. Copies of such material, including the complete registration
statement and the exhibits, can be inspected, without charge at the offices of
the Commission, or obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
72
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Peter C. Cosmas Co., CPA's ................................................... F-2
Fidelity Holdings, Inc. and Subsidiaries Consolidated Financial Statements for the Year
Ended December 31, 1996 and Period November 7, 1995 (inception date) to
December 31, 1995 ...................................................................... F-3
Nine Months Ended September 30, 1997 and 1996 (Unaudited) .............................. F-17
Pro Forma Combining Financial Statements ................................................ F-22
Report of BDO Seidman, LLP ............................................................... F-28
Major Chevrolet and Affiliates Combined Financial Statements for the Years Ended
December 31, 1996 and 1995 and the Nine-Month Periods Ended September 30, 1997
and 1996 (Unaudited) .................................................................. F-29
Report of Marcum & Kliegman, LLP ......................................................... F-38
Major Fleet & Leasing Corp. Financial Statements for the Years Ended December 31, 1996
and 1995 ............................................................................... F-39
Report of Doane Raymond, Chartered Accountants .......................................... F-48
786710 Ontario Limited for the Year Ended December 31, 1996 .............................. F-49
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
Fidelity Holdings, Inc.
We have audited the consolidated balance sheets of Fidelity Holdings, Inc.
and subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income (loss), stockholders equity, and cash flows for the periods
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not examine the financial statements of
Major Fleet & Leasing Corp. and 786710 Ontario Limited, both wholly-owned
subsidiaries, which statements, after intercompany eliminations, reflect total
assets of $4,299,354, as of December 31, 1996 and total revenue of $796,602.
Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Major Fleet & Leasing Corp. and 786710 Ontario Limited is based solely on
he report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the reports of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Fidelity Holdings, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the periods then ended in conformity with generally
accepted accounting principles.
PETER C. COSMAS CO., CPA'S
New York, New York
February 27, 1997
except as to the information
in Note 1(n) and Note 14
for which the date is
December 19, 1997 and
the second and third paragraphs of
Note 16, for which
the date is January 6, 1998
F-2
<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 and shareholder ............ 142,659 --
Accounts receivable .................................... 179,837 --
Inventories ............................................. 1,494,020 --
Other current assets .................................... 45,349 10,000
----------- ---------
Total current assets ................................. 3,826,949 49,063
Net investment in direct financing leases, net of current
portion ................................................... 1,059,287 --
Property and equipment .................................... 1,023,523 --
Excess of costs over net assets acquired .................. 1,475,269 --
Other intangible assets .................................... 1,653,474 500,000
Other assets ................................................ 278,362 --
----------- ---------
Total assets .......................................... $ 9,316,864 $ 549,063
=========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ....................................... $ 419,052 $ --
Accrued expenses ....................................... 522,026 5,480
Current maturities of long-term debt ..................... 643,976 35,714
Accrued income taxes .................................... 4,378 --
Deferred revenue ....................................... 67,409 --
Due to affiliates ....................................... 1,404,079 --
----------- ---------
Total current liabilities ........................... 3,060,920 41,194
Long-term debt, less current maturities .................. 515,609 464,286
Deferred income taxes .................................... 424,000 --
Other ...................................................... 72,122 --
----------- ---------
Total liabilities .................................... 4,072,651 505,480
----------- ---------
Commitments
Stockholders' equity
Preferred stock, .01 par value; 2,000,000 shares authorized,
250,000 shares issued and outstanding in 1996 and none
in 1995 ................................................. 2,500 --
Common stock, .01 par value 50,000,000 shares authorized,
6,279,200 shares issued and outstanding in 1996 and
5,000,000 in 1995 ..................................... 62,792 50,000
Additional paid in capital .............................. 4,509,108 --
Cumulative translation adjustment ........................ 264 --
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-3
<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 ......... 1,115,966 6,417
Provision for income taxes ................................. 441,000 --
----------- ----------
Net income (loss) .......................................... $ 675,966 $ (6,417)
=========== ==========
Earning (loss) per share
Primary ................................................ $ 0.12 $ --
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
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<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 ................................................... $ -- --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock
Shares Amount Shares Amount
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Issuance of Common Stock...... -- $ -- 5,000,000 $50,000
------- ------ --------- -------
Net Loss ..................
Balance December 31, 1995.... -- 5,000,000 50,000
Issuance of Common
Stock and exercise of
warrants net of expenses -- -- 990,000 9,900
Issuance of Common
Stock as payment for
long-term debt ............ -- -- 160,000 1,600
Issuance of Common
Stock for the
acquisition of 786710
Ontario Ltd. ............... -- -- 125,000 1,250
Issuance of Preferred stock
for the acquisition of
Major Fleet & Leasing Corp.. 250,000 2,500 -- --
Net income .................. -- -- -- --
Effect of stock compensation
charge...................... -- -- 4,200 42
Translation adjustment ...... -- -- -- --
------- ------ --------- -------
Balance December 31, 1996.... 250,000 $2,500 6,279,200 $62,792
======= ====== ========= =======
Additional Retained Cumulative Total
Paid-In Earnings Translation Stockholders'
Capital (Deficit) Adjustment Equity
------------ ----------- ------------- --------------
Issuance of Common Stock...... $ -- $ -- $ -- $ 50,000
Net Loss .................. (6,417) (6,417)
---------- -------- ---- ----------
Balance December 31, 1995.... -- (6,417) -- 43,583
Issuance of Common
Stock and exercise of
warrants net of expenses 979,000 988,900
Issuance of Common
Stock as payment for
long-term debt ............ 398,400 -- -- 400,000
Issuance of Common
Stock for the
acquisition of 786710
Ontario Ltd. ............... 623,750 -- -- 625,000
Issuance of Preferred stock
for the acquisition of
Major Fleet & Leasing Corp.. 2,497,500 -- -- 2,500,000
Net income .................. -- 675,966 -- 675,966
Effect of stock compensation
charge ..................... 10,458 -- -- 10,500
Translation adjustment ...... -- -- 264 264
---------- -------- ---- ----------
Balance December 31, 1996.... $4,509,108 $669,549 $264 $5,244,213
========== ======== ==== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<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 number of
common and common equivalent shares, outstanding each year. Common equivalent
shares consist of shares issuable upon the exercise of stock options and
warrants, except where anti-dilutive.
d) Cash Equivalents:
Cash equivalents consist of highly liquid investments, principally money
market accounts, with a maturity of three months or less at the time of
purchase. Cash equivalents are stated at cost which approximate market value.
e) Inventories:
Inventories are stated at the lower of cost (first-in, first-out) or
market. Automobiles and trucks held for sale or lease are valued at the lower of
cost (specific identification) or market.
f) Property and Equipment:
Property and equipment are recorded at cost. Depreciation and amortization
of property and equipment are computed using the straight-line method over the
estimated useful lives of the assets, ranging from three to ten years.
Depreciation of leased equipment is calculated on the cost of the equipment,
less an estimated residual value, on the straight-line method over the term of
the lease. Maintenance and repairs are charged to operations as incurred. When
property and equipment are sold or otherwise disposed of, the asset cost and
accumulated depreciation are removed from the accounts, and the resulting gain
or loss, if any, is included in the results of operations.
g) Revenue Recognition:
The Company recognizes revenue from the sale of telecommunications and
computer products at the date of product shipment. Any additional costs related
to the product sold are provided for at the time of the sale. The Company
records income from direct financing leases based on a constant periodic rate of
return on the net investment in the lease. Income earned from operating lease
agreements is recorded evenly over the term of the lease.
F-7
<PAGE>
h) Foreign Currency Translation:
The Company translates the assets and liabilities of its foreign
subsidiaries at the exchange rates in effect at year end. Revenues and expenses
are translated using exchange rates in effect during the year. Gains and losses
from foreign currency translation are credited or charged to cumulative
translation adjustment included in stockholders' equity in the accompanying
consolidated balance sheets.
i) Use of Estimates In Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of income and expenses during the reporting
periods. Operating results in the future could vary from the amounts derived
from management's estimates and assumptions.
j) Excess of Costs over Net Assets Acquired:
The excess of cost over fair value of net assets of businesses acquired is
amortized on a straight-line basis from five to fifteen years. Amortization
recorded in 1996 was $107,593.
k) Impairment of Long-Lived Assets:
Effective January 1, 1996, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be disposed of. SFAS No. 121 requires the
Company to review the recoverability of the carrying amount of its long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset might not be recoverable.
In the event that facts and circumstances indicate that the carrying amount
of long-lived assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset would be compared to the assets' carrying amount
to determine if a write-down to fair value is required. Fair value may be
determined by reference to discounted future cash flows over the remaining
useful life of the related asset. Such adoption did not have a material effect
on the Company's consolidated financial position or results of operations.
l) Fair Value Disclosures:
The carrying amounts reported in the Consolidated Balance Sheets for cash
and cash equivalents, notes and accounts receivable, accounts payable, accrued
expenses, and due to affiliates approximate fair value because of the immediate
or short-term maturity of these financial instruments.
The fair value of long-term debt, including the current portion, is
estimated based on current rates offered to the Company for debt of the same
remaining maturities.
m) Stock Options:
The Company accounts for its stock options in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense would be recorded on the date of grant only if the current market price
of the underlying stock exceeded the exercise price. On January 1, 1996, the
Company adopted the disclosure requirements of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. Had the
Company determined Compensation Cost based on fair value at the grant date for
stock options under SFAS No. 123 the effect would have been immaterial.
n) New Accounting Pronouncements:
In 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," No. 129,
"Disclosures of Information About Capital Structure," No. 130, "Reporting
Comprehensive Income" and No. 131 "Disclosures about Segments of an Enterprise
and Related Information". SFAS No. 128 and No. 129 will be adopted by the
Company as required for the year ended December 31, 1997. Upon adoption of SFAS
No. 128, the Company will present basic earnings per share
F-8
<PAGE>
and diluted earnings per share. Basic earnings per share will be computed based
on the weighted average number of shares outstanding during the period,
increased by the dilutive effect of potential common stock. SFAS No. 130 and 131
are required to be adopted by the Company for fiscal years beginning after
December 15, 1997. However, the Company may apply them early, i.e. for the year
ended December 31, 1997. The added disclosures and information required by SFAS
Nos. 129, 130 and 131 will not materially impact the interpretation of the
Company's consolidated financial statements.
2) Accounts Receivable:
The Company evaluates its accounts receivable on a customer by customer
basis and has determined that no allowance for doubtful accounts is necessary at
December 31, 1996.
3) Notes receivable -- officer shareholder:
Note in the principal amount of $140,000 plus accrued interest of $2,659.
Interest rate is 5 7/8% per annum.
4) Net Investment in Direct Financing Leases:
Components of the net investment in direct financing leases are as follows:
December 31,
----------------------
1996 1995
---- ----
Total minimum lease payments to be received ...... $2,705,711 $-0-
Estimated residual value of leased property ...... 200,315 -0-
Unearned income ................................. (456,141) -0-
---------- ----
Net investment .................................... $2,449,885 $-0-
---------- ----
Future minimum lease payments receivable at December 31, 1996 is as
follows:
Year Ending
December 31, Amount
------------ ------
1997 ................................ $1,512,465
1998 ................................ 1,108,499
1999 ................................ 77,493
2000 ................................ 7,254
----------
Total ............................. $2,705,711
----------
5) Inventories:
Inventories consisted of the following:
December 31,
--------------------
1996 1995
---- ----
Telecommunication parts ........................... $ 36,395 $-0-
Automobiles and trucks held for sale or lease ...... 1,457,625 -0-
---------- ----
$1,494,020 $-0-
---------- ----
6) Property and Equipment:
Property and equipment consisted of the following:
December 31,
--------------------
1996 1995
---- ----
Leasehold improvements .............................. $ 22,096 $-0-
Furniture and fixtures .............................. 10,314 -0-
Computer equipment and software ..................... 804,639 -0-
Leased equipment .................................... 309,803 -0-
---------- ---
1,146,852 -0-
Less accumulated depreciation and amortization ...... 123,329 -0-
---------- ---
$1,023,523 $-0-
---------- ---
F-9
<PAGE>
7) Income Taxes:
The Company accounts for income taxes using the asset and liability method
whereby deferred assets and liabilities are recorded for differences between the
book and tax carrying amounts of balance sheet items. Deferred liabilities or
assets at the end of each period are determined using the tax rate expected to
be in effect when the taxes are actually paid or recovered. The measurement of
deferred tax assets is reduced, if necessary, by a valuation allowance for any
tax benefits that are not expected to be realized. The effects of changes in tax
rates and laws on deferred tax assets and liabilities are reflected in net
income in the period in which such changes are enacted.
The provision for taxes on income is as follows:
Year-Ended December 31,
------------------------
1996 1995
---- ----
Federal:
Current ................................... $ 13,000 $-0-
Deferred ................................... 319,000 -0-
State:
Current ................................... 4,000 -0-
Deferred ................................... 105,000 -0-
-------- ----
Total ...................................... $441,000 $-0-
-------- ---
The reconciliation between the amount computed by applying the federal statutory
rate to income (loss) before income taxes and the actual income tax expense were
as follows:
Year-Ended December 31,
------------------------
1996 1995
---- ----
Amount using the statutory Federal tax rate ...... $380,000 $-0-
State income tax, net of federal tax benefit ...... 69,000 -0-
Other, net ....................................... (8,000) -0-
-------- ----
Provision for taxes on income ..................... $441,000 $-0-
-------- ----
The tax effect of temporary differences resulted in deferred tax liabilities as
follows:
<TABLE>
<CAPTION>
December 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Temporary Differences
Revenue and expenses of consolidated subsidiary recognized on the
cash basis for tax purposes, resulting in a timing difference ...... $399,427 $ --
Depreciation ...................................................... 17,310 --
Other ............................................................... 7,263 --
-------- -----
Total ............................................................... $424,000 $ --
-------- -----
</TABLE>
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.
F-10
<PAGE>
Maturities are as follows:
Year-Ended December 31,
------------------------
1996 1995
---- ----
1997 ............................................ $463,976 $ -0-
1998 ............................................ 230,851 -0-
1999 ............................................ 70,437 -0-
2000 ............................................ 6,594 -0-
-------- -----
Total ............................................ $771,858 $ -0-
-------- -----
In addition long-term debt includes $387,727 still due from the acquisition
of 786710 Ontario Limited.
Maturities are as follows:
Year-Ended December 31,
------------------------
1996 1995
---- ----
1997 ............................................ $180,000 $ -0-
1998 ............................................ 207,727 -0-
-------- -----
Total ............................................ $387,727 $ -0-
-------- -----
9) Business Combinations
a) Acquisition of 786710 Ontario Limited
On April 18, 1996, the Company acquired 786710 Ontario Limited, doing
business as "Info Systems". 786710 developed both the complex of
telecommunications and interactive voice response modules known as "Talkie",
including "Talkie-Globe" for international calling and the talkie power web line
machine system and "BCS" -- "Business Control Software", an integrated group of
modules for accounting functions capable of real time use in various languages
and currencies.
Talkie is a trademarked name for an interrelated group of modules and
applications of telephonic and interactive voice processing software which
786710 had marketed for several years.
The transaction was accounted for under the purchase method of accounting
and the total cost for the acquisition was $1,413,977. The results of operations
for 786710 are included in the Company's "Consolidated Statements of Operations"
from April 18, 1996, the date of acquisition.
The Company issued 125,000 of its shares valued at $625,000 for the
acquisition. These shares shall vest at the rate of 25,000 shares per year over
a five year period.
The Company independently reviewed their investment in this technology to
ensure proper valuation on the financial statements.
The cost of $1,413,977 was allocated as follows:
<TABLE>
<S> <C>
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
----------
</TABLE>
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.
F-11
<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
Fair value of net assets acquired at October 1, 1996 ............ $ 401,512
Licenses ...................................................... 1,200,000
Intangible asset-excess of costs over net assets acquired ...... 898,488
----------
Total ......................................................... $2,500,000
----------
</TABLE>
The excess of costs over net assets acquired amounting to $898,488 is being
amortized over a fifteen-year period.
Separate results for the periods prior to the acquisition were as follows:
Nine month Year ended
period ended December 31,
9/30/96 1995
------- ----
Revenues .................................... $692,314 $1,105,434
Net income ................................. $158,383 $ 310,051
The results of operations for the year ended December 31, 1996, combining
the acquisition of Major Fleet & Leasing Corp. and 786710 Ontario Limited as
though they were both acquired by tbe Company as of January 1, 1996, are as
follows:
Revenues ............................................ $4,385,884
Net income ......................................... $ 609,430
10) Other intangible Assets Consist of :
Patents:
The Company has purchased two patents to be used in the manufacture of
armored conduit. The patents, which were valued at their cost to the seller,
will be amortized over the remaining useful life of 14 years on the straight
line basis. The Company has an agreement with the seller of the patents to pay
royalty payments. The payments will be calculated at the greater of 5% of the
manufactured cost of the armored conduit or 2% of the net sales.
Licenses:
The $1,200,000 value attributed to the licenses acquired as part of the
Major Fleet & Leasing Corp. acquisition is being amortized on a straight-line
basis over a twelve to seventeen year period.
11) Commitments:
Compensation Agreements:
Mr. Bruce Bendell, Chairman of the Board of the Company, entered into a
Consulting Agreement effective January 1, 1996. The Consulting Agreement
provides for base annual compensation of $150,000 and provides for increases in
such base compensation and for performance-based and discretionary bonuses.
Mr. Doron Cohen, President and Treasurer of the Company, entered into an
Employment Agreement effective January 1, 1996. The Agreement provides for base
annual compensation of $150,000 and provides for increases in such base
compensation and for both performance-based and discretionary bonuses.
F-12
<PAGE>
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
damages of $5,000,000 for breach of contract, libel, slander, disparagement,
violation of copyright laws, fraud and misrepresentation. On February 4, 1997
the Defendants filed an amended Answer, and a Counterclaim seeking damages of
$50,000,000 for breach of contract and violation of the Lanham Act. The
Plaintiffs have filed an Answer to the Counterclaim. Discovery has not yet
commenced.
On September 18, 1996, the Company's subsidiary, 786710 Ontario Limited,
the Company as owner of 786710, and the Baraks as the original principals of
786710, were sued in the Ontario Court (General Division) by Touch Tone
Connections, indexed at 96-CU-111059. Touch Tone Connections seeks damages of
CN$200,000 in connection with the installation, in 1995, of certain hardware and
software claimed to have been faulty and not meeting the sales representation.
All of the events occurred prior to the Company's acquisition of 786710 and the
Baraks indemnified the Company against any such action.
While it is not possible to determine the ultimate disposition of these
proceedings, the Company believes that the outcome of such proceedings will not
have a material adverse effect on the financial position or results of
operations of the Company.
12) Related Party Transactions:
Approximately 55% of the Company's revenues derived from the sale of
computer products and telecommunications equipment was to Nissko Telecom, a
partner with the Company on a joint venture in which the Company owns 45%. The
Company will receive 45% of the net revenues generated by the joint venture. The
investment in the Joint Venture is recorded under Equity Method of Accounting.
F-13
<PAGE>
Amounts due affiliates are amounts owed by the Company's leasing subsidiary
for advances made in the ordinary course of business from various entities which
are wholly owned by the subsidiaries former stockholders. The advances are in
the form of non-interest-bearing obligations with no specified maturity dates.
The subsidiary also purchased a substantial portion of its leased vehicles from
affiliates.
13) Warrants:
In October 1996 the Company revised the Patent Purchase Agreement. Under
the amendment the purchase price was changed 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) Capital Stock:
Preferred Stock
Of the 2,000,000 shares of undesignated Preferred Stock authorized, to date
the Company has designated 250,000 shares as the 1996-Major Series. The shares
of the 1996-Major Series are voting, vote with the Common Stock and not as a
separate class, and each share has two votes per share reflecting the underlying
conversion rate. The shares of the 1996-Major 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 liquidation preference is ten dollars per share
or a total of $2,500,000. Pursuant to an agreement between the Company and the
preferred stockholders, the right of recission (under certain circumstances),
which was a part of the original agreement, has been rescinded.
Common Stock
In 1996 the Company issued at no cost to various employees, in recognition
of their services in 1996, 4,200 shares of common stock. The value assigned to
each of the relevant issues was $2.50 per share based on a discount determined
by management to reflect the lack of marketability due to the fact that the
shares are restricted securities.
The fair values of additional shares issued in connection with employment
agreements will be charged as compensation expense (and capital in excess of par
credited) ratably during each month of employment over which the shares will be
earned, i.e. vest. Vesting periods are from three to five years from date of
employment. Such common stock was issued in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act.
Pursuant to oral agreements entered into in January 1996, in connection
with investment banking and marketing services rendered to the Company, the
Company in October 1996, upon the completion of these services issued 200,000
shares of its stock at its par value of $.01 per share. The gross proceeds to
the Company from such sales were $2,000.00 which was considered to be the fair
value in January 1996. Such common stock was issued and sold in reliance upon
the exemption from registration contained in section 4(2) of the Securities Act.
The warrants issued in connection with the management agreement referred to
in Note 13, convertible into restricted shares at $1.25 per share, was separate
and distinct from the Major Fleet acquisition and was performance based with no
registration rights and could have been terminated. Therefore, a lower value was
assigned to reflect a discount for marketability and risk.
F-14
<PAGE>
15) Business Segments
The Company currently operates in two industry segments: Computer and
telephony products and leasing; It also has a plastics division currently in the
development stage.
The Company's operation by industry segment for the year ended December 31,
1996 is as follows:
<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
-----------
Capital expenditures ........................ 837,040 309,812 -- 1,146,852
----------- --------- ------- -----------
Depreciation and amortization of property and
equipment ................................. 63,980 59,349 -- 123,329
----------- --------- ------- -----------
Amortization of other assets ............... -- -- 178,104 178,104
----------- --------- ------- -----------
Identifiable assets ........................ 2,891,748 4,179,257 2,245,859 9,316,864
----------- --------- --------- -----------
</TABLE>
16) Subsequent Events:
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.
The Company filed an action in the Supreme Court of the State of New York
seeking a return of $100,000 paid and 160,000 shares of common stock issued to
the sellers of the two patents referred to in Note 10. Such amounts were paid
pursuant to a First Amendment to the Patent Sale and Purchase Agreement dated
Septem-ber 30, 1996 ("Patent Agreement Amendment"). The Patent Agreement
Amendment was entered into in settlement of litigation brought by the Company
against the sellers of the patents. Such litigation was for damages related to
misrepresentations concerning additional development expenditures required in
connection with the subject patents. The Company intends to reinstate its
litigation to modify the purchase price of the relevant patents. Management
believes that, whatever the outcome of any or all of the foregoing actions,
there will be no material impact on the Company's assets, earnings or net worth.
In a related matter, the Company received notice from an individual
claiming to have acquired, through foreclosure of a security interest, 12,000
shares of the Company's common stock originally issued to the sellers of the
patents as discussed in the preceding paragraph. Such individual requested the
Company to exchange his restricted certificates for ones without restriction.
Upon advice of counsel, the Company will not accede to this request until such
time as the holder demonstrates compliance with the rules of the Securities Act
of 1933 relating to the lifting of restrictions after the passage of time for
the appropriate holder. This individual has also asserted a number of claims
against the Company, including some related to the patent acquisition discussed
in the preceding paragraph. The Company has been advised by counsel that such
claims are without merit.
F-15
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
F-16
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
(UNAUDITED) (AUDITED)
--------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .............................. $ 186,814 $ 574,486
Net investment in direct financing leases, current ...... 1,703,877 1,390,598
Notes receivable - officer shareholder .................. 140,000 142,659
Accounts receivable .................................... 1,318,339 179,837
Inventories ............................................. 102,511 1,494,020
Other current assets .................................... 164,405 45,349
---------- ----------
Total current assets ................................. 3,615,946 3,826,949
Net investment in direct financing leases,
net of current portion .................................... 530,334 1,059,287
Property and equipment net ................................. 1,803,455 1,023,523
Intangible assets .......................................... 2,897,861 3,128,743
Other assets ................................................ 237,947 278,362
---------- ----------
Total assets ....................................... $9,085,543 $9,316,864
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ....................................... $ 376,479 $ 419,052
Accrued expenses ....................................... 116,664 522,026
Current maturities of long-term debt ..................... 898,669 643,976
Accrued income taxes .................................... 341,000 4,378
Deferred revenue ....................................... 59,794 67,409
Due to affiliates ....................................... 126,375 1,404,079
---------- ----------
Total current liabilities ........................... 1,918,981 3,060,920
Long-term debt, less current maturities ..................... 324,798 515,609
Income taxes deferred ....................................... 275,000 424,000
Other ...................................................... 26,303 72,122
---------- ----------
Total liabilities .................................... 2,545,082 4,072,651
---------- ----------
Commitments
Stockholders' Equity
Preferred stock, .01 par value; 2,000,000 shares
authorized, 250,000 shares issued and outstanding
in 1997 and 1996 ....................................... 2,500 2,500
Common stock, .01 par value 50,000,000 shares
authorized, 6,877,700 shares issued and outstanding
in 1997 and 6,279,200 in 1996 ........................ 68,777 62,792
Additional paid in capital .............................. 5,240,375 4,509,108
Cumulative translation adjustment ........................ 222 264
Retained earnings ....................................... 1,228,587 669,549
---------- ----------
Total stockholders' equity ........................... 6,540,461 5,244,213
---------- ----------
Total liabilities and stockholders' equity ......... $9,085,543 $9,316,864
========== ==========
</TABLE>
F-17
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1997 1996
-------------- --------------
<S> <C> <C>
Revenues:
Computer products and telecommunications equipment ...... $2,752,256 $1,144,795
Leasing income .......................................... 776,671 --
---------- ----------
Total revenues ....................................... 3,528,927 1,144,795
---------- ----------
Operating expenses:
Cost of products sold .................................... 622,398 434,802
Selling, general and administrative expenses ............ -- --
Products ............................................. 1,276,557 859,946
Leasing ............................................. 528,653 --
Amortization of intangible assets ........................ 234,366 --
---------- ----------
2,661,974 1,294,748
---------- ----------
Operating income (loss) .................................... 866,953 (149,953)
Other income (expenses)
Interest expense ....................................... (105,505) (25,950)
Interest income .......................................... 10,922 --
Income on joint venture ................................. 53,668 --
---------- ----------
Income (loss) before provision for income taxes ............ 826,038 (175,903)
Provision for income taxes ................................. 267,000 --
---------- ----------
Net income (loss) .......................................... $ 559,038 $ (175,903)
========== ==========
Net income (loss) per common share ........................ $ 0.07 $ (0.03)
========== ==========
</TABLE>
F-18
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
1997 1996
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .......................................... $ 559,038 $ (175,903)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Amortization of intangible assets ........................... 234,366 98,821
Depreciation ................................................ 384,722 59,362
Deferred income taxes ....................................... (149,000) --
Non cash items -- stock based compensation .................. 83,502
(Increase) decrease in assets:
Net investment in direct financing leases .................. 215,674 --
Notes receivable .......................................... 2,659 --
Accounts receivable ....................................... (1,138,502) (80,410)
Inventories ................................................ 991,509 (5,610)
Other assets ................................................ (78,641) (29,023)
Increase (decrease) in liabilities:
Accounts payable .......................................... (90,928) 210,305
Accrued expenses .......................................... (405,362) 18,903
Accrued income taxes ....................................... 336,622 --
Deferred revenue .......................................... (7,615) 91,700
Due to affiliates .......................................... (1,277,704) --
------------ -----------
Net cash provided (used) by operating activities ......... (339,660) 188,145
------------ -----------
Cash flows from investing activities:
Additions to property and equipment ........................ (465,644) (80,301)
Acquisition of 786710 Ontario Limited, net of cash ......... -- (738,636)
------------ -----------
Net cash used in investing activities .................. (465,644) (818,937)
------------ -----------
Cash flows from financing activities:
(Increase) payments on long-term debt-net .................. (236,118) 441,988
Proceeds from issuance of common stock for exercise of
warrants ................................................... 653,750 738,976
------------ -----------
Net cash provided by financing activities ............... 417,632 1,180,964
------------ -----------
Net increase (decrease) in cash and cash equivalents ......... (387,672) 550,172
Cash and cash equivalents, beginning of period ............... 574,486 39,063
============ ===========
Cash and cash equivalents, end of period ..................... $ 186,814 $ 589,235
============ ===========
</TABLE>
F-19
<PAGE>
FIDELITY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- ----------------------
Shares Amount Shares Amount
--------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Balance December 31, 1996 250,000 $2,500 6,279,200 $62,792
Effect of stock compensation
charge .................. -- -- 75,500 755
Issuance of Common Stock
pursuant to exercise of
warrants .................. -- -- 523,000 5,230
Net income ............... -- -- -- --
Translation adjustment ... -- -- -- --
------- ------ --------- -------
Balance September 30, 1997 250,000 $2,500 6,877,700 $68,777
======= ====== ========= =======
Additional Retained Currency Total
Paid in Earnings Translation Stockholders'
Capital (Deficit) Adjustment Equity
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
Balance December 31, 1996 $4,509,108 $ 669,549 $ 264 $ 5,244,213
Effect of stock compensation
charge .................. 82,747 -- -- 83,502
Issuance of Common Stock
pursuant to exercise of
warrants .................. 648,520 -- -- 653,750
Net income ............... -- 559,038 -- 559,038
Translation adjustment ... -- -- (42) (42)
---------- ---------- ----- -----------
Balance September 30, 1997 $5,240,375 $1,228,587 $ 222 $ 6,540,461
========== ========== ===== ===========
</TABLE>
F-20
<PAGE>
Fidelity Holdings Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 1997
1. Basis of Presentation:
The accompanying unaudited consolidated interim financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine month period
ended September 30, 1997 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1997. These financial statements
should be read in conjunction with the audited December 31, 1996 financial
statements and related notes included elsewhere in this Prospectus.
F-21
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
AND MAJOR AUTOMOTIVE GROUP, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements are based
upon the financial statements of Fidelity Holdings, Inc. and Subsidiaries (the
"Company" or "Fidelity"), and Major Chevrolet, Inc. and Affiliates ("Major")
combined and adjusted to give effect to the merger. The Merger Agreement
provides that the Company and its wholly-owned subsidiary Major Acquisition
Corp. have entered into a merger agreement with Major Automotive Group, Inc.
("Major Auto") and its sole stockholder, Bruce Bendell. Bruce Bendell owns all
of the issued and outstanding shares of common stock of Major Chevrolet, Inc.
("Major Chevrolet") and Major Subaru, Inc. ("Major Subaru") and 50% of the
issued and outstanding shares of common stock of Major Dodge, Inc. ("Major
Dodge") and Major Chrysler, Plymouth, Jeep Eagle, Inc. ("Major Chrysler,
Plymouth, Jeep Eagle"), which, collectively, operate five franchised automobile
dealerships. Pursuant to such merger agreement, Bruce Bendell will contribute to
Major Auto all of his shares of common stock of Major Chevrolet, Major Subaru,
Major Dodge and Major Chrysler, Plymouth, Jeep Eagle, and Major Acquisition
Corp. will then acquire from Bruce Bendell all of the issued and outstanding
shares of common stock of Major Auto in exchange for shares of a new class of
the Company's preferred stock. Harold Bendell, Bruce Bendell's brother, owns the
remaining 50% of the issued and outstanding shares of common stock of Major
Dodge and Major Chrysler, Plymouth, Jeep Eagle. Major Acquisition Corp. will
purchase Harold Bendell's shares for $4 million in cash under a Stock Purchase
Agreement. The unaudited pro forma combined balance sheet at September 30, 1997
gives effect to the merger as if it occurred on such date. The unaudited pro
forma combined statement of operations for the nine months ended September 30,
1997 gives effect to the merger as if it occurred at January 1, 1997. The
unaudited pro forma combined statement of operations for the year ended December
31, 1996 gives effect to the merger and the Company's acquisition of Major Fleet
& Leasing Corp. and 786710 Ontario Ltd. as if they occurred at January 1, 1996.
The unaudited pro forma combined statement of operations for the period ended
December 31, 1996 is derived from the audited historical financial statements of
the Company and audited historical financial statements of Major and should be
read in conjunction with the Company's and Major's audited historical financial
statements included elsewhere in this Prospectus. The pro forma combined
financial statements as of and for the nine-month period ended September 30,
1997 have been prepared on the same basis as the historical information derived
from the audited financial statements. In the opinion of the Company's and
Major's management, the unaudited financial statements of the Company and Major
referred to above include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the financial position and
results of operations for such periods. These pro forma statements of operations
are not necessarily indicative of future operations or what the Company's
operations would actually have been had the combinations occurred at the dates
indicated and, therefore, should not be construed as being representative of
future operating results.
F-22
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Fidelity Major Adjustments Combined
------------- -------------- ---------------------- -------------
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents ..................... $ 186,814 $ 825,209 $ 5,775,000 (c) $ 2,787,023
(4,000,000)(b)
Net investment in direct financing leases,
current .................................... 1,703,877 1,703,877
Notes receivable -- officer shareholder ...... 140,000 665,838 805,838
Accounts receivable ........................... 1,318,339 7,087,489 8,405,828
Inventories ................................. 102,511 18,597,597 18,700,108
Other current assets ........................ 164,405 133,095 297,500
----------- ------------ ------------
Total current assets ..................... 3,615,946 27,309,228 1,775,000 32,700,174
Net investment in direct financing leases, net of
current portion ................................. 530,334 530,334
Property and equipment, net ..................... 1,803,455 678,650 2,482,105
Leased and rental vehicles ..................... 262,618 262,618
Excess of costs over net assets acquired ......... 1,327,689 7,625,037 (b) 8,952,726
Other intangible assets ........................ 1,570,172 1,570,172
Other assets .................................... 237,947 13,723 251,670
----------- ------------ ------------
Total assets .............................. $ 9,085,543 $ 28,264,219 $ 9,400,037 $ 46,749,799
=========== ============ ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................. $ 376,479 $ 1,343,308 $ $ 1,719,787
Accrued expenses .............................. 116,664 2,228,340 2,345,004
Current maturities of long-term debt ......... 898,669 898,669
Accrued income taxes ........................ 341,000 341,000
Deferred revenue .............................. 59,794 59,794
Due to affiliates ........................... 126,375 126,375
Floor plan liability ........................ 20,678,059 20,678,059
Other current liabilities ..................... 957,963 957,963
------------ -------------
Total current liabilities .................. 1,918,981 25,207,670 27,126,651
Long-term debt, less current maturities ......... 324,798 324,798
Income taxes deferred ........................... 275,000 275,000
Other .......................................... 26,303 681,586 707,889
----------- ------------ -------------
Total liabilities ........................ 2,545,082 25,889,256 28,434,338
----------- ------------ -------------
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Fidelity Major Adjustments Combined
------------ ------------- --------------------- ------------
<S> <C> <C> <C> <C>
Stockholders' equity
Preferred stock, - 1996 - MAJOR, $.01
par value: 2,000,000 shares authorized
250,000 shares issued and outstanding .. $ 2,500 $ $ $ 2,500
Preferred stock - 1997-MAJOR, $.01 par
value: ................................. 9,000 (b) 9,000
Common stock, $.01 par value 50,000,000
shares authorized 8,027,700 shares
issued and outstanding ............... 68,777 11,500 (c) 80,277
Common stock - Major, net ............... 730,100 (730,100)(b)
Additional paid in capital ............ 5,240,375 176,700 (176,700)(b) 16,994,875
5,991,000 (b)
5,763,500 (c)
Cumulative translation adjustment ...... 222 222
Retained earnings ..................... 1,228,587 1,468,163 (1,468,163)(b) 1,228,587
---------- ----------- ------------- -----------
Total stockholders' equity ......... 6,540,461 2,374,963 9,400,037 18,315,461
---------- ----------- ------------- -----------
Total liabilities and stockholders'
equity .............................. $9,085,543 $28,264,219 $ 9,400,037 $46,749,799
========== =========== ============= ===========
</TABLE>
F-24
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Fidelity Major Adjustments Combined
------------- --------------- ------------------ ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Computer products and
telecommunications equipment ......... $2,752,256 $ $2,752,256
Automobile dealers ..................... 123,265,262 123,265,262
Leasing income ........................ 776,671 776,671
---------- -----------
Total revenues ..................... 3,528,927 123,265,262 126,794,189
---------- ----------- -----------
Operating expenses:
Cost of products sold .................. 622,398 108,999,167 109,621,565
Selling, general and
administrative expenses
Products ........................... 1,276,557 1,276,557
Leasing .............................. 528,653 528,653
Automobile dealers .................. 11,225,425 11,225,425
Amortization of intangible assets ...... 234,366 $ 154,813(c) 389,179
---------- ----------- -----------
2,661,974 120,224,592 154,813 123,041,379
---------- ----------- ----------- -----------
Operating income (loss) .................. 866,953 3,040,670 (154,813) 3,752,810
Other income (expense)
Interest expense ........................ (105,505) (1,228,846) (1,334,351)
Interest income ........................ 10,922 -- 10,922
Other ................................. 90,944 90,944
Income on joint venture ............... 53,668 -- -- 53,668
---------- ----------- ----------- -----------
Income before provision for taxes ......... 826,038 1,902,768 (154,813) 2,573,993
Provision for taxes ........................ 267,000 239,000 582,000(d) 1,088,000
---------- ----------- ----------- -----------
Net income ................................. $ 559,038 $1,663,768 $ (736,813) $1,485,993
========== =========== =========== ===========
Net income per common share ............... $ 0.14
===========
Weighted average number of common
shares outstanding ........................ (f) 10,975,866
===========
</TABLE>
F-25
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Fleet 786710
Jan. 1, 1996 Jan. 1, 1996
thru thru April
Fidelity Sept. 30, 1996 18, 1996
-------------- ---------------- --------------
<S> <C> <C> <C>
Revenues:
Computer products and
telecommunications equipment ............ $3,175,528 $ $ 259,095
Automobile division .....................
Leasing income ........................... 258,947 692,314
---------- --------- -----------
Total revenues ........................ 3,434,475 692,314 259,095
---------- --------- -----------
Operating expenses:
Cost of products sold .................. 965,792 151,969
Selling, general and administrative
expenses
Products .............................. 935,529 137,901
Leasing ................................. 191,372 482,147
Automobile division .....................
Amortization of intangible assets ...... 178,104
---------- --------- -----------
2,270,797 482,147 289,870
---------- --------- -----------
Operating income (loss) .................. 1,163,678 210,167 (30,775)
Other income (expense)
Interest expense ........................ (24,132) (60,653)
Interest income ........................ 9,830 8,869
Other .................................... --
Income on joint venture .................. (32,410)
---------- --------- -----------
Income (loss) before provision for taxes 1,116,966 158,383 (30,775)
Income taxes .............................. 441,000
---------- --------- -----------
Net income (loss) ........................ $ 675,966 $ 158,383 $ (30,775)
========== ========= ===========
Net income per common share ...............
Weighted average number of common
shares outstanding .....................
Fidelity
Fidelity Major
Pro Forma Pro Forma Pro Forma Pro Forma
Adjustments Combined Major Adjustments Combined
---------------- -------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues:
Computer products and
telecommunications equipment ............ $ $3,434,623 $ $ $ 3,434,823
Automobile division ..................... -- 144,692,083 144,692,083
Leasing income ........................... 951,261 951,261
---------- ---------- ------------ ---------- ------------
Total revenues ........................ 4,385,884 144,692,083 -- 149,077,967
---------- ---------- ------------ ---------- ------------
Operating expenses:
Cost of products sold .................. 1,117,761 129,376,852 130,494,613
Selling, general and administrative
expenses
Products .............................. 1,073,430 1,073,430
Leasing ................................. 673,519 673,519
Automobile division ..................... -- 13,337,323 13,337,323
Amortization of intangible assets ...... 139,144(f) 317,248 309,627(c) 626,875
---------- ---------- ------------ ---------- ------------
139,144 3,181,958 142,714,175 309,627 146,205,760
---------- ---------- ------------ ---------- ------------
Operating income (loss) .................. (139,144) 1,203,926 1,977,908 (309,627) 2,872,207
Other income (expense)
Interest expense ........................ (84,785) (1,675,202) (1,759,987)
Interest income ........................ 18,699 -- 18,699
Other .................................... -- 118,940 118,940
Income on joint venture .................. (32,410) (32,410)
---------- ---------- ------------ ---------- ------------
Income (loss) before provision for taxes (139,144) 1,105,430 421,646 (309,627) 1,217,449
Income taxes .............................. 55,000(e) 496,000 105,973 147,000(d) 748,973
---------- ---------- ------------ ---------- ------------
Net income (loss) ........................ $ (194,144) $ 609,430 $ 315,673 $ (456,627) $ 468,476
========== ========== ============ ========== ============
Net income per common share ............... $ 0.04
============
Weighted average number of common
shares outstanding ..................... (e) 10,551,200
============
</TABLE>
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS
Assumptions Used and Adjustments Made
(a) The merger transaction, which was accounted for as a purchase pursuant to
Accounting Principles Board Opinion Number 16, was accomplished by
payment of $4,000,000 in cash and the issuance of 900,000 shares of the
Company's Convertible Preferred Stock ("1997-MAJOR Preferred"). Such
shares are convertible, in accordance with their terms, into 1,800,000
shares of the Company's Common Stock. Such common shares were valued at
$3.33 per share at the time the transaction was agreed to. The valuation
was based on fair market value of the Company's freely trading shares and
considered such factors as restrictions and blockage. The number of
shares was determined, in accordance with the acquisition agreement, as
the greater of (i) 1,800,000 shares and (ii) that number of shares of
Common Stock that have a market value of $6,000,000. Together, the cash
payment plus the 1997-MAJOR Preferred stock, represents a purchase price
of $10 million. The assets and liabilities of Major were recorded at
their historical book value. Since the preponderance of such assets and
liabilities are current; primarily cash, receivables, inventories and
related liabilities, management believes such book value ($2,374,963 at
September 30, 1997) approximates fair market value. This entire
transaction was assumed to have taken place as contemplated. However, in
the event that approval is not received from each of the respective
automobile manufacturers, the acquisitions of Major's constituent
dealerships will occur individually, as approval is received. This will
result in pro rata stock and cash payments as each individual dealership
is acquired and the financial results will, inevitably, differ from those
presented in these pro forma statements.
(b) The Company plans to sell 1,150,000 shares of its Common Stock at a
price, net of underwriting commissions, of $5.40 per share. The gross
proceeds were reduced by $435,000 of underwriting and other offering
expenses, resulting in net proceeds to the Company of $5,775,000. Of
these net proceeds, $4,000,000 was assumed to have been used to fund the
cash payment required in the acquisition of Major.
(c) The excess of cost over net assets acquired ($9,288,805) is being
amortized over thirty years on a pro forma basis. The statements of
operations reflects nine months and twelve months of amortization for the
periods ended September 30, 1997 and December 31, 1996 respectively. A
professional appraisal will be made following the completion of the
acquisition and, based thereon, the excess of cost over net assets
required will be allocated to tangible and intangible assets, if any, and
they will be appropriately amortized and depreciated over their estimated
useful lives.
(d) Taxes have been provided for the Company at historic rates. Major has
historically operated as a Subchapter S Corporation under provisions of
the Internal Revenue Code, wherein the stockholders are required to
report taxable income or loss on their personal returns and no such taxes
are reflected on Major's financial statements. Pro forma taxes have been
provided for Major at an estimated effective rate of 35%.
(e) Earnings per share has been calculated based on the weighted average
number of shares outstanding and assumes the exercise of outstanding
warrants and options and the related issuance of Common Stock and the
conversion of the Convertible Preferred Stock into Common Stock as of
January 1, 1997, and January 1, 1996 for the periods ended September 30,
1997 and December 31, 1996, respectively, as follows.
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
-------------------- ------------------
<S> <C> <C>
Weighted average number of shares used for the
financial statements ................................. 8,025,866 7,601,200
Issuance of 1997-Major Preferred, as if converted ...... 1,800,000 1,800,000
Shares issued in offering .............................. 1,150,000 1,150,000
--------- ---------
10,975,866 10,551,200
========== ==========
</TABLE>
(f) The statement of operations has been adjusted to reflect a full year's
amortization on the excess of costs over net assets acquired in the 1996
acquisitions of Major Fleet & Leasing Corp. and 786710 Ontario Limited.
The additional amortization amounted to $104,925 for Major Fleet &
Leasing Corp. and $34,219 for 786710 Ontario Ltd., a total of $139,144.
F-27
<PAGE>
Report of Independent Certified Public Accountants
Major Chevrolet, Inc. and Affiliates
Long Island City, New York
We have audited the accompanying combined balance sheet of Major Chevrolet,
Inc. and Affiliates as of December 31, 1996, and the related combined statements
of income, and cash flows for each of the two years in the period ended December
31, 1996. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Major Chevrolet,
Inc. and Affiliates at December 31, 1996, and the results of their operations
and their cash flows for each of the two years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
BDO Seidman, LLP
New York, New York
August 14, 1997
F-28
<PAGE>
Major Chevrolet, Inc. and Affiliates
Combined Balance Sheets
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1997
------------------- -------------------
(Unaudited)
<S> <C> <C>
Assets
Current:
Cash and cash equivalents ................................. $ 350,237 $ 24,034
Certificates of deposit .................................... 784,612 801,175
Trade receivables .......................................... 5,227,776 7,087,489
Inventories ................................................ 25,332,146 18,597,597
Notes receivable .......................................... 637,166 665,838
Prepaid expenses and other current assets .................. 70,020 133,095
----------- -----------
Total current assets ....................................... 32,401,957 27,309,228
Property, plant and equipment, less accumulated depreciation and
amortization ................................................ 704,782 678,650
Lease and rental vehicles .................................... 3,550,625 262,618
Other assets:
Security deposits .......................................... 13,945 13,723
----------- -----------
$36,671,309 $28,264,219
=========== ===========
Liabilities and Stockholders' Equity
Current:
Customer deposits .......................................... $ 1,263,379 $ 957,963
Accounts payable .......................................... 1,964,487 1,343,308
Accrued expenses .......................................... 749,034 2,228,340
Notes payable on vehicle floor plan ........................ 31,298,202 20,678,059
----------- -----------
Total current liabilities .............................. 35,275,102 25,207,670
Loans payable to stockholders ................................. 664,060 665,894
Notes payable -- other -- noncurrent ........................... 20,952 15,692
----------- -----------
Total liabilities ....................................... 35,960,114 25,889,256
----------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock ................................................ 730,100 730,100
Additional paid-in capital ................................. 176,700 176,700
Retained earnings (deficit) ................................. (195,605) 1,468,163
----------- -----------
Total stockholders' equity .............................. 711,195 2,374,963
----------- -----------
$36,671,309 $28,264,219
=========== ===========
</TABLE>
See accompanying summary of accounting policies and notes to combined
financial statements.
F-29
<PAGE>
Major Chevrolet, Inc. and Affiliates
Combined Statements of Income
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
------------------------------- ------------------------------
1996 1995 1997 1996
-------------- -------------- -------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Sales .............................. $144,692,083 $118,476,189 $123,265,262 $109,449,870
Cost of sales ..................... 129,376,852 104,728,435 108,999,167 97,917,164
------------ ------------ ------------ ------------
Gross profit .................. 15,315,231 13,747,754 14,266,095 11,532,706
Operating expenses .................. 13,337,323 11,439,981 11,225,425 10,034,389
Interest expense ..................... 1,675,202 1,899,821 1,228,846 1,278,398
------------ ------------ ------------ ------------
Operating income ............... 302,706 407,952 1,811,824 219,919
Other income ........................ 118,940 109,072 90,944 70,147
------------ ------------ ------------ ------------
Income before income taxes ...... 421,646 517,024 1,902,768 290,066
Income taxes ........................ 105,973 26,158 239,000 51,919
------------ ------------ ------------ ------------
Net income ........................... $ 315,673 $ 490,866 $ 1,663,768 $ 238,147
============ ============ ============ ============
</TABLE>
See accompanying summary of accounting policies and notes to combined
financial statements.
F-30
<PAGE>
Major Chevrolet, Inc. and Affiliates
Combined Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 315,673 $ 490,866
------------- -------------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ........................... 680,400 523,049
Other -- net .......................................... (30,848) --
Changes in assets -- (increase) decrease in:
Trade receivables .................................... 2,969,953 390,502
Inventories .......................................... 6,224,583 (16,417,109)
Prepaid expenses and other current assets ............ 80,066 (89,263)
Security deposits .................................... (4,139) (1,024)
Changes in liabilities - increase (decrease) in:
Customer deposits .................................... 1,078,951 (90,715)
Accounts payable ....................................... 243,203 147,915
Accrued expenses ....................................... (374,171) (296,425)
------------- -------------
Total adjustments .................................... 10,867,998 (15,833,070)
------------- -------------
Net cash provided by (used in) operating
activities .......................................... 11,183,671 (15,342,204)
------------- -------------
Cash flows from investing activities:
Purchase of property, plant and equipment ............... (115,630) (150,297)
Lease and rental vehicles ................................. 332,666 463,713
Note receivable .......................................... (36,166) (601,000)
Certificate of deposit .................................... (19,828) 46,008
------------- -------------
Net cash provided by (used in) investing
activities .......................................... 161,042 (241,576)
------------- -------------
Cash flows from financing activities:
Increase in (payment of) stockholder loans ............... 14,060 214
Increase (decrease) in long-term debt ..................... (92,224) 453,140
Increase (decrease) in floor plan notes payable ......... (11,382,436) 15,989,182
Decrease in additional paid-in capital .................. -- (1,041,100)
Treasury stock repurchase ................................. -- (8,900)
S corporation distributions .............................. (200,000) --
------------- -------------
Net cash provided by (used in) financing
activities .......................................... (11,660,600) 15,392,536
------------- -------------
Net increase (decrease) in cash and cash equivalents ...... (315,887) (191,244)
Cash and cash equivalents, beginning of period ............ 666,124 857,368
------------- -------------
Cash and cash equivalents, end of period .................. $ 350,237 $ 666,124
============= =============
Supplemental disclosures of cash flow information: Cash paid
during the period for:
Interest ................................................ $ 1,812,010 $ 1,777,023
Income taxes .......................................... 79,266 35,618
============= =============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------------
1997 1996
---- ----
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 1,663,768 $ 238,147
------------- ------------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ........................... 141,357 725,023
Other -- net .......................................... -- (30,848)
Changes in assets -- (increase) decrease in:
Trade receivables .................................... (1,859,713) 888,174
Inventories .......................................... 6,734,549 7,367,061
Prepaid expenses and other current assets ............ (63,075) 47,319
Security deposits .................................... 222 (13,552)
Changes in liabilities - increase (decrease) in:
Customer deposits .................................... (305,416) 1,479,910
Accounts payable ....................................... (621,179) (274,091)
Accrued expenses ....................................... 1,479,306 261,816
------------- ------------
Total adjustments .................................... 5,506,051 10,450,812
------------- ------------
Net cash provided by (used in) operating
activities .......................................... 7,169,819 10,688,959
------------- ------------
Cash flows from investing activities:
Purchase of property, plant and equipment ............... (21,130) (105,802)
Lease and rental vehicles ................................. 3,193,912 (1,403,397)
Note receivable .......................................... (28,672) (27,149)
Certificate of deposit .................................... (16,563) (15,165)
------------- ------------
Net cash provided by (used in) investing
activities .......................................... 3,127,547 (1,551,513)
------------- ------------
Cash flows from financing activities:
Increase in (payment of) stockholder loans ............... 1,834 (100,000)
Increase (decrease) in long-term debt ..................... (5,260) (90,470)
Increase (decrease) in floor plan notes payable ......... (10,620,143) (8,559,113)
Decrease in additional paid-in capital .................. -- --
Treasury stock repurchase ................................. -- --
S corporation distributions .............................. -- (200,000)
------------- ------------
Net cash provided by (used in) financing
activities .......................................... (10,623,569) (8,949,583)
------------- ------------
Net increase (decrease) in cash and cash equivalents ...... (326,203) 187,863
Cash and cash equivalents, beginning of period ............ 350,237 666,124
------------- ------------
Cash and cash equivalents, end of period .................. $ 24,034 $ 853,987
============= ============
Supplemental disclosures of cash flow information: Cash paid
during the period for:
Interest ................................................ $ 1,371,788 $ 1,396,453
Income taxes .......................................... 52,538 49,806
============= ============
</TABLE>
See accompanying summary of accounting policies and notes to combined
financial statements.
F-31
<PAGE>
Major Chevrolet, Inc. and Affiliates
Summary of Accounting Policies
Business and Principles of
Combination and
Reporting................ Major Chevrolet, Inc. and Affiliates (the
"Company") is a retailer of new and used vehicles,
trucks, parts and accessories. The financial
statements consist of the combined operations of
Major Chevrolet, Inc., Major Dodge, Inc., Major
Chrysler Plymouth Jeep Eagle, Inc. ("Major CPJE"),
and Major Subaru, Inc. (effective January 1, 1996),
all of which are under common control. All
significant intercompany balances and transactions
have been eliminated.
Use of Estimates.......... The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements and the reported amounts of revenues and
expenses during the reporting period. Actual
results could differ from those estimates.
Credit Risk............... Financial instruments which potentially subject
the Company to concentration of credit risk consist
principally of cash and cash equivalents. The
Company places its cash and cash equivalents in
quality financial institutions and, by policy,
limits the amount of credit exposure in any one
financial vehicle.
Financial Instruments..... The fair values of the financial instruments,
including cash, cash equivalents, trade
receivables, inventories, accounts payable, accrued
expenses and notes payable on vehicle floor plan,
approximate their carrying value because of the
current nature of these instruments. It is not
practical to determine the fair value of loans
payable to stockholders because the repayment terms
are subject to management's discretion.
Revenue and
Cost Recognition.......... Revenues and cost are recognized upon delivery of
the vehicle to the customer. At time of delivery,
all financing arrangements between and among the
parties have been concluded.
Interim Financial
Information............... The accompanying unaudited combined interim
financial statements have been prepared in
accordance with generally accepted accounting
principles for interim financial information. In
the opinion of management, all adjustments
(consisting of only normal recurring accruals)
considered necessary for a fair presentation have
been included. Operating results for the nine-month
period ended September 30, 1997 are not necessarily
indicative of the results that may be expected for
the year ending December 31, 1997.
Inventories............... New vehicle inventories are valued at the lower
of cost or market, with cost determined on a
last-in, first-out basis. Used vehicle inventories
are valued at the lower of cost or market, with
cost determined on a specific identification basis.
Parts and accessories inventories are also valued
at the lower of cost or market, with cost
determined on the first-in, first-out method.
During 1997, total inventory quantities were
reduced, resulting in a LIFO liquidation. The net
income realized as a result of the inventory
liquidation amounted to approximately $1,359,000.
F-32
<PAGE>
Major Chevrolet, Inc. and Affiliates
Summary of Accounting Policies
Property, Plant
and Equipment............. Property, plant and equipment are stated at cost.
Depreciation is calculated using the straight-line
method over the estimated useful lives of the
assets (ranging from 5 to 10 years). Leasehold
improvements are depreciated using the
straight-line method over their estimated useful
lives, not to exceed the life of the lease.
Income Taxes.............. The Company elected, with the consent of its
stockholders, to be taxed as an S corporation under
the provisions of the Internal Revenue Code (Sec.
1361) and New York State Franchise Tax Law. The
stockholders are required to report the Company's
taxable income or loss in their personal income tax
returns; accordingly, such income taxes are not
reflected in the combined financial statements. In
addition, New York State imposes a corporate level
tax, based upon the differential between corporate
and individual tax rates, which has been provided
for. The combined financial statements include a
provision for the New York State tax and New York
City income taxes since New York City does not
recognize S corporation status. Deferred income
taxes reflect the impact of temporary differences
between amounts of assets and liabilities for
financial reporting purposes and such amounts as
measured by tax laws. There are no significant
temporary differences; accordingly, no deferred tax
calculation has been made.
Supplemental Cash Flow
Information.............. The Company considers all short-term, highly
liquid instruments purchased with an original
maturity of three months or less to be cash
equivalents. The Company's cash and cash
equivalents are carried at cost, which approximates
market value and consists primarily of time
deposits.
Certificates of Deposit... The Company has two certificates of deposit with
a financial institution which have initial
maturities of one year and nine months,
respectively, that automatically renew on such
maturity dates. The fair value of the certificates
of deposit approximate their carrying value due to
their short-term maturities.
Long-Lived Assets......... The Company adopted Statement of Financial
Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" in 1996. The Company
reviews certain long-lived assets and identifiable
intangibles for impairment whenever events or
changes in circumstances indicate that the carrying
amount may not be recoverable. In that regard, the
Company assesses the recoverability of such assets
based upon estimated nondiscounted cash flow
forecasts.
Reclassification.......... Certain accounts in the prior year's financial
statements have been reclassified for comparative
purposes to conform with the presentation in the
current year's financial statements. These
reclassifications have no effect on previously
reported income.
F-33
<PAGE>
Major Chevrolet, Inc. and Affiliates
Notes to Combined Financial Statements
1. Trade Receivables
(a) The Company's trade receivables include amounts due from related
parties as follows:
December 31, 1996
------------------
Major Fleet and Leasing, Inc. ...... $1,338,825
Major Pennsylvania, Inc. ............ 174,761
----------
$1,513,586
==========
These related parties have substantially the same ownership and management
as the Company.
(b)Trade receivables, at December 31, 1996, included approximately $.5
million in delayed payments which are approved by the vehicle manufacturer
and its financial institution.
2. Inventories
Inventories consist of the following:
December 31, 1996
------------------
New automobiles .................. $11,619,105
New trucks and vans ............... 10,207,147
Used automobiles and trucks ...... 6,041,011
Parts and accessories ............ 664,138
Other ........................... 18,047
-----------
28,549,448
Less: LIFO reserve ............... 3,217,302
-----------
$25,332,146
===========
3. Property, Plant and Equipment
Major classes of property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
Estimated
December 31, 1996 useful lives
------------------- --------------
<S> <C> <C>
Furniture and fixtures ........................ $ 493,079 7-10 years
Service equipment .............................. 180,748 5-7 years
Automobiles .................................... 18,138 3 years
Leasehold improvements ........................ 596,571 Life of lease
----------
1,288,536
Less: Accumulated depreciation and amortization. 583,754
----------
$ 704,782
==========
</TABLE>
4. Lease and Rental Vehicles
The Company leases vehicles to an unrelated third party under operating
lease arrangements. These vehicles are used as rental vehicles through
agreements providing for daily, weekly or monthly terms. The Company holds title
to the vehicles and is reimbursed for the carrying charges paid on these
vehicles.
The following is an analysis of the carrying amount of the leased vehicles:
December 31, 1996
------------------
Cost ................................. $4,161,130
Less: Accumulated depreciation ...... 610,505
----------
$3,550,625
==========
F-34
<PAGE>
Major Chevrolet, Inc. and Affiliates
Notes to Combined Financial Statements -- (Continued)
5. Mortgage Receivable
During fiscal 1994, the Company purchased a mortgage note from a financial
institution for $364,882. The borrower issuing the note is a former shareholder
of the Company. The note bears interest at a rate of 10% per annum payable on
the first day of each month. The note matures on February 24, 1998. During 1996,
an agreement was made to offset the mortgage receivable and all accrued interest
against a Company-issued note payable of $450,000 to the former stockholder. The
remaining portion of approximately $19,000 is included in accounts receivable.
6. Notes Payable - Vehicle Floor Plan
Notes payable on the vehicle floor plan are due to Chrysler Credit Corp.
and bear interest ranging from 8.7% to 10% during the year ended December 31,
1996. These notes are secured by the new vehicles inventory and will be repaid
at the time the vehicles are sold or by certain delayed payments included in
trade receivables as described in Note 1.
7. Notes Payable
In November 15, 1995, Major CPJE, Inc. issued a note payable to Chrysler
Credit Corporation in order to purchase equipment for the service department.
Because Major CPJE, Inc. and Major Dodge, Inc. equally share the service
department, an equal share was allocated to Major Dodge, Inc. amounting to
$14,029.
8. Stock Repurchase
On December 31, 1995, Major Chevrolet, Inc. repurchased 89 shares of its
Class B common stock, representing 10% of the shares then outstanding from a
stockholder. The purchase price was $1.05 million, which was comprised of a
$32,124 cash payment, a $450,000 note payable issued to the stockholder (see
Note 5), and an immediate cancellation of certain promissory notes.
9. Loans Payable To Stockholders
Amounts due to stockholders represent cash advances made to the Company for
cash flow purposes. The stockholders agreed not to demand payment of these loans
in the next fiscal year. Accordingly, the loans have been classified as
noncurrent. The loans do not bear interest.
10. Related Party Transaction
In addition to certain trade receivables as discussed in Note 1(a), on
October 16, 1995, the Company entered into an agreement with BHB Realty, LLP, a
related party with similar ownership as the Company, purchasing a note
receivable for $601,000. The note receivable bears interest at 6% per annum and
is payable annually on the anniversary of the note. The note is due on demand,
but not earlier than October 15, 1996.
The Company rents its Dodge showroom premises from its stockholders. The
agreement is on a month-to-month basis. Rent expense relating to the this
agreement amounted to $96,000 for the year ended December 31, 1996.
During 1996, the Company rented space for a used car lot from BHB Realty,
LLP. The agreement was on a month-to-month basis. Rent expense relating to this
agreement amounted to $240,000 in 1996.
The Company rents its Dodge and CPJE service centers from Bendell Realty,
L.L.C. Bendell Realty, L.L.C. is owned by the stockholder of the Company. The
rent expense amounted to approximately $120,000 for the years ended December
31, 1996 and 1995.
F-35
<PAGE>
Major Chevrolet, Inc. and Affiliates
Notes to Combined Financial Statements -- (Continued)
11. Common Stock
Common stock consists of the following:
<TABLE>
<CAPTION>
December 31, 1996
------------------
<S> <C>
Major Chevrolet, Inc. - common stock:
Class A, $100 par - shares authorized 950; none issued and outstanding ...... $ --
Class B, $100 par - shares authorized 1,700; issued and outstanding 890 ...... 89,000
Treasury stock, $100 par - 89 shares.......................................... (8,900)
Major Dodge, Inc. - no par value; shares authorized 200; issued and outstanding
20 ........................................................................... 250,000
Major Chrysler Eagle Jeep, Inc. - no par value; shares authorized 200; issued and
outstanding 100 ............................................................... 250,000
Major Subaru, Inc. - no par value; shares authorized 200; issued and outstanding
10 ........................................................................... 150,000
--------
$730,100
========
</TABLE>
12. Commitments
At December 31, 1996, the Company is committed to make minimum annual lease
payments under real property operating leases as follows:
1997 ................................... $ 692,000
1998 ................................... 614,000
1999 ................................... 608,000
2000 ................................... 608,000
2001 ................................... 608,000
Thereafter ............................. 2,934,000
----------
$6,064,000
==========
Rent expense under real property operating leases approximated $961,000 and
$751,000 for the years ended December 31, 1996 and 1995, respectively.
The Company has a line of credit totaling $1,500,000 with Chrysler Credit
Corporation. The credit facility is used to secure vehicles exported overseas by
General Motors on behalf of the Company. None of the line of credit has been
used as of December 31, 1996.
The Company guarantees the obligations of Major Fleet and Leasing, Inc. under a
$5 million line of credit with a financial institution. Major Fleet and
Leasing, Inc. was formerly owned by the shareholders of the Company.
13. Governmental Regulations
Substantially all of the Company's facilities are subject to Federal, state
and local regulations relating to the discharge of materials into the
environment. Compliance with these provisions has not had, nor does the Company
expect such compliance to have, any material effect on the financial condition
or results of operations of the Company. Management believes that its current
practices and procedures for the control and disposition of such wastes comply
with applicable Federal and state requirements.
14. Litigation
Various claims and lawsuits arising in the normal course of business are
pending against the Company. The results of such litigation are not expected to
have a material or adverse effect on the Company's combined financial position
or results of operations.
15. Subsequent Events
The Company has entered into a joint venture subsequent to the year-end.
The venture is with an out-of-state Ford dealership, the purpose of which is to
purchase Ford fleet vehicles for resale.
F-36
<PAGE>
Major Chevrolet, Inc. and Affiliates
Notes to Combined Financial Statements -- (Continued)
15. Subsequent Events -- (Continued)
For the nine months ended September 30, 1997, the Company has recorded
approximately $11,000,000 in sales in connection with the joint venture.
The Company has entered into a merger agreement with Fidelity Holdings,
Inc. and Major Acquisition Corp., a wholly-owned subsidiary of Fidelity
Holdings, Inc. Pursuant to the merger agreement, Major Acquisition Corp. will
acquire all of the Company's shares of stock in exchange for shares of a new
class of preferred stock of Fidelity Holdings, Inc. and $4 million in cash. A
condition to the closing is that all manufacturers' approvals must be obtained.
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Major Fleet & Leasing Corp.
We have audited the accompanying balance sheet of Major Fleet & Leasing
Corp. as of December 31, 1996 and 1995, and the related statements of income,
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Major Fleet & Leasing Corp.
as of December 31, 1996 and 1995, and the results of its operations and is cash
flows for the years then ended in conformity with generally accepted accounting
principles.
Marcum & Kliegman LLP
Woodbury, N.Y.
February 5, 1997
F-38
<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.
F-39
<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 ................................................... 1,404,079 136,835
---------- ----------
Total Current Liabilities ....................................... 3,638,398 769,563
---------- ----------
OTHER LIABILITIES
Long-term debt, less current maturities ........................... 307,882 417,269
Lease deposits payable, noncurrent ................................. 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.
F-40
<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 ........................ 269,671 374,680
--------- ----------
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.
F-41
<PAGE>
MAJOR FLEET & LEASING CORP.
STATEMENTS OF RETAINED EARNINGS
For the Years Ended December 31, 1996 and 1995
1996 1995
---------- ---------
RETAINED EARNINGS -- Beginning ............ $738,266 $678,215
Add: Net income ........................... 197,434 310,051
Less: Distributions to stockholders ...... 775,845 250,000
-------- --------
RETAINED EARNINGS -- Ending ............... $159,855 $738,266
======== ========
The accompanying notes are an integral part of these financial statements.
F-42
<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
---------- ----------
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.
F-43
<PAGE>
MAJOR FLEET & LEASING CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- Summary of Significant Accounting Policies
Nature of Business
Major Fleet & Leasing Corp. (the "Company") is in the business of leasing
automobiles and trucks primarily in the New York City metropolitan area under
direct financing and operating leases expiring in various years through 2000.
Effective October 2, 1996, the Company became a wholly-owned subsidiary of
Fidelity Holdings, Inc. ("Fidelity"). Since the change in ownership, the
Company has expanded its operations to include the leasing of telephone
equipment.
Revenue Recognition
The Company records income from direct financing leases based on a constant
periodic rate of return on the net investment in the lease. Income earned from
operating lease agreements is recorded evenly over the term of the lease.
Inventory
Inventory consists of automobiles and trucks held for sale or lease, and is
valued at the lower of cost (specific identification) or market.
Depreciation
Depreciation of leased equipment is calculated on the cost of the
equipment, less an estimated residual value, on the straight-line method over
the term of the lease. Depreciation of other property and equipment is provided
by the straight-line method over the estimated useful lives of the assets.
Property and Equipment
Property and equipment is stated at cost. Costs of major additions and
betterments are capitalized, and maintenance, repairs and minor renewals are
expensed as incurred. When property and equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation are eliminated from the
accounts and any resulting gain or loss is reflected in income.
Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
Income Taxes
The Company, with the consent of its stockholders, had elected under the
Internal Revenue Code to be an "S" corporation. In lieu of corporation income
taxes, the stockholders of an "S" corporation are taxed on their proportionate
share of the 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.
F-44
<PAGE>
MAJOR FLEET & LEASING CORP.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 1 -- Summary of Significant Accounting Policies -- (Continued)
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.
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
==========
F-45
<PAGE>
MAJOR FLEET & LEASING CORP.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 4 -- Property and Equipment
Property and equipment at December 31, 1996 and 1995 is comprised of the
following:
<TABLE>
<CAPTION>
Estimated
1996 1995 Useful Lives
--------- --------- -------------
<S> <C> <C> <C>
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
======= =======
</TABLE>
Depreciation expense related to property and equipment for the years ended
December 31, 1996 and 1995 was $2,596 and $1,753, respectively.
NOTE 5 -- Long-Term Debt
Various lenders advance funds to the Company in the form of notes payable
to finance leased vehicles. Interest on each note is charged depending on the
prime rate in effect at the time the vehicle is leased and remains constant over
the term of the lease. Applicable rates at December 31, 1996 ranged between 7%
and 9.5%. Equal monthly installments are paid over the term of the lease (which
can range from 12 to 60 months), together with a final balloon payment, if
applicable. These loans are collateralized by the vehicles.
Maturities of long-term debt at December 31, 1996 are as follows:
Year ending
December 31, Amount
----------- ------
1997 $463,976
1998 230,851
1999 70,437
2000 6,594
--------
Total $771,858
========
NOTE 6 -- Notes Payable, Related Party
In December 1996 the Company purchased telephone equipment from an
affiliated entity for $1,670,534 (see Note 12) and incurred notes payable
totalling such amount. The notes are expected to be repaid in full in 1997 and,
accordingly, are shown as a current liability in the accompanying financial
statements. The notes are collateralized by the telephone equipment. Interest
rates on these notes have not yet been determined by management.
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.
F-46
<PAGE>
MAJOR FLEET & LEASING CORP.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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.
NOTE 12 -- Major Suppliers
The Company purchased a substantial portion of its leased vehicles from
three entities which are wholly-owned by the Company's former stockholders.
Purchases attributable to those entities were $198,108 (68%), $28,329 (10%) and
$49,742 (17%) in 1996 and $519,426 (56%), $95,685 (10%), and $95,775 (10%) in
1995, respectively.
In 1996, the Company purchased $1,158,056 (100%) of its new car inventory
from an entity which is wholly-owned by its former stockholders.
Amounts due to these companies at December 31, 1996 and 1995 are included
in due to affiliates (see Note 7).
In addition, in 1996, the Company purchased $1,670,534 (100%) of its leased
telephone equipment from an entity wholly-owned by Fidelity. The balance owed to
this entity at December 31, 1996 is included in notes payable, related party
(see Note 6).
F-47
<PAGE>
AUDITOR'S REPORT
To the Directors of
786710 Ontario Limited
We have audited the balance sheet of 786710 Ontario Limited as at December
31, 1996 and the statements of operations and retained earnings and cash flow
for the year then ended. These financial statements are the responsibility of
the company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial 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
F-48
<PAGE>
<TABLE>
<CAPTION>
786710 Ontario Limited Five Months
(Operating as Info Systems) Year Ended Ended
Statements of Operations and Retained Earnings December 31, December 31,
1996 1995
(Expressed in Canadian Dollars) -------------- ------------
<S> <C> <C>
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
========== ==========
</TABLE>
*See accompanying notes to the financial statements.
F-49
<PAGE>
786710 Ontario Limited
(Operating as Info Systems)
BALANCE SHEET
1996 1995
(Expressed in Canadian Dollars) ---------- ---------
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)
See accompanying notes to the financial statements
F-50
<PAGE>
<TABLE>
<CAPTION>
786710 Ontario Limited Five Months
(Operating as Info Systems) Year Ended Ended
STATEMENT OF CASH FLOW December 31, December 31,
1996 1995
(Expressed in Canadian Dollars) -------------- -------------
<S> <C> <C>
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
========== =========
</TABLE>
See accompanying notes to the financial statements.
F-51
<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.
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.
F-52
<PAGE>
786710 Ontario Limited (Operating as Info Systems) NOTES TO THE FINANCIAL
STATEMENTS (Expressed in Canadian Dollars)
December 31, 1996
- --------------------------------------------------------------------------------
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
<TABLE>
<CAPTION>
1996 1995
------ -----
<S> <C> <C>
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
==== ====
</TABLE>
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.
F-53
<PAGE>
786710 Ontario Limited (Operating as Info Systems) NOTES TO THE FINANCIAL
STATEMENTS (Expressed in Canadian Dollars)
December 31, 1996
- --------------------------------------------------------------------------------
8. Concentration of Credit Risk
The Company sells on credit terms to its customers located in Canada and
the United States. No single customer represented more than 10% of the Company's
sales in the reporting period.
9. Contingency
A legal claim of $200,000 has been filed against the Company and other
parties relating to a matter which arose in the ordinary course of business. In
the opinion of management, the likelihood of the lawsuit being successful and
the amount of loss, if any, is not determinable. Accordingly, no provision has
been made in these financial statements.
10. Comparative Figures
Comparative figures of the prior year have been restated in order to
conform with the financial statement format adopted in current year.
F-54
<PAGE>
===============================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances create any implication that there has been no
change in the affairs of the Company since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the registered securities to which it
relates. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy such securities in any circumstances in which such offer or
solicitation is unlawful.
TABLE OF CONTENTS
Page
-----------
PROSPECTUS SUMMARY ........................ 3
RISK FACTORS .............................. 7
PLANNED ACQUISITION........................ 16
POTENTIAL ACQUISITION ..................... 17
USE OF PROCEEDS ........................... 17
DILUTION ................................. 18
CAPITALIZATION ........................... 19
MANAGEMENT'S DISCUSSION AND ANALYSIS ...... 20
DESCRIPTION OF BUSINESS .................. 27
LEGAL PROCEEDINGS ........................ 48
DESCRIPTION OF PROPERTY .................. 49
DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS ......... 51
EXECUTIVE COMPENSATION .................. 52
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS ........................... 55
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT ...... 59
DESCRIPTION OF SECURITIES ............... 63
MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS ..................... 68
SELLING SHAREHOLDERS ..................... 69
PLAN OF DISTRIBUTION ..................... 70
EXPERTS AND COUNSEL ..................... 71
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE .................. 72
AVAILABLE INFORMATION...................... 72
FINANCIAL STATEMENTS ..................... F-1
Until [__________], 1998, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be
required to deliver a Prospectus. This is in addition to the obligation of
dealers to deliver a Prospectus when acting as Underwriters and with respect to
their unsold allotments or subscriptions.
===============================================================================
<PAGE>
===============================================================================
1,150,000 Shares
FIDELITY HOLDINGS, INC.
Common Stock
------------
PROSPECTUS
------------
Hobbs Melville Securities Corp.
, 1998
-------
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Under Section 78.751 of the Nevada General Corporation Law, as amended, a
director, officer, employee or agent of a Nevada corporation may be entitled to
indemnification by the corporation under certain circumstances against expenses,
judgments, fines and amounts paid in settlement of claims brought against them
by a third person or by or in right of the corporation.
The Company is obligated under its Articles of Incorporation to indemnify
any of its present or former directors who served at the Company's request as a
director, officer or member of another organization against expenses, judgments,
fines and amounts paid in settlement of claims brought against them by a third
person or by or in right of the corporation if such director acted in good faith
or in a manner such director reasonably believed to be in, or not opposed to,
the best interests of the Company and, with respect to any criminal action or
proceeding, if such director had no reason to believe his or her conduct was
unlawful. However with respect to any action by or in the right of the Company,
the Articles of Incorporation prohibit indemnification in respect of any claim,
issue or matter as to which such director is adjudged liable for negligence or
misconduct in the performance of his or her duties to the Company, unless
otherwise ordered by the relevant court. The Company's Articles of Incorporation
also permit it to indemnify other persons except against gross negligence or
willful misconduct.
The Company is obligated under its by-laws to indemnify its directors,
officer and other persons who have acted as a representatives of the Company at
its request to the fullest extent permitted by applicable law as in effect from
time to time, except for costs, expenses or payments in relation to any matter
as to which such officer, director or representative is finally adjudged
derelict in the performance of his or her duties, unless the Company has
received an opinion from independent counsel that such person was not so
derelict.
In addition, pursuant to indemnification agreements that the Company has
entered into with each of its directors, the Company has agreed to indemnify its
directors to the fullest extent permitted by applicable corporate law and its
Articles of Incorporation. The indemnification agreements also provide that,
upon the request of a director and provided that director undertakes to repay
amounts that turn out not to be reimbursable, that director is entitled to
reimbursement of litigation expenses in advance of the final disposition of the
legal proceeding.
The Nevada General Corporation Law, as amended, also permits a corporation
to limit the personal liability of its officers and directors for monetary
damages resulting from a breach of their fiduciary duty to the corporation and
its stockholders. The Company's Articles of Incorporation limit director
liability to the maximum extent permitted by The Nevada General Corporation Law,
which presently permits limitation of director liability except (i) for a
director's acts or omissions that involve intentional misconduct, fraud or a
knowing violation of law and (ii) for a director's willful or grossly negligent
violation of a Nevada statutory provision that imposes personal liability on
directors for improper distributions to stockholders. As a result of the
inclusion in the Company's Articles of Incorporation of this provision, the
Company's stockholders may be unable to recover monetary damages against
directors as a result of their breach of their fiduciary duty to the Company and
its stockholders. This provision does not, however, affect the availability of
equitable remedies, such as injunctions or rescission based upon a breach of
fiduciary duty by a director.
Reference is also made to Section 8 of the Underwriting Agreement (a form
of which is attached to this registration statement as Exhibit 1.1) with respect
to undertakings to indemnify the Company, its directors, its officers who have
signed this registration statement and each person who controls the Company
within the meaning of the Securities Act, against certain civil liabilities,
including certain liabilities under the Securities Act.
II-1
<PAGE>
The Company does not maintain any liability insurance for the benefit of
its officers or directors and has no present plans to obtain such insurance.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses, other than underwriting discounts and commissions,
in connection with this offering are as follows:
SEC Registration Fee ........................ $ 2,950
Nasdaq Fees ................................. 1,474
Blue Sky Fees and Expenses .................. 30,000*
Printing Expenses ........................... 75,000*
Legal Fees and Expenses ..................... 75,000*
Accounting Fees and Expenses ............... 30,000*
Transfer Agent Fees and Expenses ............ 7,000*
Underwriter's Non-Accountable Expenses ...... 207,000*
Miscellaneous .............................. 6,576*
----------
$ 435,000*
==========
- ------------
*Estimated.
Item 26. Recent Sales of Unregistered Securities.
The securities described below of the Company were sold by the Company
during the past three years without being registered under the Securities Act.
All such sales made in reliance on Section 4(2) of the Securities Act were, to
the best of the Company's knowledge, made to investors that, either alone or
together with a representative that assisted such investor in connection with
the applicable investment, had such sufficient knowledge and experience in
financial and business matters to be capable of evaluating the merits and risks
connected with the applicable investment.
1. On November 7, 1995, upon its formation, the Company sold to each of
Bruce Bendell and Doron Cohen 2,500,000 shares of Common Stock, for which the
Company received gross proceeds of $50,000 ($.01 per share). Such Common Stock
was issued and sold in reliance upon the exemption from registration contained
in Section 4(2) of the Securities Act.
II-2
<PAGE>
2. In February 1996, the Company completed the placement of 20,000 Units to
70 investors, (or investor groups) at a price of $5.00 per Unit, for which the
Company received gross proceeds of $100,000 ($5.00 per Unit). Each Unit
consisted of 2 shares of Common Stock and 23 Common Stock Purchase Warrants.
Each such warrant entitled the holder thereof to purchase one share of Common
Stock for $1.95. The warrants were immediately exercisable and remained
exercisable until June 30, 1996. The warrants were transferable separately from
the Common Stock. The Units were issued and sold in reliance upon the exemption
from registration contained in Rule 504 of Regulation D under the Securities
Act. The 70 investors (or investor groups) were:
Amanda Bienfeld Kathleen T. Giaimo Matthew J. Scheiner
Deborah Bienfeld Rhoda Goldstein Robyn E. Scheiner
Diana Bienfeld Beverly Gopin Stephen G. Scheiner
Samuel Bienfeld Seth Gopin Michael Setzen
Saul Bienfeld Eli Greenwald Alan Silberberg
Mark S. Brody Margot Greenwald Estes Silberberg
Scott Canner Wayne Greenwald Mark Silberberg
Carlos Cepeda Malka Gross Michael Silberberg
David Christie Meyer Gross Sara Silberberg
David L. Clarke Steven Hornstock Barry R. Silver
Marc Cohen Gregory Horoski Martin Silver
John and Rita Devita Lillian R. Kaplan Cheryl Steinberg
Michael DeZorett Helen Koppel Mark Stteiner
Paul Drucker Andi Mansukhani Alex Wagman
Bradly E. Dubler Moses Mayer Ted Weinberg
Howard Edelstein Benjamin Mintz William Weinberg
David Edelstein Gary E. Rosenberg Jeffrey Weiner
Robert Eisman Gary E. Rosenberg, PC Annie Weiss
Vevel Finkelstein Nell Rosenberg Robert Weiss
Aliza Fischer Adam Scheiner George Wertheimer
Simon and Hannah Fischer Daniel E. Scheiner David Zeldin
Warren Forman Jason Scheiner and Michael Zezima.
Zishe Friedman Lauren R. Scheiner
Rebecca Frommer Linda M. Scheiner
3. During 1996, the Company sold 460,000 shares of Common Stock upon the
exercise of 460,000 Common Stock Purchase Warrants (exercisable at $1.95 per
Common Stock Purchase Warrant), for which the Company received gross proceeds of
$897,000. Such Common Stock was issued and sold in reliance upon the exemption
from registration contained in Rule 504 of Regulation D under the Securities Act
(the "504 Offering").
4. In March 1996, in connection with the agreement by Nissko Telecom, Ltd.
to purchase certain equipment manufactured by the Company, the Company issued to
three of the principals of Nissko Telecom, Ltd., Yossi Koren, Avraham Nissanian
and Chmuel Livian, an aggregate of 750,000 Class A Warrants and 750,000 Class B
Warrants. The Class A Warrants were immediately exercisable and remain
exercisable until 60 days after the effectiveness of this registration
statement. The Class B Warrants were immediately exercisable and remain
exercisable until March 19, 1998. Each Class A Warrant and each Class B Warrant
entitles the holder to purchase one share of Common Stock at an initial exercise
price of $1.25 per share, subject to adjustment. Such warrants were issued in
reliance upon the exemption from registration contained in Section 4(2) of the
Securities Act.
5. In April 1996, in connection with the acquisition by the Company from
Zvi Barak and Sarah Barak of all of the issued and outstanding stock of Info
Systems, and an employment agreement between the Company and Zvi Barak, the
Company issued to each of Sarah Barak and Zvi Barak 125,000 shares of Common
Stock, which vest (i) in the case of Sarah Barak, 25,000 shares on December 31,
1997 and 50,000 shares on each of December 31, 1998 and 1999 and (ii) in the
case of Zvi Barak, 25,000 shares per year on the last day of February commencing
on February 28, 1997 and continuing through February 28, 2002. Such Common Stock
was issued in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act and Regulation S under the Securities Act.
II-3
<PAGE>
6. In October 1996, in connection with the acquisition (the "Major Fleet
Acquisition") by the Company from Bruce Bendell and Harold Bendell of all of the
issued and outstanding stock of Major Fleet & Leasing Corp., the Company issued
to the Bendells an aggregate of 250,000 shares of the 1996-MAJOR Series of
Convertible Preferred Stock. Each share of the 1996-MAJOR Series of Convertible
Preferred Stock is convertible into Common Stock having a value of $10.00
commencing December 31, 1996. For purposes of conversion, each share of Common
Stock is valued at the lesser of (a) $5.00 and (b) if available, the average of
the bid and ask closing prices for the twenty consecutive trading days ending on
the day prior to conversion. The holders of shares of the 1996-MAJOR Series of
Convertible Preferred Stock have the right to require the Company to repurchase
such shares for $10.00 per share commencing July 1, 1997 and the Company has the
right to redeem such shares for $15.87 per share commencing January 1, 2002. The
1996-MAJOR Series of Convertible Preferred Stock was issued in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act.
7. In November 1996, as required by the acquisition agreement between the
Company, Bruce Bendell and Harold Bendell relating to the Major Fleet
Acquisition, the Company issued to the Bendells an aggregate of 100,000 shares
of Common Stock as a result of Major Fleet having attained a threshold level of
financial performance. Such Common Stock was issued in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act.
8. In October 1996, pursuant to a management agreement entered into between
the Company, Bruce Bendell and Harold Bendell in connection with the Major Fleet
Acquisition, the Company and the Bendells issued to the Bendells warrants to
acquire 100,000 shares of the Company's Common Stock for $1.25 per share. The
warrants became exercisable on January 1, 1997 and remain exercisable until six
months after the effectiveness of a registration statement relating to the
underlying shares of Common Stock, which, in the case of the Warrants issued to
Harold Bendell, is this registration statement. Each warrant entitles the holder
to purchase one share of Common Stock at an initial exercise price of $1.25 per
share, subject to adjustment. Such warrants were issued in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act.
9. In October 1996, the Company issued to Progressive Polymerics
International, Inc. 80,000 Units pursuant to an amendment to a patent purchase
agreement between the Company, Progressive Polymerics International, Inc. and
Progressive Polymerics, Inc. Each Unit consists of 2 shares of Common Stock and
2 warrants. The warrants were immediately exercisable and remained exercisable
until October 31, 1997. Each warrant entitled the holder to purchase one share
of Common Stock at an initial exercise price of $3.125, subject to adjustment.
The amendment to the Company's agreement with Progressive Polymerics
International, Inc. and Progressive Polymerics, Inc. was entered into in
settlement of legal proceedings resulting from a dispute between the parties
arising out of the patent purchase agreement. The amendment provided that the
original $500,000 cash purchase price to paid by the Company for the armored
conduit patents would be replaced by the issuance of 80,000 Units and $100,000
cash. The Company has filed a legal action seeking rescission of the amendment
and the issuance of such shares of Common Stock and a return of the $100,000
purchase price. Such Common Stock and warrants were issued in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act.
10. In October 1996, as compensation for the performance of certain
investment banking services rendered to the Company pursuant to an oral
agreement made by the Company in January 1996 with Richard R. Rozzi, the Company
issued 100,000 shares of Common Stock, for which the Company received gross
proceeds of $1,000 ($.01 per share). As part of such services, Mr. Rozzi acted
as a liaison between the Company and the investment community, including
introducing the Company to potential underwriters, coordinated the Company's
interviews and press releases, and publicized the activities of the Company to
the investment community and the general public. Such Common Stock was issued
and sold in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act.
11. In October 1996, upon the completion of performance of certain
marketing services rendered to the Company pursuant to an oral agreement made by
the Company in January 1996 with Rebecca Frommer, the Company issued 100,000
shares of Common Stock to Ms. Frommer, for which the Company received gross
II-4
<PAGE>
proceeds of $1,000 ($.01 per share). Ms. Frommer's services consisted of
introducing the Company to wealthy individual investors known to her personally
with a view to their purchasing Units in the 504 Offering. Such Common Stock was
issued and sold in reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act.
12. In November 1996, in consideration for 1180513 Ontario Limited, the
then employer of Moise Benedid, to permit Mr. Benedid to become the President of
Info Systems, the Company issued to 1180513 Ontario Limited 20,000 shares of
Common Stock, 10,000 of which vested on July 31, 1997 and 10,000 of which vest
on July 31, 1998. Such Common Stock was issued in reliance upon the exemption
from registration contained in Section 4(2) of the Securities Act and Regulation
S under the Securities Act.
13. In November 1996, in connection with an Employment Agreement between
the Company's wholly-owned subsidiary Computer Business Sciences, Inc. and
Shlomo Nessim, the Company issued to Mr. Nessim 15,000 shares of Common Stock.
Such Common Stock was issued in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act. The shares issued to Mr. Nessim
were returned to the treasury of the Company upon the Company's termination of
the Employment Agreement.
14. In November 1996, in connection with an Employment Agreement between
Computer Business Sciences and Paul Vesel, the Company issued to Mr. Vesel
30,000 shares of Common Stock, 20,000 of which shares will vest upon the
completion of his first year of employment in November 1997 and 10,000 of which
shares will vest upon the completion of his second year of employment in
November 1998. Such Common Stock was issued in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act.
15. In December 1996, the Company issued as a bonus to certain employees an
aggregate of 4,200 shares of Common Stock under a newly adopted Employees
Performance Recognition Plan. All such shares vest on January 1, 1998, subject
to the continued employment of the respective employee, or upon the earlier
retirement, death or permanent disability of such employee. Such Common Stock
was issued in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act. The employees to whom such Common Stock was issued
were: Solisha Alexander; Boysie Brown; Alan Cohen; Irma D'Intino; Vajreshwar
Domakonda; Richard Dreitlein; Samantha Greire; Nina Hughes; Timothy Jones;
Michael Lukin; Shlomo Nessim; Benilda Ottley; Dulcie Ramkay; and Patricia
Searle.
16. In January 1997, in connection with an informal consulting agreement
between the Company and Ronald Premo, the Company issued to Mr. Premo, 7,500
shares of Common Stock. The consulting services included analyzing the Company
armored conduit plastics products, identifying business opportunities for the
Company's Plastics and Utilities Products Division and introducing the Company
to manufacturers, distributors and others in the plastics industry. Such Common
Stock was issued in reliance upon the exemption from registration contained in
Section 4(2) of the Securities Act. In March 1997, in connection with an
Employment Agreement between the Company and Ronald Premo, the Company issued to
Mr. Premo, 30,000 shares of Common Stock, 10,000 of which shares will vest upon
the completion of each of his first three years of employment with the Company.
Such Common Stock was issued in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act.
17. In February 1997, in connection with the agreement of Ronald Shapss to
perform certain consulting services for the Company, the Company issued to Mr.
Shapss 50,000 shares of Common Stock for an aggregate purchase price of $500.
Such services included assisting the Company in obtaining financing and in
identifying and consummating potential acquisitions. Such Common Stock was
issued in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act.
Effective May 1997, pursuant to such agreement, the Company granted to Mr.
Shapss at no cost options to acquire up to 50,000 shares of Common Stock at an
exercise price of $4.50 per share, the fair market value of the Common Stock on
February 18, 1997, the date of such agreement. Such options are exercisable for
five years from the date of grant. Such options were issued in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act.
18. In July 1997, the Company issued to Lewis Glogower, as part of the
termination of Mr. Glowgower's employment with the Company, 3,000 shares of
Common Stock. Such Common Stock was issued in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act.
II-5
<PAGE>
19. In September 1997, in connection with the execution of the MOU relating
to Computer Business Sciences' acquisition of the Agent, an aggregate $653,750
deposit that the Nissko Principals and Robert L. Rimberg had previously paid
towards the full exercise price of the Class A Warrants was converted to a
partial exercise of the Class A Warrants. Upon such conversion, the Company
issued an aggregate of 523,000 shares of its Common Stock to the Nissko
Principals and Mr. Rimberg. All of such Common Stock was issued in reliance upon
the exemption from registration contained in Section 4(2) of the Securities Act.
20. In November 1997, in connection a Consulting Agreement between Computer
Business Sciences and Bruce A. Hall, the Company issued to Mr. Hall 10,000
shares of Common Stock, 3,334 of which shares will vest after the completion of
Mr. Hall's first year of consulting and 3,333 of which shares will vest after
completion of each of Mr. Hall's second and third years of consulting. Such
Common Stock was issued in reliance upon the exemption from registration
contained in Section 4(2) of the Securities Act and Regulation S under the
Securities Act.
Item 27. Exhibits.
See Exhibit Index immediately preceding the exhibits.
Item 28. Undertakings.
(a) The Company hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act.
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; Notwithstanding the forgoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered (if the total dollar value of securities offered would
not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the
form of prospects filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in the volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) (a) File a post-effective amendment if the Selling Shareholder
Lock-Up Period is waived for ten percent or more of the Selling Shareholders'
Shares and (b) add a sticker to the Prospectus if the Selling Shareholder
Lock-Up Period is waived for five percent or more but less than ten percent
of the Selling Shareholders' Shares.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company pursuant to the foregoing provisions, or otherwise, the Company has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
Company in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the Company will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this registration statement
to be signed on its behalf by the undersigned, in the County of New York, and
State of New York, on the 8th day of January, 1998.
FIDELITY HOLDINGS, INC.
By /s/ Doron Cohen
----------------------------------
Doron Cohen
President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ Doron Cohen Chief Executive Officer, President, January 8, 1998
- ----------------------------- Treasurer and Director
Doron Cohen
/s/ Bruce Bendell Chairman of the Board and Director January 8, 1998
- -----------------------------
Bruce Bendell
/s/ Yossi Koren Director January 8, 1998
- -----------------------------
Yossi Koren
/s/ Glenn H. Bank Secretary January 8, 1998
- -----------------------------
Glenn H. Bank
/s/ Richard L. Feinstein Chief Financial Officer January 8, 1998
- -----------------------------
Richard L. Feinstein
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- --------- ----------- ----
<S> <C> <C>
1.1 Proposed form of Underwriting Agreement --
3.1** Articles of Incorporation of Fidelity Holdings, Inc., ("Company") incorporated by
reference to Exhibit 3.1 of Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange Commission on March 7, 1997. N/A
3.2** Articles of Incorporation of Computer Business Sciences, Inc., incorporated by
reference to Exhibit 3.2 of Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange Commission on March 7, 1997. N/A
3.3** Articles of Incorporation of 786710 (Ontario) Limited, incorporated by reference to
Exhibit 3.3 of Company's Registration Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission on March 7, 1997. N/A
3.4** Articles of Incorporation of Premo-Plast, Inc., incorporated by reference to Exhibit
3.4 of Company's Registration Statement on Form 10-SB, as amended, filed with
the Securities and Exchange Commission on March 7, 1997. N/A
3.5** Articles of Incorporation of C.B.S. Computer Business Sciences Ltd., incorporated
by reference to Exhibit 3.5 of Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange Commission on March 7, 1997. N/A
3.6** Articles of Incorporation of Major Fleet & Leasing Corp., incorporated by reference
to Exhibit 3.6 of Company's Registration Statement on Form 10-SB, as amended,
filed with the Securities and Exchange Commission on March 7, 1997. N/A
3.7** Articles of Incorporation of Reynard Service Bureau, Inc., incorporated by reference
to Exhibit 3.7 of Company's Registration Statement on Form 10-SB, as amended,
filed with the Securities and Exchange Commission on March 7, 1997. N/A
3.8** Articles of Incorporation of Major Acceptance Corp., incorporated by reference to
Exhibit 3.8 of Company's Registration Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission on March 7, 1997. N/A
3.9** By-Laws of the Company incorporated by reference to Exhibit 3.9 of Company's
Registration Statement on Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
4.1** Certificate of Designation for the Company's 1996-MAJOR Series of Convertible
Preferred Stock, incorporated by reference to Exhibit 4.1 of Company's Registration
Statement on Form 10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
4.1(i) Form of Amended and Restated Certificate of Designation for the Company's
1996-MAJOR Series of Convertible Preferred Stock. --
4.2** Warrant Agreement for Nissko Warrants, incorporated by reference to Exhibit 4.2 of
Company's Registration Statement on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7, 1997. N/A
4.3** Warrant Agreement for Major Fleet Warrants, incorporated by reference to Exhibit
4.3 of Company's Registration Statement on Form 10-SB, as amended, filed with
the Securities and Exchange Commission on March 7, 1997. N/A
4.3(i)* Amended and Restated Warrant Agreement, dated October 11, 1997 between the
Company, Bruce Bendell and Harold Bendell. --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description Page
- --------- ----------- ----
<S> <C> <C>
4.4** Warrant Agreement for Progressive Polymerics International, Inc. Warrants,
incorporated by reference to Exhibit 4.4 of Company's Registration Statement on
Form 10-SB, as amended, filed with the Securities and Exchange Commission on
March 7, 1997. __
4.5 Form of Certificate of Designation for the Company's 1997A-Major Automotive
Group Series of Preferred Stock. __
4.6 Form of Certificate of Designation for the Company's 1997-Major Series of
Convertible Preferred Stock. __
4.7 Form of Registration Rights Agreement between the Company and Bruce Bendell. __
4.8* Warrant Agreement between the Company and SouthWall Capital Corp. __
4.9* Stock Pledge and Security Agreement, dated March 26, 1996, between Doron
Cohen, Bruce Bendell, Avraham Nissanian, Yossi Koren, Sam Livian and Robert
Rimberg. __
4.10 Form of Registration Rights Agreement between the Company, Castle Trust and
Management Services Limited and Bruce Bendell. --
5.1* Opinion of Piper & Marbury L.L.P. __
10.1** Employment Agreement, dated November 7, 1995, between the Company and
Doron Cohen, incorporated by reference to Exhibit 10.1 of Company's Registration
Statement on Form 10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.1(i)* Amendment No. 1 to Employment Agreement, dated as of November 7, 1995
between the Company and Doron Cohen. __
10.2** Consulting Agreement, dated November 7, 1995, between the Company and Bruce
Bendell, incorporated by reference to Exhibit 10.2 of Company's Registration
Statement on Form 10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.2(i) Amendment No. 1 to Consulting Agreement, dated as of November 7, 1995
between Fidelity Holdings, Inc. and Bruce Bendell. __
10.3** Agreement for Purchase of Patents, dated November 14, 1995, between the
Company and Progressive Polymerics, Inc., incorporated by reference to Exhibit
10.3 of the Company's Registration Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission on March 7, 1997. N/A
10.3(i)** First Amendment, dated September 30, 1996, to Agreement for Purchase of Patents,
dated November 14, 1995, incorporated by reference to Exhibit 10.4 of Company's
Registration Statement on Form 10-SB as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.5** Agreement, dated March 25, 1996, between Nissko Telecom, Ltd. and Computer
Business Sciences, Inc., incorporated by reference to Exhibit 10.5 of Company's
Registration Statement on Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.6** Asset Purchase Agreement, dated April 18, 1996, between the Company and Zvi
and Sarah Barak, incorporated by reference to Exhibit 10.6 of Company's
Registration Statement on Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description Page
- --------- ----------- ----
<S> <C> <C>
10.6(i) Amendment to Asset Purchase Agreement dated August 7, 1997. --
10.7** Employment Agreement dated April 18, 1996 between the Company and Dr. Zvi
Barak, incorporated by reference to Exhibit 10.7 of Company's Registration
Statement on Form 10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.8** Employment Agreement dated October 18, 1996 between Computer Business
Sciences, Inc. and Paul Vesel, incorporated by reference to Exhibit 10.8 of
Company's Registration Statement on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7, 1997. N/A
10.9** Indemnification Agreement dated November 7, 1995 between the Company and
Doron Cohen, incorporated by reference to Exhibit 10.9 of Company's Registration
Statement on Form 10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.10** Indemnification Agreement dated November 7, 1995 between the Company and
Bruce Bendell, incorporated by reference to Exhibit 10.10 of Company's
Registration Statement on Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.11** Indemnification Agreement dated December 6, 1995 between the Company and
Richard C. Fox, incorporated by reference to Exhibit 10.11 of Company's
Registration Statement on Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.12** Indemnification Agreement dated March 28, 1996 between the Company and Dr.
Barak, incorporated by reference to Exhibit 10.12 of Company's Registration
Statement on Form 10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.13** Indemnification Agreement dated March 28, 1996 between the Company and Yossi
Koren, incorporated by reference to Exhibit 10.13 of Company's Registration
Statement on Form 10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.14** Plan of Reorganization for acquisition of Major Fleet & Leasing Corp. dated August
23, 1996 between the Company, Bruce Bendell and Harold Bendell, incorporated by
reference to Exhibit 10.17 of Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange Commission on March 7, 1997. N/A
10.15** Patent Purchase Agreement dated December 30, 1996 between Premo-Plast, Inc. and
John Pinciaro, incorporated by reference to Exhibit 10.16 of Company's
Registration Statement on Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.16** Employment Agreement dated December 30, 1996 between Premo-Plast, Inc. and
John Pinciaro, incorporated by reference to Exhibit 10.17 of Company's
Registration Statement on Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.17** Employment Agreement dated January 27, 1997 between the Company and Ronald
K. Premo, incorporated by reference to Exhibit 10.18 of Company's Registration
Statement on Form 10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description Page
- --------- ----------- ----
<S> <C> <C>
10.18** Plan and Agreement of Merger, dated April 21, 1997, the Company, Major
Automotive Group, Inc., Major Acquisition Corp. and Bruce Bendell, incorporated
by reference to Exhibit 10.19 of Company's Registration Statement on Form 10-SB,
as amended, filed with the Securities and Exchange Commission on March 7, 1997. N/A
10.18(i) Amendment to Plan and Agreement of Merger, dated August 1, 1997, between
Fidelity Holdings, Inc., Major Automotive Group, Inc., Major Acquisition Corp. and
Bruce Bendell. __
10.18(ii) Amendment to Plan and Agreement of Merger, dated August 26, 1997, between
Fidelity Holdings, Inc., Major Automotive Group, Inc., Major Acquisition Corp. and
Bruce Bendell. __
10.18(iii)* Amendment to Plan and Agreement of Merger, dated November 20, 1997, between
Fidelity Holdings, Inc., Major Automotive Group, Inc., Major Acquisition Corp. and
Bruce Bendell. --
10.19** Stock Purchase Agreement with Escrow Agreement attached, incorporated by
reference to Exhibit 10.20 of Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange Commission on March 7, 1997. N/A
10.20** Management Agreement, incorporated by reference to Exhibit 10.21 of Company's
Registration Statement on Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.21** Employment Agreement with Moise Benedid, incorporated by reference to Exhibit
10.22 of Company's Registration Statement on Form 10-SB, as amended, filed with
the Securities and Exchange Commission on March 7, 1997. N/A
10.22* Partnership Agreement between Nissko Telecom Associates and the Company. __
10.23 Memorandum of Understanding, dated September 9, 1997, by and among Computer
Business Sciences, Inc., Nissko Telecom Ltd., the Company and Robert L. Rimberg. __
10.24* Letter of Intent, dated June 6, 1997, between the Company and SouthWall Capital
Corp. (formerly known as Sun Coast Capital Corp.) __
10.25 Letter of Intent, dated September 1997, between the Company, Lichtenberg Robbins
Buick, Inc. and Lichtenberg Motors Inc. __
10.26 Consulting Agreement, dated February 18, 1997, with Ronald Shapss Corporate
Services, Inc. __
10.27* Value Added Reseller Agreement between Summa Four, Inc. and Computer
Business Sciences, Inc., as Reseller. __
10.28* Lease Agreement, dated March 1996, between 80-02 Leasehold Company, as
Owners and the Company, as Tenant. __
10.29* Master Lease Agreement, dated December 26, 1996, between Major Fleet &
Leasing Corp., as Lessor, and Nissko Telecom, Ltd., as Lessee. __
10.30* Sublease Agreement, dated March 1995, between Speedy R.A.C., Inc., as Sublessor,
and Major Subaru Inc., as Sublessee. __
10.31* Lease Agreement, dated November 1, 1991, between Gloria Hinsch, as Landlord,
and Major Chrysler-Plymouth, Inc., as Tenant. __
10.32* Store Lease Agreement, dated June 10, 1992, between Bill K. Kartsonis, as Owner,
and Major Automotive Group, as Tenant. __
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description Page
- --------- ----------- ----
<S> <C> <C>
10.33* Lease Agreement, dated June 3, 1994, between General Motors Corporation, as
Lessor, and Major Chevrolet, Inc., as Lessee. __
10.34* Lease Agreement, dated August 1990, between Bruce Bendell and Harold Bendell,
as Landlord and Major Chrysler-Plymouth, Inc., as Tenant. __
10.34(i)* Extension of Lease Agreement, dated August 14, 1997, betweeen Bruce Bendell and
Harold Bendell, as Landlord and Major Dodge, Inc. (formerly known as Major
Chrysler-Plymouth, Inc.), as Tenant. --
10.34(ii)* Extension of Lease Agreement, dated December 16, 1997, between
Bruce Bendell and Harold Bendell, as Landlord and Major Dodge
(formerly known as Major Chrysler-Plymouth, Inc.), as Tenant.
10.35* Lease Agreement, dated February 1995, between Bendell Realty, L.L.C., as
Landlord, and Major Chrysler-Plymouth Jeep Eagle, Inc., as Tenant. __
10.35(i)* Extension of Lease Agreement, dated August 14, 1997, between Bendell Realty,
L.L.C., as Landlord and Major Chrysler-Plymouth Jeep Eagle, Inc., as Tenant. --
10.35(ii)* Extension of Lease Agreement, dated December 16, 1997, between
Bendell Realty, L.L.C., as Landlord and Major Chrysler-Plymouth
Jeep Eagle, Inc., as Tenant.
10.36* Lease Agreement, dated February 1996, between Prajs Drimmer Associates, as
Landlord, and Barak Technology Inc., as Tenant. __
10.37* Sublease Agreement, dated January 8, 1997, between Newsday, Inc., as Sublessor,
and Major Fleet & Leasing Corp., as Sublessee. __
10.37(i)* Consent to Sublease Agreement, dated January 16, 1997, between 80-02 Leasehold
Company, Newsday Inc. and Major Fleet and Leasing Corp. __
10.38* General Security Agreement between Major Fleet & Leasing Corp., as Debtor, and
Marine Midland Bank, as Secured Party. __
10.39 Retail and Wholesale Dealer's Agreement, dated March 30, 1995, between Marine
Midland Bank, as Bank, and Major Fleet & Leasing Corp., as Dealer. __
10.40* Wholesale Lease Financing Line of Credit between General Electric Capital
Corporation, as Lender, and Major Fleet & Leasing Corp., as Borrower. __
10.41* Chrysler Leasing System License Agreement between Chrysler Motors Corporation,
as Licensor, and Major Fleet & Leasing Corp., as Licensee. __
10.42* GMAC Retail Plan Agreement between General Motors Acceptance Corp. and
Major Fleet & Leasing Corp., as Dealer. __
10.43* Fidelity Holdings, Inc. 1996 Employees' Performance Recognition Plan. __
10.44* Secured Promissory Note, dated December 31, 1996, between Doron Cohen, as
Maker, and Fidelity Holdings, Inc., as Holder. __
10.45* Dealer Master Agent Agreement and License, dated February 1996, between
Computer Business Sciences, Inc. and Progressive Polymerics International, Inc., as
Master Agent. __
10.46* Dealer Master Agent Agreement and License, dated February 1996, between
Computer Business Sciences, Inc. and Cellular Credit Corp. of America, Inc., as
Master Agent. __
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Description Page
- --------- ----------- ----
<S> <C> <C>
10.47* Dealer Master Agent Agreement and License, dated February 1996, between
Computer Business Sciences, Inc. and America's New Beginning, Inc., as Master
Agent. __
10.48* Dealer Master Agent Agreement and License, dated February 1996, between
Computer Business Sciences, Inc. and Korean Telecom, as Master Agent. __
10.49* Dealer Master Agent Agreement and License, dated February 1996, between
Computer Business Sciences, Inc. and Philcom Telecommunications, as Master
Agent. __
10.50 Management Agreement, dated August 23, 1996, between Major Fleet, Bruce
Bendell and Harold Bendell. __
10.51* Wholesale Security Agreement, dated April 26, 1990, between General Motors
Acceptance Corporation ("GMAC") and Major Fleet. __
10.51(i)* Amendment, dated February 14, 1991, to Wholesale Security Agreement between
GMAC and Major Fleet. __
10.52* Direct Leasing Plan Dealer Agreement, dated July 24, 1986, between GMAC and
Major Fleet. __
10.53 Retail Lease Service Plan Agreement, dated April 3, 1987, between GMAC and
Major Fleet. __
10.54 Contribution Agreement dated as of October 6, 1997 between the Company, Bruce
Bendell and Doron Cohen __
21.1 ** List of Subsidiaries of the Company, incorporated by reference to Exhibit 22.1 of
Company's Registration Statement on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7, 1997. --
23.1 Consent Letter of Peter C. Cosmas. __
23.2 Consent Letter of BDO Seidman, LLP. __
23.3 Consent Letter of Doane Raymond. __
23.4 Consent Letter of Marcum & Kliegman LLP. __
23.5 Consent letter of Piper & Marbury L.L.P. (included in the opinion filed as Exhibit
5.1 to this registration statement). __
</TABLE>
- ------------
* To be filed by amendment.
** Previously filed with the Commission as Exhibits to, and incorporated herein
by reference from, the registrant's registration statement on Form 10-SB
(File No. 0-29182).
<PAGE>
EXHIBIT 1.1
1,150,000 Shares
Fidelity Holdings, Inc.
Common Stock
($.01 Par Value)
UNDERWRITING AGREEMENT
Hobbs Melville Securities Corp.
As Representative of the Several Underwriters
110 Wall Street
New York. New York 10005
Gentlemen:
Fidelity Holdings, Inc., a Nevada corporation (the "Company"), proposes
to sell to the several underwriters (the "Underwriters") named in Schedule I
hereto for whom you are acting as Representative (the "Representative") an
aggregate of 1,150,000 shares of the Company's Common Stock, $.01 par value (the
"Firm Shares"). The respective amounts of the Firm Shares to be so purchased by
the several Underwriters are set forth opposite their names in Schedule I
hereto. The Company also proposes to sell at the Underwriters' option an
aggregate of up to 172,500 additional shares of the Company's Common Stock (the
"Option Shares") as set forth below. The Firm Shares and the Option Shares (to
the extent the aforementioned option is exercised) are herein collectively
called the "Shares."
As the Representative, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if you elect to exercise the over-allotment option in whole or in part for the
accounts of the several Underwriters.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each of the Underwriters as follows:
(a) A registration statement on Form SB-2 (File No. 333-38563 ) with
respect to the Shares has been carefully prepared by the Company in conformity
-1-
<PAGE>
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the Rules and Regulations (the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission. The Company has complied with the conditions for the use of Form
SB-2. Copies of such registration statement, including any amendments thereto,
the preliminary prospectuses (meeting the requirements of the Rules and
Regulations) contained therein and the exhibits, financial statements and
schedules. as finally amended and revised, have heretofore been delivered by the
Company to you. Such registration statement, together with any registration
statement filed by the Company pursuant to Rule 462 (b) of the Act, herein
referred to as the "Registration Statement," which shall be deemed to include
all information omitted therefrom in reliance upon Rule 43OA and contained in
the Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of the
date of this Agreement. "Prospectus" means (a) the form of prospectus first
filed with the Commission pursuant to Rule 424(b) or (b) the last Preliminary
prospectus included in the Registration Statement filed prior to the time it
becomes effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers of the
Shares, together with the term sheet or abbreviated term sheet filed with the
Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus
included in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus." Any reference herein to the
Registration Statement, any Preliminary Prospectus or to the Prospectus shall be
deemed to refer to and include any documents incorporated by reference therein,
and, in the case of any reference herein to any Prospectus, also shall be deemed
to include any documents incorporated by reference therein, and any supplements
or amendments thereto, filed with the Commission after the date of filing of the
Prospectus under Rules 424(b) or 430A, and prior to the termination of the
offering of the Shares by the Underwriters.
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Nevada with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement. Each of the subsidiaries of
the Company as listed in Exhibit 21 to Item 27 of the Registration Statement
(collectively, the "Subsidiaries") has been duly organized and is validly
existing as a corporation in good standing under the laws of the jurisdiction of
its incorporation, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement.
The Subsidiaries are the only subsidiaries, direct or indirect, of the Company.
The Company and each of the Subsidiaries are duly qualified to transact business
in all jurisdictions in which the conduct of their business requires such
qualification. The outstanding shares of capital stock of each of the
Subsidiaries have been duly authorized and validly issued, are fully paid and
non-assessable and are owned by the Company or another Subsidiary free and clear
of all liens, encumbrances and equities and claims; and no options, warrants or
other rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or ownership
interests in the Subsidiaries are outstanding.
(c) The outstanding shares of Common Stock of the Company have been
duly authorized and validly issued and are fully paid and non-assessable; the
Shares have been duly authorized and when issued and paid for as contemplated
herein will be validly issued, fully paid and nonassessable; and no preemptive
rights of stockholders exist with respect to any of the Shares or the issue and
-2-
<PAGE>
sale thereof. Neither the filing of the Registration Statement nor the offering
or sale of the Shares as contemplated by this Agreement gives rise to any
rights, other than those which have been waived or satisfied, for or relating to
the registration of any shares of Common Stock.
(d) The information set forth under the caption "Capitalization" in the
Prospectus is true and correct. All of the Shares conform to the description
thereof contained in the Registration Statement. The form of certificates for
the Shares conforms to the corporate law of the jurisdiction of the Company's
incorporation.
(e) The Commission has not issued an order preventing or suspending the
use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement contains,
and the Prospectus and any amendments or supplements thereto will contain, all
statements which are required to be stated therein by, and will conform, to the
requirements of the Act and the Rules and Regulations. The documents
incorporated by reference in the Prospectus, at the time filed with the
Commission conformed, in all respects to the requirements of the Securities
Exchange Act of 1934 or the Act, as applicable, and the rules and regulations of
the Commission thereunder. The Registration Statement and any amendment thereto
do not contain, and will not contain, any untrue statement of a material fact
and do not omit, and will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein not misleading. The
Prospectus and any amendments and supplements thereto do not contain, and will
not contain, any untrue statement of material fact; and do not omit, and will
not omit, to state any material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted from the
Registration Statement or the Prospectus, or any such amendment or supplement,
in reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of any Underwriter through the Representative,
specifically for use in the preparation thereof.
(f) The consolidated financial statements of the Company and the
Subsidiaries, together with related notes and schedules as set forth or
incorporated by reference in the Registration Statement, present fairly the
financial position and the results of operations and cash flows of the Company
and the consolidated Subsidiaries, at the indicated dates and for the indicated
periods. Such financial statements and related schedules have been prepared in
accordance with generally accepted principles of accounting, consistently
applied throughout the periods involved, except as disclosed herein, and all
adjustments necessary for a fair presentation of results for such periods have
been made. The summary financial and statistical data included in the
Registration Statement presents fairly the information shown therein and such
data has been compiled on a basis consistent with the financial statements
presented therein and the books and records of the Company. The pro forma
financial statements and other pro forma financial information included in the
Registration Statement and the Prospectus present fairly the information shown
therein, have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, have been properly
compiled on the pro forma bases described therein, and, in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions or
circumstances referred to therein.
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(g) (1) Peter C. Cosmas Co., CPA's who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(2) Doane Raymond, Chartered Accountants, who have certified
certain of the financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required by the
Act and the Rules and Regulations.
(3) BDO Seidman, LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement, are
independent public accountants as required by the Act and the Rules and
Regulations.
(4) Marcum & Kliegman LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and the
Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise which if
determined adversely to the Company or any of its Subsidiaries might result in
any material adverse change in the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company and of the Subsidiaries taken as a whole or to prevent the
consummation of the transactions contemplated hereby, except as set forth in the
Registration Statement.
(i) The Company and the Subsidiaries have good and marketable title to
all of the properties and assets reflected in the financial statements (or as
described in the Registration Statement) herein above described, subject to no
lien, mortgage, pledge, charge or encumbrance of any kind except those reflected
in such financial statements (or as described in the Registration Statement) or
which are not material in amount. The Company and the Subsidiaries occupy their
leased properties under valid and binding leases conforming in all material
respects to the description thereof set forth in the Registration Statement.
(j) The Company and the Subsidiaries have filed all Federal, State,
local and foreign income tax returns which have been required to be filed and
have paid all taxes indicated by said returns and all assessments received by
them or any of them to the extent that such taxes have become due and are not
being contested in good faith. All tax liabilities have been adequately provided
for in the financial statements of the Company.
(k) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not been
any material adverse change or any development involving a prospective material
adverse change in or affecting the earnings, business, management, properties,
assets, rights, operations, condition (financial or otherwise), or prospects of
the Company and its Subsidiaries taken as a whole, whether or not occurring in
the ordinary course of business, and there has not been any material transaction
-4-
<PAGE>
entered into or any material transaction that is probable of being entered into
by the Company or any of the Subsidiaries, other than transactions in the
ordinary course of business and changes and transactions described in the
Registration Statement, as it may be amended or supplemented. The Company and
the Subsidiaries have no material contingent obligations which are not disclosed
in the Company's financial statements which are included in the Registration
Statement.
(l) Neither the Company nor any of the Subsidiaries is or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Charter or ByLaws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by which
it, or any of its properties, is bound and which default is of material
significance in respect of the condition, financial or otherwise of the Company
and its Subsidiaries taken as a whole or the business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects of
the Company and the Subsidiaries taken as a whole. The execution and delivery of
this Agreement and the consummation of the transactions herein contemplated and
the fulfillment of the terms hereof will not conflict with or result in a breach
of any of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiary is a party, or of the Charter or By-Laws of the
Company or any order, rule or regulation applicable to the Company or any
Subsidiary of any court or of any regulatory body or administrative agency or
other governmental body having jurisdiction.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery by the
Company of this Agreement and the consummation of the transactions herein
contemplated (except such additional steps as may be required by the Commission,
the National Association of Securities Dealers, Inc. (the "NASD") or such
additional steps as may be necessary to qualify the Shares for public offering
by the Underwriters under state securities or Blue Sky laws) has been obtained
or made and is in full force and effect.
(n) The Company and each of the Subsidiaries holds all material
licenses, certificates and permits from governmental authorities which are
necessary to the conduct of its business; and neither the Company nor any of the
Subsidiaries has infringed any patents, patent rights, trade names, trademarks
or copyrights, which infringement is material to the business of the Company and
the Subsidiaries taken as a whole. The Company knows of no material infringement
by others of patents, patent rights, trade names, trademarks or copyrights owned
by or licensed to the Company.
(o) Neither the Company, nor to the Company's best knowledge, any of
its affiliates, has taken or may take, directly or indirectly, any action
designed to cause or result in, or which has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of the shares of Common Stock to facilitate the sale or resale of the
Shares. The Company acknowledges that the Underwriters may engage in passive
market making transactions in the Shares on The National Market System in
accordance with Rule 10b-6A under the Exchange Act.
(p) Neither the Company nor any Subsidiary is an "investment company"
within the meaning of such term under the Investment Company Act of 1940 and the
rules and regulations of the Commission thereunder.
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(q) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(r) The Company [and each of its Subsidiaries] carries, or is covered
by, insurance in such amounts and covering such risks as is adequate for the
conduct of its business and the value of its properties and as is customary for
companies engaged in similar industries.
(s) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security Act
of 1974, as amended, including the regulations and published interpretations
thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred
with respect to any "pension plan" (as defined in ERISA) for which the Company
would have any liability; the Company has not incurred and does not expect to
incur liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal
Revenue Code of 1986, as amended, including the regulations and published
interpretations thereunder (the "Code"); and each "pension plan" for which the
Company would have any liability that is intended to be qualified under Section
401 (a) of the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which would cause the loss of
such qualification.
(t) The warrants to be issued to the Representative pursuant to the
agreement referred to in Section 4 (m) (the "Underwriter's Warrants"), upon
issuance and payment therefor, will be duly authorized and validly issued and
will constitute valid and binding agreements of the Company. The shares of
Common Stock issuable upon exercise of the Underwriter's Warrants are duly
authorized and have been duly reserved for issuance and, when so issued, will be
validly issued, fully paid, nonassessable and free of preemptive rights and no
personal liability will attach to the ownership thereof. The description in the
Registration Statement and the Prospectus of the Underwriter's Warrants is, and
at the Closing Date and the Option Closing Date will be, in all material
respects complete and accurate.
2. PURCHASE SALE AND DELIVERY OF THE FIRM SHARES.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Company
agrees to sell to the Underwriters and each Underwriter agrees, severally and
not jointly, to purchase, at a price of $5.40 per share, the number of Firm
Shares set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof, such price
representing the initial public offering price of $6.00 per share minus the
underwriting discount of $.60 per share.
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<PAGE>
(b) Payment for the Firm Shares to be sold hereunder is to be made in
same day funds via wire transfer to the order of the Company for the shares to
be sold by it against delivery of certificates therefor to the Representative
for the several accounts of the Underwriters. Such payment and delivery are to
be made at the offices of Hobbs Melville Securities Corp., 110 Wall Street, New
York City at 10:00 a.m., New York time, on the third business day after the date
of this Agreement or at such other time and date not later than five business
days thereafter as you and the Company shall agree upon, such time and date
being, herein referred to as the "Closing Date." (As used herein, "business day"
means a day on which the New York Stock Exchange is open for trading and on
which banks in New York are open for business and not permitted by law or
executive order to be closed.) The certificates for the Firm Shares will be
delivered in such denominations and in such registrations as the Representative
requests in writing not later than the second full business day prior to the
Closing Date, and will be made available for inspection by the Representative at
least one business day prior to the Closing Date.
(c) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase the
Option Shares at the price per share as set forth in the first paragraph of this
Section 2. The option granted hereby may be exercised in whole or in part by
giving written notice (i) at any time before the Closing Date and (ii) only once
thereafter within 45 days after the date of this Agreement, by you, as
Representative of the several Underwriters, to the Company, setting forth the
number of Option Shares as to which the option is being exercised, the names and
denominations in which the Option Shares are to be registered and the time and
date at which such certificates are to be delivered. If the option granted
hereby is exercised in part, the respective number of Option Shares to be sold
by the Company shall be determined on a pro rata basis in accordance with the
percentages set forth opposite their names on Schedule I hereto, adjusted by you
in such manner as to avoid fractional shares. The time and date at which
certificates for Option Shares are to be delivered shall be determined by the
Representative but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the date of exercise of the option is three or more days before the
Closing Date, the notice of exercise shall set the Closing Date as the Option
Closing Date. The number of Option Shares to be purchased by each Underwriter
shall be in the same proportion to the total number of Option Shares being
purchased as the number of Firm Shares being purchased by such Underwriter bears
to the total number of Firm Shares, adjusted by you in such manner as to avoid
fractional shares. The option with respect to the Option Shares granted
hereunder may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. You, as , Representative of the several
Underwriters, may cancel such option at any time prior to its expiration by
giving written notice of such cancellation to the Company. To the extent, if
any, that the option is exercised, payment for the Option Shares shall be made
on cashier's check drawn to the order of the Company against delivery of
certificates therefor at the offices of Hobbs Melville Securities Corp., 110
Wall Street, New York City.
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<PAGE>
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representative deems it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representative may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any Option Shares are purchased pursuant
to Section 2 hereof, the Underwriters will offer them to the public on the
foregoing terms.
It is further understood that you will act as the Representative for
the Underwriters in the offering and sale of the Shares in accordance with a
Master Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY.
The Company covenants and agrees with the several Underwriters that:
(a) The Company will (A) use its best efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the Rules and
Regulations is followed, to prepare and timely file with the Commission under
Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the
Representative containing information previously omitted at the time of
effectiveness of the Registration Statement in reliance on Rule 430A of the
Rules and Regulations, and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus or document incorporated by reference
therein of which the Representative shall not previously have been advised and
furnished with a copy or to which the Representative shall have reasonably
objected in writing or which is not in compliance with the Rules and Regulations
and (C) file on a timely basis all reports and any definitive proxy or
information statements required to be filed by the Company with the Commission
subsequent to the date of the Prospectus and prior to the termination of the
offering of the Shares by the Underwriters.
(b) The Company will advise the Representative promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have become
effective, (B) of receipt of any comments from the Commission, (C) of any
request of the Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (D) of the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to prevent
the issuance of any such stop order preventing or suspending the use of the
Prospectus and to obtain as soon as possible the lifting thereof, if issued.
(c) The Company will cooperate with the Representative in endeavoring
to qualify the Shares for sale under the securities laws of such jurisdictions
as the Representative may reasonably have designated in writing and will make
such applications, file such documents, and furnish such information as may be
reasonably required for that purpose, provided the Company shall not be required
to qualify as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not now so qualified or required to file
such a consent. The Company will, from time to time, prepare and file such
statements, reports, and other documents, as are or may be required to continue
such qualifications in effect for so long a period as the Representative may
reasonably request for distribution of the Shares.
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<PAGE>
(d) The Company will deliver to, or upon the order of, the
Representative, from time to time, as many copies of any Preliminary Prospectus
as the Representative may reasonably request. The Company will deliver to, or
upon the order of, the Representative during the period when delivery of a
Prospectus is required under the Act, as many copies of the Prospectus in final
form, or as thereafter amended or supplemented, as the Representative may
reasonably request. The Company will deliver to the Representative at or before
the Closing Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits led therewith, and will deliver to the
Representative such number of copies of the Registration Statement (including
such number of copies of the exhibits filed therewith that may reasonably be
requested), including documents incorporated by reference therein, and of all
amendments thereto, as the Representative may reasonably request.
(e) The Company will comply with the Act and the Rules and Regulations,
and the Securities Exchange Act of 1934 (the "Exchange Act"), and the rules and
regulations of the Commission thereunder, so as to permit the completion of the
distribution of the Shares as contemplated in this Agreement and the Prospectus.
If during the period in which a prospectus is required by law to be delivered by
an Underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the Underwriters, it
becomes necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances existing at the time the
Prospectus is delivered to a purchaser, not misleading, or, if it is necessary
at any time to amend or supplement the Prospectus to comply with any law, the
Company promptly will prepare and file with the Commission an appropriate
amendment to the Registration Statement or supplement to the Prospectus which
shall be incorporated by reference in the Prospectus so that the Prospectus as
so amended or supplemented will not, in the light of the circumstances when it
is so delivered, be misleading, or so that the Prospectus will comply with the
law.
(f) The Company will make generally available to its security holders,
as soon as it is practicable to do so, but in any event not later than 15 months
after the effective date of the Registration Statement, an earning statement
(which need not be audited) in reasonable detail, covering a period of at least
12 consecutive months beginning after the effective date of the Registration
Statement, which earning, statement shall satisfy the requirements of Section 11
(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in
writing when such statement has been so made available.
(g) The Company will, for a period of five years from the Closing Date,
deliver to the Representative copies of annual reports and copies of all other
documents, reports and information furnished by the Company to its stockholders
or filed with any securities exchange pursuant to the requirements of such
exchange or with the Commission pursuant to the Act or the Securities Exchange
Act of 1934, as amended. The Company will deliver to the Representative similar
reports with respect to significant subsidiaries, as that term is defined in the
Rules and Regulations, which are not consolidated in the Company's financial
statements.
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<PAGE>
(h) No offering, sale, short sale or other disposition of any shares of
Common Stock of the Company or other securities convertible into or exchangeable
or exercisable for shares of Common Stock or derivative of Common Stock (or
agreement for such) will be made for a period of days after the date of this
Agreement, directly or indirectly, by the Company otherwise than hereunder or
with the prior written consent of Hobbs Melville Securities Corp.
(i) The Company will use its best efforts to list, subject to notice of
issuance, the Shares on The National Market System.
(j) The Company has caused each officer and director of the Company to
furnish to you, on or prior to the date of this agreement, a letter or letters,
in form and substance satisfactory to the Underwriters, pursuant to which each
such person shall agree not to offer, sell, sell short or otherwise dispose of
any shares of Common Stock of the Company or other capital stock of the Company,
or any other securities convertible, exchangeable or exercisable for Common
Shares or derivative of Common Shares owned by such person or request the
registration for the offer or sale of any of the foregoing (or as to which such
person has the right to direct the disposition of) for a period of one years
after the completion of the offering, directly or indirectly, except with the
prior written consent of Hobbs Melville Securities Corp. ("Lockup Agreements").
(k) The Company shall apply the net proceeds of its sale of the Shares
as set forth in the Prospectus and shall file such reports with the Commission
with respect to the sale of the Shares and the application of the proceeds
therefrom as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as would
require the Company or any of the Subsidiaries to register as an investment
company under the Investment Company Act of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar for the Common
Stock.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably be
expected to constitute, the stabilization or manipulation of the price of any
securities of the Company.
(m) The Company will enter into an agreement with the Hobbs Melville
Securities Corp., substantially in the form of the agreement filed as Exhibit
[__ ] to the Registration Statement whereby the Company will grant to Hobbs
Melville Securities Corp., on the Closing Date, for a consideration of [____]
($.001) per warrant, warrants to purchase an aggregate of 115,000 shares of
Common Stock at 125% of the offering price.
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5. COSTS AND EXPENSES.
(a) The Company will pay all expenses incurred in connection with the
Offering, including fees and expenses of Company's accountants and legal counsel
and expenses incurred in connection with (i) preparation, printing, filing,
mailing and delivery of the Registration Statement, Preliminary Prospectuses and
the Prospectus and any amendments thereto, including without limitation any fees
payable to the Securities and Exchange Commission and the National Association
of Securities Dealers, Inc., (ii) listing or qualification of the Shares for
trading on the National Market System, (iii) printing and mailing the
Underwriting Agreement and related documents, (iv) issuance, transfer and
delivery of the Shares, qualification, registration or exemption if required, of
the Shares under the laws of those states in which the Representative reasonably
determines to offer the Shares, including costs of preparing, printing and
mailing "Blue Sky" surveys and fees and disbursements of Underwriter's counsel
in connection therewith, (v) the Company's and the Representative's travel in
connection with a reasonable number of informational meetings with the brokerage
community and institutional investors, (vi) costs of such tombstone
advertisements as the Representative reasonably elects to publish and (vii)
settlement in same-day funds if desired by the Company. The Representative will
bear all fees and expenses of its legal counsel and its other incidental costs
and expenses that are not covered under clauses (i)-(vii) above.
(b) In addition to the payment of expenses by the Company as provided
in the immediately preceding paragraph, the Company will reimburse the
Representative for its expenses on a non-accountable basis in an amount equal to
three percent (3%) of the aggregate offering price of the Shares, of which
$25,000 was paid upon the execution of the letter of intent between the Company
and the Representative, dated June 6, 1997. A further $25,000 shall be paid no
later than January 5, 1998 with the balance to be paid on the Closing Date.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm Shares
on the Closing Date and the Option Shares, if any, on the Option Closing Date
are subject to the accuracy, as of the Closing Date or the Option Closing Date,
as the case may be, of the representations and warranties of the Company
contained herein, and to the performance by the Company of its covenants and
obligations hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing Date
which would prevent the issuance of the Shares.
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<PAGE>
(b) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Piper & Marbury L.L.P.,
counsel for the Company, dated the Closing Date or the Option Closing Date, as
the case may be, addressed to the Underwriters (and stating that it may be
relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Nevada, with
corporate power and authority to own or lease its properties and conduct its
business as described in the Registration Statement; each of the Subsidiaries
has been duly organized and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, with corporate
power and authority to own or lease its properties and conduct its business as
described in the Registration Statement; the Company and each of the
Subsidiaries are duly qualified to transact business in all jurisdictions in
which the conduct of their business requires such qualification, or in which the
failure to qualify would have a materially adverse effect upon the business of
the Company and the Subsidiaries taken as a whole; and the outstanding shares of
capital stock of each of the Subsidiaries have been duly authorized and validly
issued and are fully paid and non-assessable and are owned by the Company or a
Subsidiary; and, to the best of such counsel's knowledge, the outstanding shares
of capital stock of each of the Subsidiaries is owned free and clear of all
liens, encumbrances and equities and claims, and no options, warrants or other
rights to purchase, agreements or other obligations to issue or other rights to
convert any obligations into any shares of capital stock or of ownership
interests in the Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding capital stock as
set forth in the Prospectus; the authorized shares of the Company's Common Stock
have been duly authorized; the outstanding shares of the Company's Common Stock
have been duly authorized and validly issued and are fully paid and
non-assessable; all of the Shares conform to the description thereof contained
in the Prospectus; the certificates for the Shares, assuming, they are in the
form filed with the Commission, are in due and proper form; the shares of Common
Stock, including the Option Shares, if any, to be sold by the Company pursuant
to this Agreement have been duly authorized and will be validly issued, fully
paid and nonassessable when issued and paid for as contemplated by this
Agreement; the Company is conveying to the Representative good and marketable
title to the Shares, free and clear of all liens, encumbrances, claims, security
interests and restrictions; and no preemptive rights of stockholders exist with
respect to any of the Shares or the issue or sale thereof.
(iii) Except as described in or contemplated by the Prospectus, to
the knowledge of such counsel, there are no outstanding securities of the
Company convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in the
Prospectus, to the knowledge of such counsel no holder of any securities of the
Company or any other person has the right, contractual or otherwise, which has
not been satisfied or effectively waived, to cause the Company to sell or
otherwise issue to them, or to permit them to underwrite the sale of, any of the
Shares or the right to have any Common Shares or other securities of the Company
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<PAGE>
included in the Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under the Act of any
shares of Common Stock or other securities of the Company.
(iv) The Registration Statement has become effective under the Act
and, to the best of the knowledge of such counsel, no stop order proceedings
with respect thereto have been instituted or are pending or threatened under the
Act.
(v) The Registration Statement, the Prospectus and each amendment
or supplement thereto and document incorporated by reference therein comply as
to form in all material respects with the requirements of the Act or the
Securities Exchange Act of 1934, as applicable and the applicable rules and
regulations thereunder (except that such counsel need express no opinion as to
the financial statements and related schedules or incorporated by reference
therein). The conditions for the use of Form SB-2, set forth in the General
Instructions thereto, have been satisfied.
(vi) The statements under the captions "Capitalization",
"Description of Securities" and "Shares Eligible for Future Sale" in the
Prospectus, insofar as such statements constitute a summary of documents
referred to therein or matters of law, fairly summarize in all material respects
the information called for with respect to such documents and matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to or incorporated by reference in the
Registration Statement or described in the Registration Statement or the
Prospectus which are not so filed, incorporated by reference or described as
required, and such contracts and documents as are summarized in the Registration
Statement or the Prospectus are fairly summarized in all material respects.
(viii) Such counsel knows of no material legal or Governmental
proceedings pending or threatened against the Company or any of the Subsidiaries
except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of, or
constitute a default under, the Charter or By-Laws of the Company, or any
agreement or instrument known to such counsel to which the Company or any of the
Subsidiaries is a party or by which the Company or any of the Subsidiaries may
be bound.
(x) This Agreement has been duly authorized, executed and delivered
by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and delivery of
this Agreement and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by State securities
and Blue Sky laws as to which such counsel need express no opinion) except such
as have been obtained or made, specifying the same.
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<PAGE>
(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and application
of the net proceeds therefrom as described in the Prospectus, required to
register as an investment company under the 1940 Act.
(xiii) The intellectual property described in the Prospectus as
being owned by the Company or the Subsidiaries are owned free and clear of all
liens, encumbrances, claims, security interests and defects in title.
In rendering such opinion Piper & Marbury L.L.P. may rely as to matters
governed by the laws of states other than New York or Federal laws on local
counsel in such jurisdictions, provided that in each case Piper & Marbury L.L.P.
shall state that they believe that they and the Underwriters are justified in
relying on such other counsel. In addition to the matters set forth above, such
opinion shall also include a statement to the effect that nothing has come to
the attention of such counsel which leads them to believe that (i) the
Registration Statement, at the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules and statistical information
therein). With respect to such statement, Piper & Marbury L.L.P. may state that
their belief is based upon the procedures set forth therein, but is without
independent check and verification.
(c) The Representative shall have received from Dolgenos Newman &
Cronin LLP , counsel for the Underwriters, an opinion dated the Closing Date or
the Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iii), (iv), (x) and (xi) of Paragraph (b) of
this Section 6, and that the Company is a duly organized and validly existing
corporation under the laws of the State of Nevada. In rendering such opinion,
Dolgenos Newman & Cronin LLP may rely as to all matters governed other than by
the laws of the State of New York or Federal laws on the opinion of counsel
referred to in Paragraph (b) of this Section 6. In addition to the matters set
forth above, such opinion shall also include a statement to the effect that
nothing has come to the attention of such counsel which leads them to believe
that (i) the Registration Statement, or any amendment thereto, as of the time it
became effective under the Act (but after giving effect to any modifications
incorporated therein pursuant to Rule 430A under the Act) as of the Closing Date
or the Option Closing Date, as the case may be, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to the
Rules and Regulations and as of the Closing Date or the Option Closing Date, as
the case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements, in the light
of the circumstances under which they are made, not misleading (except that such
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<PAGE>
counsel need express no view as to financial statements, schedules and
statistical information therein). With respect to such statement, Dolgenos
Newman & Cronin LLP may state that their belief is based upon the procedures set
forth therein, but is without independent check and verification.
(d) The Representative shall have received at or prior to the Closing
Date from a memorandum or summary, in form and substance satisfactory to the
Representative, with respect to the qualification for offering and sale by the
Underwriters of the Shares under the State securities or Blue Sky laws of such
jurisdictions as the Representative may reasonably have designated to the
Company.
(e) You shall have received, on each of the dates hereof, the Closing
Date and the Option Closing Date, as the case may be, a letter dated the date
hereof, the Closing Date or the Option Closing Date, as the case may be, in form
and substance satisfactory to you, of Peter C. Cosmas Co. confirming that they
are independent public accountants within the meaning of the Act and the
applicable published Rules and Regulations thereunder and stating that in their
opinion the financial statements and schedules examined by them and included in
the Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations; and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus.
(f) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer and the Chief Financial Officer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the case may
be, each of them severally represents as follows:
(i) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registration Statement has
been issued, and no proceedings for such purpose have been taken or are, to his
knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained in
Section I hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules 424
or 43OA under the Act have been made;
(iv) He or she has carefully examined the Registration Statement
and the Prospectus and, in his or her opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration Statement
were true and correct, and such Registration Statement and Prospectus did not
omit to state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading, and since the effective
date of the Registration Statement, no event has occurred which should have been
set forth in a supplement to or an amendment of the Prospectus which has not
been so set forth in such supplement or amendment; and
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(v) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise) or
prospects of the Company and the Subsidiaries taken as a whole, whether or not
arising in the ordinary course of business.
(g) The Company shall have furnished to the Representative such further
certificates and documents confirming the representations and warranties,
covenants and conditions contained herein and related matters as the
Representative may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, have been approved for
designation upon notice of issuance on The National Market System.
(i) The Lockup Agreements described in Section 4 (j) are in full force
and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representative and to Dolgenos Newman &
Cronin LLP, counsel for the Underwriters.
If any of the conditions herein above provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representative by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls any Underwriter within the meaning of the
Act, against any losses, claims, damages or liabilities to which such
Underwriter or any such controlling person may become subject under the Act or
otherwise, insofar as such losses, claims, damages or liabilities (or actions
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or proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided, however.
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus. the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representative it
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer, or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were made; and
will reimburse any legal or other expenses reasonably incurred by the Company or
any such director, officer, or controlling person in connection with
investigating or defending any such loss, claim, damage, liability, action or
proceeding; provided, however, that each Underwriter will be liable in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representative
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice. but the failure to
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give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
other wise than on account of the provisions of Section 8(a) or (b). In case any
such proceeding shall be brought against any indemnified party and it shall
notify the indemnifying party of the commencement thereof, the indemnifying
party shall be entitled to participate therein and, to the extent that it shall
wish, jointly with any other indemnifying party similarly notified, to assume
the defense thereof, with counsel satisfactory to such indemnified party and
shall pay as incurred the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel at its own expense. Notwithstanding the foregoing, the
indemnifying party shall pay as incurred (or within 30 days of presentation) the
fees and expenses of the counsel retained by the indemnified party in the event
(i) the indemnifying party and the indemnified party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such proceeding
(including any impeded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them or,
(iii) the indemnifying party shall have failed to assume the defense and employ
counsel acceptable to the indemnified party within a reasonable period of time
after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) and by the Company in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then each indemnifying party shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Shares. If,
however, the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company on the one hand and the Underwriters on the other in
connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities, (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
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received by the Company on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total net proceeds from the
offering (before deducting expenses) received by the Company bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand or the Underwriters on the other and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 8(d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), (1) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11 (f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 8(d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (1) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
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9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Shares
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company), you, as
Representative of the Underwriters, shall use your reasonable efforts to procure
within 36 hours thereafter one or more of the other Underwriters, or any others,
to purchase from, the Company such amounts as may be agreed upon and upon the
terms set forth herein, the Firm Shares or Option Shares, as the case may be.
which the defaulting Underwriter or Underwriters failed to purchase. If during
such 36 hours you, as such Representative, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company or you
as the Representative of the Underwriters will have the right, by written notice
given within the next 36-hour period to the parties to this Agreement, to
terminate this Agreement without liability on the part of the non-defaulting
Underwriters or of the Company except to the extent provided in Section 8
hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 9, the Closing Date or Option Closing Date, as the case
may be, may be postponed for such period, not exceeding seven days, as you, as
Representative, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows:
if to the Underwriters,
Hobbs Melville Securities Corp.
110 Wall Street
New York, New York 10005
Attention: Marc M. Drimer;
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with a copy to
Dolgenos Newman & Cronin LLP
96 Spring Street, 8th Floor
New York, New York 10012
Attention: Dennis P. McConnell, Esq.
If to the Company
Fidelity Holdings, Inc.
80-02 Kew Gardens Road
Kew Gardens, New York 11415
Attention: Doron Cohen
With a copy to
Piper & Marbury L.L.P.
1251 Avenue of the Americas
New York, New York 10020
Attention: Robinson Markel, Esq.
11. TERMINATION.
This Agreement may be terminated by you by notice to the Company as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company and its Subsidiaries taken as
a whole or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company and
its Subsidiaries taken as a whole, whether or not arising in the ordinary course
of business; (ii) any outbreak or escalation of hostilities or declaration of
war or national emergency or other national or international calamity or crisis
or change in economic or political conditions if the effect of such outbreak.
escalation, declaration, emergency, calamity, crisis or change on the financial
markets of the United States would, in your reasonable judgment, make it
impracticable to market the Shares or to enforce contracts for the sale of the
Shares; (iii) suspension of trading in securities generally on the New York
Stock Exchange or theNational Market System or limitation on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such Exchange; (iv) the enactment, publication, decree or other promulgation of
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any statute, regulation, rule or order of any court or other governmental
authority which in your opinion materially and adversely affects or may
materially and adversely affect the business or operations of the Company; (v)
declaration of a banking moratorium by United States or New York State
authorities; (vi) any downgrading in the rating of the Company's debt securities
by any "nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g) under the Exchange Act); (vii) the suspension of trading
of the Company's common stock by the Commission on The National Market System or
(viii) the taking of any action by any governmental body or agency in respect of
its monetary or fiscal affairs which in your reasonable opinion has a material
adverse effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters and the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person will have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign merely because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), legends required by Item 502(d)
of Regulation S-B under the Act and the information under the caption "Plan of
Distribution" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and covenants in
this Agreement shall remain in full force and effect regardless of (a) any
termination of this Agreement, (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof, or by or on behalf of the Company or
its directors or officers and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of the State of New York.
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If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
FIDELITY HOLDINGS, INC.
By
President
The foregoing Underwriting Agreement is hereby confirmed and accepted as of the
date first above written.
HOBBS MELVILLE SECURITIES CORP.
As Representative of the several Underwriters listed on Schedule I
By: Hobbs Melville Securities Corp.
By:
[Title]
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SCHEDULE I
SCHEDULE OF UNDERWRITERS
Underwriter Number of Firm Shares
- ----------- to be Purchased
Hobbs Melville Securities Corp.
Total
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FIDELITY HOLDINGS, INC.
Amended and Restated Certificate of Designation,
Powers, Preferences and Rights of the
1996-MAJOR Series of Convertible Preferred Stock
($.01 Par Value)
Liquidation Value $10.00 Per Share
----------
Pursuant to Section 78.195(6) of the
Corporation Law of the State of Nevada
----------
The undersigned, President of FIDELITY HOLDINGS, INC., a Nevada
Corporation (hereinafter called the "Company") does hereby certify as required
by NRS 78.195(6) that the following resolution has been duly adopted by the
Board of Directors of the Company:
RESOLVED, that pursuant to authority expressly granted to and vested in
the Board of Directors of the Company (the "Board of Directors") by the
provisions of the Certificate of Incorporation, as amended (hereinafter the
"Certificate of Incorporation") of the Company, there hereby is created, out of
the 2,000,000 shares of preferred stock of the Company authorized in Article III
of its Certificate of Incorporation (the "Preferred Stock"), a series of 250,000
shares, which series shall have the following designations, powers, preferences,
rights, qualifications, limitations and restrictions (in addition to the
designations, powers, preferences, rights, qualifications, limitations and
restrictions set forth in the Certificate of Incorporation of the Company which
are applicable to the Preferred Stock):
1. Designation.
The designation of the said series of the Preferred Stock shall be
the "The 1996-MAJOR Series of Convertible Preferred Stock" (the "1996-MAJOR
Series").
2. Number of Shares; Par Value.
The number of shares of the 1996-MAJOR Series shall be limited to 250,000.
The shares of the 1996-MAJOR Series shall be issued as full shares and shall
have a par value of $.01 per share.
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3. Dividends.
The holders of the 1996-Major Series shall be entitled to receive, out of
any funds of the Company at the time legally available for the declaration of
dividends, a participating dividend equivalent to that declared and/or paid with
respect to the shares of Common Stock, except that each share of the 1996-MAJOR
Series shall receive twice the dividend payable with respect to each share of
Common Stock.
4. Liquidation.
In the event of a liquidation, dissolution, or winding up of the Company,
whether voluntary or involuntary, the holders of shares of 1996-MAJOR Series
shall be entitled to receive out of the assets of the Company, whether such
assets are capital or surplus of any nature, the sum of Ten Dollars ($10.00) per
share, and, in addition to such amount, a further amount equal to the dividends
declared but unpaid and accumulated thereon, to the date of such distribution,
and no more, before any payment shall be made or any assets distributed to the
holders of shares of Common Stock. If upon such liquidation, dissolution, or
winding up, whether voluntary or involuntary, the assets distributed among the
holders of all classes of the 1996-MAJOR Series shall be insufficient to permit
the payment to such shareholders of the full preferential amounts, then the
entire assets of the Company to be distributed shall be distributed ratably
among the holders of the 1996-MAJOR Series.
5. Redemption.
(a) At any time after December 31, 2001, the Company, at the option of the
Board of Directors, may redeem the whole of, or from time to time may redeem any
part of, the 1996-MAJOR Series on any dividend date by either (i) paying in cash
therefor $15.87 per share and, in addition to such amount, an amount in cash
equal to all dividends on the 1996-MAJOR Series declared but unpaid and
accumulated up to and including the date fixed for redemption or (ii) issuing,
to the extent of any amount not paid in cash, the Company's Bonds.
(b) In case of the redemption of a part only of the outstanding shares of
the 1996-MAJOR Series, the Company shall designate by lot, in such manner as the
Board of Directors may determine, the shares to be redeemed, or shall effect
such redemption pro rata. Less than all of the shares of the 1996-MAJOR Series
at any time outstanding may not be redeemed until all dividends declared,
accrued and in arrears upon all of the shares of the 1996-MAJOR Series
outstanding shall have been paid for all past dividend periods, and until full
dividends, if any, for
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<PAGE>
the then current dividend period on all shares of the 1996-MAJOR Series then
outstanding, other than the shares to be redeemed, shall have been paid or
declared and the full amount thereof set apart for payment. At least 30 days'
previous notice by mail, postage prepaid, shall be given to the holders of
record of the shares to be redeemed.
(c) In the event that the Company exercises its right to purchase the
1996-MAJOR Series with Bonds, such Bonds shall bear interest at the current
prime rate of interest as set by CitiBank, N.A. shall mature on December 31,
2006, shall require quarterly payments of interest, in arrears, on the second
Thursday of April, July, October and January, and shall require quarterly
repayments of principal. The Company, at the option of the Board of Directors,
may redeem any of such Bonds at any time upon payment of the principal value
together with all unpaid interest.
6. Voting.
The 1996-MAJOR Series shall have voting rights. For voting purposes, such
series shall be considered part of the Common Shares and shall vote with the
common stock, rather than as a separate series of preferred stock. Each share of
the 1996-MAJOR Series shall have two votes per share.
7. Conversion.
The shares of 1996-MAJOR Series shall be convertible into fully paid and
nonassessable Common Shares of the Company, upon the terms and conditions set
forth in this Paragraph 8, at any time and from time to time, except that any of
such 1996-MAJOR shares which have been called for redemption shall be
convertible up to and including, but not after, the close of business on the
tenth (10) day prior to the redemption date.
(i) In order to exercise the conversion privilege, the holder of any of
the shares of the 1996-MAJOR Series to be converted shall surrender the
certificate or certificates therefor to any transfer agent of the Company
for such shares, duly endorsed in blank for transfer with the signature
medallion guaranteed, accompanied by written notice of election to convert
such shares or a portion thereof executed on the form set forth on such
certificates or on such other form as may be provided form time to time by
the Company.
As soon as practicable after the surrender of such certificates as
provided above, the Company shall cause to be issued and delivered, at the
office of such transfer agent, to or on the order of the holder of the
certificates thus surrendered, a certificate or
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<PAGE>
certificates for the number of full shares of Common Stock issuable
hereunder upon the conversion of such shares of the 1996-MAJOR Series and
cash or scrip, as provided in subparagraph (v) below, in respect of any
fraction of a common share issuable upon such conversion. Such conversion
shall be deemed to have been effected on the date on which the
certificates for such shares of the 1996-MAJOR Series have been
surrendered as provided above, and the person in whose name any
certificate or certificates for Common Stock are issuable upon conversion
shall be deemed to have become on such date the holder of record of the
shares represented thereby.
(ii) Each share of the 1996-MAJOR Series shall be convertible into that
number of Common Shares of the Company obtained by dividing the
liquidation preference of the -MAJOR Series ($10.00 per share) by the
conversion price of the Common Shares as set forth in the immediately
succeeding sentence. The conversion price per Common Share shall be the
lower of (a) Five Dollars ($5.00) or (b) the average of the bid and asked
closing prices of the Common Shares for the twenty (20) consecutive
trading days ending on the day prior to conversion, so that each share of
the 1996-MAJOR Series shall be convertible into at least two (2) Common
Shares. No fractional Common Shares shall be issued.
(iii) Earned and declared but unpaid and accrued or accumulated dividends
on the 1996-MAJOR Series shall be paid in cash on the date of conversion.
(iv) In case of the voluntary dissolution, liquidation, or winding up of
the Company, all conversion rights of the holders of shares of 1996-MAJOR
Series shall terminate on a date fixed by the Board of Directors, but not
more than thirty (30) days prior to the record date for determining the
holders of the Common Shares entitled to receive any distribution upon
such dissolution, liquidation or winding up. The Company shall cause
notice of the proposed action, and of the date of termination of
conversion rights, to be mailed to the holders of record of shares of the
1996-MAJOR Series not later than thirty (30) days prior to the date of
such termination, and shall promptly give similar notice to each transfer
agent for such Preferred Stock and for the Common Stock.
(v) No fractional share of Common Stock shall be issued upon conversion of
any share of the 1996-MAJOR Series, but in lieu of fractional shares the
Company shall, at its option, either pay an amount in cash equal to the
current market value of such fractional interest, computed on the basis of
the last reported sale price of the Common Stock prior
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<PAGE>
to the date of conversion, or issue scrip of the Company in respect
thereof. Such scrip shall be noninterest-bearing and non-voting, shall be
exchangeable in combination with other similar scrip for the number of
full shares of Common Stock represented thereby, shall be issued in such
denominations and in such form, shall expire after such reasonable time,
which shall not be less than one year from the date of issue, may contain
such provisions for the sale for the account of the holder of such scrip
of the shares of Common Stock for which such scrip is exchangeable, and
shall be subject to such other terms and provisions, if any, as the Board
of Directors may from time to time determine prior to the issuance
thereof.
(vi) As long as any of the shares of the 1996-MAJOR Series remain
outstanding, the Company shall take all steps necessary to reserve and
keep available a number of its authorized but unissued shares of Common
Stock sufficient for issuance upon conversion of all such outstanding
shares of the 1996-MAJOR Series, and for issuance in exchange for all
outstanding scrip certificates.
(vii) All certificates for the shares of the 1996-MAJOR Series surrendered
for conversion as provided herein shall be canceled and retired, and no
further shares of the 1996-MAJOR Series shall be issued in lieu thereof.
(ix) The exercise of the conversion privilege shall be subject to such
regulations, not inconsistent with the foregoing provisions of this
paragraph, as may from time to be adopted by the Board of Directors of the
Company.
(x) All shares of Common Stock issued upon the conversion of the shares of
the 1996-MAJOR Series shall be validly issued and outstanding, and fully
paid and nonassessable.
8. No Preemptive Rights.
No holder of any shares of the 1996-MAJOR Series, as such, shall be
entitled as a matter of right to subscribe for or purchase any part of any new
or additional issue of shares of any class or series, junior or senior thereto,
or securities convertible into, exchangeable for, or exercisable for the
purchase of, shares of any class or series, junior or senior, whether now or
hereafter authorized, and whether issued for cash, property, services, by way of
dividends, or otherwise.
-5-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate to be duly
executed on its behalf by its undersigned President and attested to by its
Secretary this [__] day of [________], 1997.
FIDELITY HOLDINGS, INC.
ATTEST:
[Corporate Seal]
By: /s/ Doron Cohen
---------------
Doron Cohen, President
/s/ Glenn H. Bank
- -----------------
Glenn H. Bank, Secretary
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<PAGE>
EXHIBIT 4.5
FIDELITY HOLDINGS, INC.
Certificate of Designation, Powers, preferences and Rights
of the
1997A - Major Automotive Group Series of Preferred Stock
($.01 Par Value)
Liquidation Value $10.00 Per Share
Pursuant to Section 78.195(6) of the
Corporation law of the State of Nevada
The undersigned, President of FIDELITY HOLDINGS, INC., a Nevada
Corporation (hereinafter called the "Company") does hereby certify as required
by NRS 78.195(6) that the following resolution has been duly adopted by the
Board of Directors of the Company:
RESOLVED, that pursuant to authority expressly granted to and vested in
the Board of Directors of the Company (the "Board of Directors") by the
provisions of the Certificate of Incorporation, as amended (hereinafter the
"Certificate of Incorporation) of the Company, there hereby is created, out of
the 2,000,000 shares of preferred stock of the Company authorized in Article III
of its Certificate of Incorporation (the "Preferred Stock"), a series of 100
shares, which series shall have the following designations, powers, preferences,
rights, qualifications, limitations and restrictions (in addition to the
designations, powers, preferences, rights, qualifications, limitations and
restrictions set forth in the Certificate of Incorporation of the Company which
are applicable to the Preferred Stock):
1. Designation.
The designation of the said series of the Preferred Stock shall be the
"The 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred Stock" (hereinafter the
"1997A-MAJOR Series").
2. Number of Shares; Par Value.
The number of shares of the 1997A-MAJOR Sodas shall be limited to 100.
The shares of the 1997A-MAJOR Series shall be issued as full shares and shall
have a par value of $.01 per share.
3. Dividends
The holders of the 1997A-MAJOR Series of Preferred Stock shall not be
entitled to receive any dividends or distributions, whether specially or
generally declared, whether in cash or in property, and whether or not funds of
the Company at the time are legally available for the declaration of dividends.
<PAGE>
4. Liquidation.
In the event of a liquidation, dissolution, or winding up of the
Company, whether voluntary or involuntary, the holders of shares of 1997A-
MAJOR Series of Preferred Stock shall be entitled to receive out of the assets
of the Company, whether such assets are capital or surplus of any nature, the
sum of One Dollar ($1.00) per share.
5. Redemption.
The Company, at the option of the Board of Directors, may redeem the
whole of, or from time to time may redeem any part of, the 1997A-MAJOR Series
of Preferred Stock, if:
(a) the Company shall dispose of the Major Automotive Group division
and shall have no further motor vehicle operations subject to the control of
the holders of the 1997A-MAJOR Series; or
(b) the Management Agreement between the Company and Bruce and Harold
Bendell shall be terminated by Bruce and Harold Bendell or shall be terminated
by mutual Agreement; or
(c) the Company shall issue another series or class of security for
the control of its motor vehicle operations and the redemption of the 1997A-
MAJOR Series shall be approved by the then existing manufacturers/franchisers.
6. Voting.
The purpose of the 1997A-MAJOR Series is to provide a structural
guarantee of control of the motor vehicle dealerships being acquired by the
Company through the issuance of a class/series of stock which can control the
Company's subsidiary or subsidiaries which own such dealerships. Accordingly,
the 1997A-MAJOR Series of Preferred Stock shall have voting rights, strictly
limited to the election of a majority of the Board of Directors of Major
Automotive Group, Inc. and/or such other subsidiaries and affiliates of the
Company as shall be engaged in the operation of motor vehicle dealerships. For
voting purposes, such series shall be considered as a separate class of
Preferred Stock and shall not vote with any other series. The 1997A-MAJOR
Series shall not have any other voting rights.
7. Conversion.
The shares of 1997A-MAJOR Series of Preferred Stock shall not be
convertible into any other security of the Company.
8. No Preemptive Rights.
No holder of any shares of the 1997A-MAJOR Series of Convertible
Preferred Stock, as such, shall be entitled as a matter of right to subscribe
for or purchase any part of any new or additional issue of shares of any class
or series, junior or senior thereto, or securities convertible into,
exchangeable for,
<PAGE>
or exercisable for the purchase of, shares of any class or series, junior or
senior, whether now or hereafter authorized, and whether issued for cash,
property, services, by way of dividends, or otherwise.
IN WITNESS WHEREOF, the Company has caused this Certificate to be duly
executed on its behalf by its undersigned President and attested to by its
Secretary this ____ day of _____________.
FIDELITY HOLDINGS, INC.
ATTEST:
(Corporate Seal]
By:
----------------------------
- ----------------------------------
Secretary
<PAGE>
Certificate of Designation
of the Powers, Preferences, Limitations,
Restrictions, and Relative Rights of the
1997-MAJOR Series of Convertible Preferred Stock
$.01 Par Value
(Under Section 78.195 of the General Corporation Law
of the State of Nevada)
It is hereby certified that:
I. The name of the corporation is FIDELITY HOLDINGS, INC. (the
"Corporation").
II. Set forth hereinafter is a statement of the powers, preferences,
limitations, restrictions and relative rights of shares of the 1997-MAJOR Series
of Convertible Preferred Stock hereinafter designated, as contained in a
resolution of the Board of Directors of the Corporation, pursuant to a provision
of the Articles of Incorporation of the Corporation permitting the designation
and issuance of said 1997-MAJOR Series of Convertible Preferred Stock by
resolution of the Corporation's Board of Directors:
1. Designation; Number of Shares.
The designation of said series of Preferred Stock shall be the
1997-MAJOR Series of Convertible Preferred Stock (the "1997-Major Series"). The
number of shares of the 1997-Major Series shall be 900,000.
2. Dividends.
The holders of outstanding shares of the 1997-Major Series shall be
entitled to receive participating dividends equivalent to any dividend declared
for payment on any shares of any Common Stock out of funds of the Corporation
legally available therefor when, as and if declared, except that each share of
the 1997-Major Series shall receive twice the dividend payable with respect to
each share of Common Stock.
3. Liquidation Rights.
(a) Upon the dissolution, liquidation or winding-up of the
Corporation, whether voluntary or involuntary, the holders of the 1997-Major
Series shall be entitled to receive, before any payment or distribution shall be
made on the Common Stock or any other series of preferred stock of the
Corporation that has a liquidation preference that is junior to that of the
1997-Major Series (collectively with the Common Stock, the "Junior Stock"), out
of the
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<PAGE>
assets of the Corporation available for distribution to stockholders, an amount
equal to the Liquidation Value per share of the 1997-Major Series (as adjusted
for any stock dividends, combinations or splits with respect to such shares) and
all accrued and unpaid dividends to and including the date of payment thereof.
Upon the payment in full of all amounts due to holders of the 1997-Major Series,
the holders of the Common Stock of the Corporation and any other Junior Stock
shall receive all remaining assets of the Corporation legally available for
distribution. If the assets of the Corporation available for distribution to the
holders of the 1997-Major Series shall be insufficient to permit payment in full
of the amounts payable as aforesaid to the holders of the 1997-Major Series upon
such liquidation, dissolution or winding-up, whether voluntary or involuntary,
then all such assets of the Corporation shall be distributed, to the exclusion
of the holders of shares of Junior Stock, among the holders of the 1997-Major
Series, and any other series of preferred stock of the Corporation that is not
Junior Stock, ratably in accordance with their respective liquidation values.
(b) Neither the purchase nor the redemption by the Corporation of
shares of any class of stock, nor the merger or consolidation of the Corporation
with or into any other corporation or corporations, nor the sale or transfer by
the Corporation of all or any part of its assets, shall be deemed to be a
liquidation, dissolution or winding-up of the Corporation for the purposes of
this paragraph 3. Holders of the 1997-Major Series shall not be entitled, upon
the liquidation, dissolution or winding-up of the Corporation, to receive any
amounts with respect to such stock other than the amounts referred to in this
paragraph 3.
4. Redemption.
The shares of the 1997-Major Series may not be redeemed.
5. Conversion into Common Stock.
Shares of the 1997-Major Series shall have the following conversion
rights and obligations:
(a) Subject to the further provisions of this paragraph 5, each
holder of shares of the 1997-Major Series shall have the right, at any time, to
convert such shares into fully paid and non-assessable shares of Common Stock of
the Corporation (as defined in subparagraph 5(h) below) at the Conversion Rate
(which shall be the Initial Converstion Rate, as adjusted to the date of
Conversion pursuant to paragraph (d) below). As used herein (i) "Initial
Conversion Rate" means the rate of the Applicable Number of Shares of Common
Stock divided by 900,000 and (ii) "Applicable Number of Shares of Common Stock"
means (A) if the Market Value of 1,800,000 shares of Common Stock on the Issue
Date is equal to or greater than $6,000,000, and (B) if the Market
Value of 1,800,000 shares of Common Stock on the Issue Date is less than
$6,000,000, such number of shares of Common Stock as shall have a Market Value
on the Issue Date equal to $6,000,000, with any fraction of a share of Common
Stock rounded upwards to the nearest integer..
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<PAGE>
(b) On the fifth anniversary of the date of initial issuance of the
1997-Major Series (the "Issue Date"), all outstanding shares of the 1997-Major
Series shall automatically be converted into shares of Common Stock at the
then-applicable Conversion Rate for such shares.
(c) The holder of any certificate(s) for shares of the 1997-Major
Series desiring to convert any of such shares or whose shares where
automatically converted pursuant to the provisions of this paragraph 5 shall
surrender such certificate(s), at the principal office of any transfer agent for
said stock (the "Transfer Agent"), with a written notice of such election to
convert (if such conversion is voluntary) such shares into Common Stock duly
completed and executed and, if necessary under the circumstances of such
conversion, with such certificate(s) properly endorsed for, or accompanied by
duly executed instruments of, transfer (and such other transfer papers as said
Transfer Agent may reasonably require). The holder of the shares so surrendered
for conversion shall be entitled to receive a certificate or certificates, which
shall be expressed to be fully paid and non-assessable, for the number of shares
of Common Stock to which such stockholder shall be entitled upon such
conversion, registered in the name of such holder or in such other name or names
as such stockholder in writing may specify. In the case of a partial conversion
of the 1997-Major Series, the holder of shares of the 1997-Major Series shall
upon delivery of the certificate or certificates representing Common Stock also
receive a new share certificate representing the unconverted portion of the
shares of the 1997-Major Series. Nothing herein shall be construed to give any
holder of shares of the 1997-Major Series surrendering the same for conversion
the right to receive any additional shares of Common Stock or other property
which results from an adjustment in conversion rights under the provisions of
subparagraphs (d) of this paragraph 5 until holders of Common Stock are entitled
to receive the shares or other property giving rise to the adjustment.
In the case of the exercise of the conversion rights set forth in
paragraph 5(a), the conversion privilege shall be deemed to have been exercised,
and the shares of Common Stock issuable upon such conversion shall be deemed to
have been issued, upon the date of receipt by such Transfer Agent for conversion
of the certificate for such shares of the 1997-Major Series. In the case of the
automatic conversion set forth in paragraph 5(b), conversion shall be deemed to
have occurred, and the shares of Common Stock issuable upon such conversion
shall be deemed to have been issued, on the fifth anniversary of the Issue Date.
The Person entitled to receive Common Stock issuable upon such conversion shall
on the date such conversion privilege is deemed to have been exercised and
thereafter be treated for all purposes as the record holder of such Common Stock
and shall on the same date cease to be treated for any purpose as the record
holder of such shares of the 1997-Major Series so converted.
Notwithstanding the foregoing, if the stock transfer books are
closed on the date such shares are received by the Transfer Agent, the
conversion privilege shall be deemed to have been exercised, and the Person
shall be treated as a record holder of shares of Common Stock, on the next
succeeding date on which the transfer books are open, but the Conversion Rate
shall be that in effect on the date such conversion privilege was exercised. The
Corporation shall not be
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<PAGE>
required to deliver certificates for shares of its Common Stock or new
certificates for unconverted shares of its 1997-Major Series while the stock
transfer books for such respective classes of stock are duly closed for any
purpose; but the right of surrendering shares of the 1997-Major Series for
conversion shall not be suspended during any period that the stock transfer
books of either of such classes of stock are closed.
Upon the conversion of any shares of the 1997-Major Series, no
adjustment or payment shall be made with respect to such converted shares on
account of any dividend on shares of such stock or on account of any dividend on
the Common Stock, except that the holder of such converted shares shall be
entitled to be paid any dividends declared on shares of Common Stock after
conversion thereof.
If the Corporation shall at any time be liquidated, dissolved or
wound-up, the conversion privilege shall terminate at the close of business on
the last business day next preceding the effective date of such liquidation,
dissolution or winding-up.
The Corporation shall not be required, in connection with any
conversion of 1997-Major Series, to issue a fraction of a share of its Common
Stock nor to deliver any stock certificate representing a fraction thereof, but
in lieu thereof the Corporation shall make a cash payment equal to such fraction
multiplied by the Payout Price of the Common Stock determined as hereinafter set
forth. The "Payout Price" of the Common Stock for the purpose of computing
payments to be made for fractional shares shall be the closing sales price (or
if there were no sales, the closing bid price) on the principal stock exchange
on which the Common Stock is listed or, if the Common Stock is not listed, the
closing bid price in the over-the-counter market. Such price shall be determined
as of the close of business on the last business day of each week and such price
as so determined shall continue in effect during the next succeeding week. In
all other cases, the Payout Price of the Common Stock shall mean the amount
determined by the Board of Directors to be the market price based upon a good
faith attempt to value the Common Stock accurately and computed in accordance
with applicable law.
(d) The Conversion Rate shall be subject to adjustment from time to
time as follows:
(i) If the Corporation shall at any time (A) declare any dividend or
distribution on its Common Stock or other securities of the Corporation,
(B) split or subdivide the outstanding Common Stock, (C) combine the
outstanding Common Stock into a smaller number of shares or (D) issue by
reclassification of its Common Stock any shares or other securities of the
Corporation, then, in each such event, the Conversion Rate shall be
adjusted proportionately so that the holders of 1997-Major Series shall be
entitled to receive the kind and number of shares or other securities of
the Corporation which such holders would have owned or have been entitled
to receive after the happening of any of the events described above had
such shares of 1997-Major Series been converted immediately prior to the
happening of such event (or any record date with
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<PAGE>
respect thereto). Such adjustment shall be made whenever any of the events
listed above shall occur. An adjustment made to the Conversion Rate
pursuant to this paragraph 5(d)(i) shall become effective immediately upon
the effective date of the event or, if earlier, shall become effective
retroactive to the record date for the event.
(ii) If the Corporation shall consolidate or merge with or into any
other corporation (other than a merger or consolidation in which the
Corporation is the surviving or continuing corporation and which does not
result in any reclassification, conversion or change of the outstanding
shares of Common Stock), then, unless the right to convert shares of the
1997-Major Series shall have terminated, as part of such consolidation or
merger, lawful provision shall be made so that holders of the 1997-Major
Series shall thereafter have the right to convert each share of the
1997-Major Series into the kind and amount of shares of stock and/or other
securities or property receivable upon such consolidation or merger by a
holder of the number of shares of Common Stock into which such shares of
the 1997-Major Series might have been converted immediately prior to such
consolidation or merger. Such provision shall also provide for adjustments
which shall be as nearly equivalent as may be practicable to the
adjustments provided for in the foregoing paragraph (i). The foregoing
provisions of this paragraph (ii) shall similarly apply to successive
consolidations and mergers.
(iii) If the Corporation shall sell or convey to another Person the
property of the Corporation as an entirety, or substantially as an
entirety, in connection with which shares or other securities or cash or
other property shall be issuable, distributable, payable or deliverable
for outstanding shares of Common Stock, then, unless the right to convert
such shares shall have terminated, lawful provision shall be made so that
the holders of the 1997-Major Series shall thereafter have the right to
convert each share of the 1997-Major Series into the kind and amount of
shares of stock or other securities or property that shall be issuable,
distributable, payable or deliverable upon such sale or conveyance with
respect to each share of Common Stock immediately prior to such
conveyance.
(e) Whenever the number of shares to be issued upon conversion of
the 1997-Major Series is required to be adjusted as provided in this paragraph
5, the Corporation shall forthwith compute the adjusted number of shares to be
so issued and prepare a certificate setting forth such adjusted conversion
amount and the facts upon which such adjustment is based, and such certificate
shall forthwith be filed with the Transfer Agent for the 1997-Major Series and
the Common Stock, and the Corporation shall mail to each holder of record of the
1997-Major Series notice of such adjusted conversion price.
(f) If at any time the Corporation shall propose:
(i) to pay any dividend or distribution payable in shares upon its
Common Stock or make any distribution (other than cash dividends) to the
holders of its Common Stock;
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<PAGE>
(ii) to offer for subscription to the holders of its Common Stock
any additional shares of any class or any other rights;
(iii) any capital reorganization or reclassification of its shares,
or the consolidation or merger of the Corporation with another
corporation; or
(iv) the voluntary dissolution, liquidation or winding-up of the
Corporation;
the Corporation shall cause at least fifteen (15) days' prior notice of the date
on which (A) the books of the Corporation shall close, or a record be taken for
such stock dividend, distribution or subscription rights, or (B) such capital
reorganization, reclassification, consolidation, merger, dissolution,
liquidation or winding-up shall take place, as the case may be, to be mailed to
the Transfer Agent for the 1997-Major Series and for the Common Stock and to the
holders of record of the 1997-Major Series.
(g) So long as any shares of the 1997-Major Series shall remain
outstanding and the holders thereof shall have the right to convert the same in
accordance with provisions of this paragraph 5, the Corporation shall at all
times reserve from the authorized and unissued shares of its Common Stock a
sufficient number of shares to provide for such conversions.
(h) The term "Common Stock" as used in this paragraph 5 shall mean
Common Stock of the Corporation as such stock is constituted at the date of
issuance thereof or as it may from time to time be changed, or shares of stock
of any class, other securities and/or property into which the shares of the
1997-Major Series shall at any time become convertible pursuant to the
provisions of this paragraph 5.
(i) The Corporation shall pay the amount of any and all issue taxes
which may be imposed in respect of any issue or delivery of stock upon the
conversion of any shares of the 1997-Major Series, but all transfer taxes that
may be payable in respect of any change of ownership of the 1997-Major Series,
or any rights represented thereby, or of stock receivable upon conversion
thereof, shall be paid by the Person or Persons surrendering such stock for
conversion.
6. Voting Rights.
Each share of the 1997-Major Series shall entitle its holder to two
votes, and with respect to such votes, a holder of shares of the 1997-Major
Series shall have full voting rights and powers equal to the voting rights and
powers of a holder of shares of Common Stock, and shall be entitled to a notice
of any stockholders' meeting in accordance with the By-laws of the Corporation
and shall be entitled to vote with holders of Common Stock together as a single
class.
-6-
<PAGE>
7. Status of Converted Stock.
In case any shares of the 1997-Major Series shall be converted
pursuant to paragraph 5, or otherwise repurchased or reacquired, the shares so
converted or otherwise repurchased or reacquired shall resume the status of
authorized but unissued shares of Preferred Stock and shall no longer be
designated as shares of the 1997-Major Series.
8. No Preemptive Rights.
No holder of any shares of the 1997-Major Series, as such,
shall be entitled as a matter of right to subscribe for or purchase any part of
any new or additional issue of shares of any class or series, junior or senior
thereto, or securities convertible into, exchangeable for, or exercisable for
the purchase of, shares of any class or series, junior or senior, whether now or
hereafter authorized, and whether issued for cash, property, services, by way of
dividends, or otherwise.
9. Defined Terms.
As used herein the following terms have the following respective
meanings:
"Conversion Rate" has the meaning assigned to such term in Section
5(a) hereof.
"Corporation" has the meaning assigned to such term in
certification I hereof.
"Issue Date" has the meaning assigned to such term in paragraph
5(b) hereof.
"Junior Stock" has the meaning assigned to such term in paragraph
3(a) hereof.
"Liquidation Value" means $4.00 per share of the 1997-Major Series.
"Payout Price" has the meaning assigned to such term in paragraph
5(c) hereof.
"Market Value" means the mean between the closing bid and asked
prices per share of the Common Stock over the 20 consecutive trading days prior
to the Issue Date.
"1997-Major Series" has the meaning assigned to such term in
paragraph 1 hereof.
"Person" means any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated association or
government (or any agency, instrumentality or political subdivision thereof).
"Transfer Agent" has the meaning assigned to such term in
paragraph 5(c) hereof.
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Signed on this ___ day of [_______], 1998.
----------------
BRUCE BENDELL
---------------
DORON COHEN
---------------
YOSSI KOREN
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EXHIBIT 4.7
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of October 22, 1997
between FIDELITY HOLDINGS, INC., a corporation organized under the laws of the
State of Nevada (the "Company"), and BRUCE BENDELL, an individual residing at 75
Georgian Court, Roslyn, New York 11576 ("Bendell").
The Company, Bendell, Major Automotive Group, Inc. ("Major
Auto"), and Major Acquisition Corp. ("Major Acquisition") are parties to a Plan
and Agreement of Merger (the "Merger Agreement") pursuant to which, among other
things, Major Acquisition will acquire from Bendell all of the issued and
outstanding shares of Major Auto in exchange for 900,000 shares of the Company's
1997-MAJOR Series of Convertible Preferred Stock (the "1997-Major Series"). The
shares of the 1997-Major Series will be convertible into shares of the Company's
Common Stock on the terms and conditions set forth in the Certificate of
Designation of the Powers, Preferences, Limitations, Restrictions, and Relative
Rights of the 1997-MAJOR Series of Convertible Preferred Stock attached hereto
as Exhibit A (the "Certificate of Designation").
In order to induce Bendell to enter into the Merger Agreement
and to consummate the acquisition contemplated thereby, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company has agreed to grant to Bendell certain registration
rights with respect to the shares of Common Stock into which the shares of the
1997-Major Series are convertible. Accordingly, the parties hereto hereby agree
as follows:
Section 1. Definitions. As used herein, the following terms
have the following respective meanings:
"Certificate of Designation" has the meaning assigned to such
term in the second paragraph of this Agreement.
"Commission" means the Securities and Exchange Commission, and
any successor entity.
"Company" has the meaning assigned to such term in the first
paragraph of this Agreement.
"Cutback Registration" means any registration to be effected
as an underwritten Public Offering in with the Managing Underwriter with respect
thereto advises the Company and the Requesting Holders in writing that, in its
opinion, the number of securities requested to be included in such registration
(including the Company's securities that are not Registrable Securities) exceeds
the number which can be sold in such offering without a material reduction in
the selling price anticipated to be received for the securities to be sold in
such Public Offering.
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"Indemnified Party" means a Person entitled to indemnification
in accordance with Section 2.04 hereof.
"Indemnifying Party" means a Person obligated to provided
indemnification in accordance with Section 2.04 hereof.
"Losses" has the meaning assigned to such term in paragraph
2.04(a) hereof.
"Major Acquisition" has the meaning assigned to such term in
the second paragraph of this Agreement.
"Major Auto" has the meaning assigned to such term in the
second paragraph of this Agreement.
"Managing Underwriter" means, with respect to any Public
Offering, the underwriter or underwriters managing such Public Offering.
"Merger Agreement" has the meaning assigned to such term in
the second paragraph of this Agreement.
"1997-Major Series" has the meaning assigned to such term in
second paragraph of this Agreement.
"Notice of Piggyback Registration" has the meaning assigned to
such term in Section 2.01(a) hereof.
"Person" means any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated association or
government (or any agency, instrumentality or political subdivision thereof).
"Public Offering" means any offering by the Company of any of
its securities to the public, either on behalf of the Company or any of its
securityholders, pursuant to an effective registration statement under the
Securities Act.
"Registrable Securities" means any shares of Common Stock
issued upon a conversion of shares of the 1997-Major Series in accordance with
the Certificate of Designation, provided that such Common Stock shall cease to
be Registrable Securities to the extent that (a) a registration statement with
respect to the sale of such Common Stock shall have become effective under the
Securities Act and such Common Stock shall have been disposed of in accordance
with such registration statement, (b) the shares of such Common Stock shall have
been distributed to the public pursuant to Rule 144 promulgated under the
Securities Act or (c) such Common Stock shall cease to be outstanding.
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"Registration Expenses" means all expenses incident to the
Company's performance or compliance with its obligations hereunder to effect the
registration of Registrable Securities, including, without limitation, all
registration, filing, securities exchange listing and National Association of
Securities Dealers' fees, all registration, filing, qualification and other fees
and expenses of complying with the securities or blue sky laws, all duplicating
and printing expenses, the fees and disbursements of counsel for the Company and
of its independent public accountants, including the expenses of any special
audits or comfort letters required by or incident to such performance and
compliance, and any fees and disbursements of underwriters customarily paid by
issuers or sellers of securities, but excluding underwriting discounts and
commissions and transfer taxes, if any, in respect of Registrable Securities,
which transfer taxes shall be paid by each holder thereof.
"Requesting Holders" means, with respect to any registration
of the Company's securities, the holders of Registrable Securities requesting to
have Registrable Securities included in such registration in accordance with the
terms hereof.
"Securities Act" means the Securities Act of 1933, as amended.
Section 2. Piggyback Registration Rights.
2.01 Registrations.
(a) Right to Include Registrable Securities. If at any time
the Company proposes to register any of its securities under the Securities Act,
it will each such time give prompt written notice (a "Notice of Piggyback
Registration"), at least 30 days prior to the anticipated filing date, to all
holders of Registrable Securities of its intention to do so and of such holders'
rights under this Section 2.01(a), which Notice of Piggyback Registration shall
include a description of the intended method of disposition of such securities.
Upon the written request of the holders of all, but not less than all, of the
Registrable Securities made within 15 days after receipt of a Notice of
Piggyback Registration (which request shall specify the Registrable Securities
intended to be disposed of and the intended method of disposition thereof), the
Company will use its best efforts to include in the registration statement
relating to such registration all Registrable Securities which the Company has
been so requested to register. Notwithstanding the foregoing, if, at any time
after giving a Notice of Piggyback Registration and prior to the effective date
of the registration statement filed in connection with such registration, the
Company shall determine for any reason not to register or to delay registration
of such securities, the Company may, at its election, give written notice of
such determination to each holder of Registrable Securities and, thereupon, (i)
in the case of a determination not to register, shall be relieved of its
obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses in
connection therewith), and (ii) in the case of a determination to delay
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registering, shall be permitted to delay registering any Registrable Securities
for the same period as the delay in registering such other securities.
(b) Registration Expenses. The Company will pay all
Registration Expenses incurred in connection with each registration of
securities.
(c) Priority in Cutback Registrations. If any such
registration of securities becomes a Cutback Registration, the Company will
include in such registration to the extent of the amount of the securities which
the Managing Underwriter advises the Company can be sold in such offering:
(i) if such registration as initially proposed by the Company
was solely a primary registration of its securities, (x) first the
securities proposed by the Company to be sold for its own account, and
(y) second, any Registrable Securities requested to be included in such
registration by the Requesting Holders and any other securities of the
Company proposed to be included in such registration, allocated among
the holders thereof in accordance with the priorities then existing
among the Company and such holders; and
(ii) if such registration as initially proposed by the Company
was in whole or in part requested by holders of securities of the
Company, other than holders of Registrable Securities in their
capacities as such, pursuant to demand registration rights, (x) first,
such securities held by the holders initiating such registration and,
if applicable, any securities proposed by the Company to be sold for
its own account, allocated in accordance with the priorities then
existing among the Company and such holders, and (y) second, any
Registrable Securities requested to be included in such registration by
the Requesting Holders and any other securities of the Company proposed
to be included in such registration, allocated among the holders
thereof in accordance with the priorities then existing among the
Company and such holders;
and any securities so excluded shall be withdrawn from and shall not be included
in such registration.
2.02 Registration Procedures. If and whenever the Company is
required to use its best efforts to effect the registration of any Registrable
Securities under the Securities Act pursuant to Section 2.01 hereof, the Company
will use its best efforts to effect the registration and sale of such
Registrable Securities in accordance with the intended methods of disposition
thereof specified by the Requesting Holders. Without limiting the foregoing, the
Company in such case will, as expeditiously as possible notify each holder of
Registrable Securities covered by such registration statement, at any time when
a prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which any prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be stated
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therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
The Company may require each holder of Registrable Securities
as to which any registration is being effected to, and each such holder, as a
condition to including Registrable Securities in such registration, shall,
furnish the Company with such information and affidavits regarding such holder
and the distribution of such securities as the Company may from time to time
reasonably request in writing in connection with such registration.
Each holder of Registrable Securities agrees by acquisition of
such Registrable Securities that upon receipt of any notice from the Company of
the happening of any event of the kind described in the second sentence of this
Section 2.02, such holder will forthwith discontinue such holder's disposition
of Registrable Securities pursuant to the registration statement relating to
such Registrable Securities until such holder's receipt of the copies of a
supplemented or amended prospectus and, if so directed by the Company, will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies, then in such holder's possession of the prospectus
relating to such Registrable Securities current at the time of receipt of such
notice.
2.03 Underwritten Offerings. If the Company at any time
proposes to register any of its securities and such securities are to be
distributed by or through one or more underwriters, the Company will, subject to
the provisions of paragraph 2.01(c), use its best efforts, if requested by the
holders of all of the Registrable Securities, to arrange for such underwriters
to include the Registrable Securities to be offered and sold by such holders
among the securities to be distributed by such underwriters, and such holders
shall be obligated to sell their Registrable Securities in such registration
through such underwriters on the same terms and conditions as apply to the other
Company securities to be sold by such underwriters in connection with such
registration. The holders of Registrable Securities shall be parties to the
underwriting agreement between the Company and such underwriter or underwriters.
No Requesting Holder may participate in such underwritten offering unless such
holder agrees to sell its Registrable Securities on the basis provided in such
underwriting agreement and completes and executes all questionnaires, powers of
attorney, indemnities and other documents reasonably required under the terms of
such underwriting agreement. If any Requesting Holder disapproves of the terms
of an underwriting, such holder may elect to withdraw therefrom.
2.04 Indemnification.
(a) Indemnification by the Company. The Company shall, to the
full extent permitted by law, indemnify and hold harmless each seller of
Registrable Securities included in any registration statement filed in
connection with the registration of the Company's securities, its directors and
officers, and each other Person, if any, who controls any such seller within the
meaning of the Securities Act, against any losses, claims, damages, expenses or
liabilities, joint or several (together, "Losses"), to which such seller or any
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such director or officer or controlling Person may become subject under the
Securities Act or otherwise, insofar as such Losses (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any such registration statement, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein (in the case of a prospectus, in the light of the circumstances under
which they were made) not misleading, and the Company will reimburse such seller
and each such director, officer and controlling Person for any legal or any
other expenses reasonably incurred by them in connection with investigating or
defending any such Loss (or action or proceeding in respect thereof); provided
that the Company shall not be liable in any such case to the extent that any
such Loss (or action or proceeding in respect thereof) arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in any such registration statement, preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
such seller for use in the preparation thereof. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
such seller or any such director, officer or controlling Person, and shall
survive the transfer of such securities by such seller. The Company shall also
indemnify each other Person who participates (including as an underwriter) in
the offering or sale of Registrable Securities, their officers and directors and
each other Person, if any, who controls any such participating Person within the
meaning of the Securities Act to the same extent as provided above with respect
to sellers of Registrable Securities.
(b) Indemnification by the Sellers. Each holder of Registrable
Securities which are included or are to be included in any registration
statement filed in connection with a registration of the Company's securities,
as a condition to including Registrable Securities in such registration
statement, shall, to the full extent permitted by law, indemnify and hold
harmless the Company, its directors and officers, and each other Person, if any,
who controls the Company within the meaning of the Securities Act, against any
Losses to which the Company or any such director or officer or controlling
Person may become subject under the Securities Act or otherwise, insofar as such
Losses (or actions or proceedings, whether commenced or threatened, in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any such registration statement, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein (in the case of a prospectus, in the
light of the circumstances under which they were made) not misleading, if such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by or on behalf of such seller for use in the preparation of such
registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement; provided, however, that the obligation to
provide indemnification pursuant to this paragraph (b) shall be several, and not
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joint and several, among such Indemnifying Parties on the basis of the number of
Registrable Securities included in such registration statement and the aggregate
amount which may be recovered from any holder of Registrable Securities pursuant
to the indemnification provided for in this paragraph (b) in connection with any
registration and sale of Registrable Securities shall be limited to the total
proceeds received by such holder from the sale of such Registrable Securities.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or any such director, officer
or controlling Person and shall survive the transfer of such securities by such
seller. Such holders shall also indemnify each other Person who participates
(including as an underwriter) in the offering or sale of Registrable Securities,
their officers and directors and each other Person, if any, who controls any
such participating Person within the meaning of the Securities Act to the same
extent as provided above with respect to the Company.
(c) Notices of Claims, Etc. Promptly after receipt by an
Indemnified Party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding paragraph (a) or (b) of this
Section 2.04, such Indemnified Party will, if a claim in respect thereof is to
be made against an Indemnifying Party pursuant to such paragraphs, give written
notice to the latter of the commencement of such action, provided that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under the paragraph (a) or (b)
of this Section 2.04, as the case may be, except to the extent that the
Indemnifying Party is actually prejudiced by such failure to give notice. In
case any such action is brought against an Indemnified Party, the Indemnifying
Party shall be entitled to participate in and, unless, in the reasonable
judgment of any Indemnified Party, a conflict of interest between such
Indemnified Party and any Indemnifying Party exists with respect to such claim,
to assume the defense thereof, jointly with any other Indemnifying Party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such Indemnified Party, and after notice from the Indemnifying
Party to such Indemnified Party of its election so to assume the defense
thereof, the Indemnifying Party shall not be liable to such Indemnified Party
for any legal or other expenses subsequently incurred by the latter in
connection with the defense thereof other than reasonable costs of
investigation; provided that the Indemnified Party may participate in such
defense at the Indemnified Party's expense; and provided further that the
Indemnified Party or Indemnified Parties shall have the right to employ one
counsel to represent it or them if, in the reasonable judgment of the
Indemnified Party or Indemnified Parties, it is advisable for it or them to be
represented by separate counsel by reason of having legal defenses which are
different from or in addition to those available to the Indemnifying Party, and
in that event the reasonable fees and expenses of such one counsel shall be paid
by the Indemnifying Party. If the Indemnifying Party is not entitled to, or
elects not to, assume the defense of a claim, it will not be obligated to pay
the fees and expenses of more than one counsel for the Indemnified Parties with
respect to such claim, unless in the reasonable judgment of any Indemnified
Party a conflict of interest may exist between such Indemnified Party and any
other Indemnified Parties with respect to such claim, in which event the
Indemnifying Party shall be obligated to pay the fees and expenses of such
additional counsel for the Indemnified Parties or counsels. No Indemnifying
Party shall consent to entry of any judgment or enter into any settlement
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without the consent of the Indemnified Party. No Indemnifying Party shall be
subject to any liability for any settlement made without its consent, which
consent shall not be unreasonably withheld.
(d) Contribution. If the indemnity and reimbursement
obligation provided for in any paragraph of this Section 2.04 is unavailable or
insufficient to hold harmless an Indemnified Party in respect of any Losses (or
actions or proceedings in respect thereof) referred to therein, then the
Indemnifying Party shall contribute to the amount paid or payable by the
Indemnified Party as a result of such Losses (or actions or proceedings in
respect thereof) in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party on the one hand and the Indemnified Party on the
other hand in connection with statements or omissions which resulted in such
Losses, as well as any other relevant equitable considerations. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Indemnifying Party or the Indemnified Party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The parties hereto agree that it would not be just
and equitable if contributions pursuant to this paragraph were to be determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the first sentence of
this paragraph. The amount paid by an Indemnified Party as a result of the
Losses referred to in the first sentence of this paragraph shall be deemed to
include any legal and other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any Loss which is the
subject of this paragraph.
No Indemnified Party guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
the Indemnifying Party if the Indemnifying Party was not guilty of such
fraudulent misrepresentation.
(e) Other Indemnification. The provisions of this Section 2.04
shall be in addition to any other rights to indemnification or contribution
which an Indemnified Party may have pursuant to law, equity, contract or
otherwise.
Section 3. Representations and Warranties of Bendell. Bendell
represents and warrants to the Company that:
3.01 Investment. Bendell will purchase the 1997-Major Series
only for his own account, for investment purposes and not with a view to resale
or distribution, and not on behalf of any other Person.
3.02 No Agreement to Transfer. Bendell is not a party to any
agreement, arrangement or understanding concerning the transfer of the
1997-Major Series or any interest therein to any other Person.
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3.03 Knowledge and Experience. Bendell has (a) adequate
knowledge and experience in financial and business matters to be able to
evaluate the merits and risks of his investment in the Company and the
1997-Major Series or (b) the advice or representation of a Person having such
knowledge or experience.
3.04 Access to Information. Bendell has had, and continues to
have access to sufficient information regarding the Company in order to evaluate
the merits and risks of his investment in the Company and the 1997-Major Series.
3.05 Risk. Bendell is able to bear the economic risk of its
investment in the Company and the 1997-Major Series and to hold the 1997-Major
Series for investment.
3.06. Restrictions on Transfer. The 1997-Major Series (i) will
not be registered by reason of an exemption from registration under Section 3(b)
or 4(2) of the Securities Act, or Regulation D promulgated thereunder, and (ii)
is not publicly traded, no market exists for the 1997-Major Series and, except
for the conversion of the shares thereof into the Company's Common Stock in
accordance with the terms and conditions set forth in the Certificate of
Designation, Bendell must hold the 1997-Major Series indefinitely unless a
subsequent transfer or other disposition is registered under the Securities Act
or is exempt from registration thereunder at the time of such transfer or other
disposition.
Section 4. Miscellaneous.
4.01 Waiver. No failure on the part of either party hereto to
exercise and no delay in exercising, and no course of dealing with respect to,
any right, power or privilege under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege under this Agreement preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The remedies provided
herein are cumulative and not exclusive of any remedies provided by law.
4.02 Notices. All notices, requests and other communications
provided for herein shall be given or made in writing (including, without
limitation, by telecopy) by the close of business on the day the notice is given
or delivered to the intended recipient at (a) in the case of the Company, 80-02
Kew Gardens Road, Suite 5000, Kew Gardens, NY 11415, telecopy: 718-793-4830,
attention: President and (b) in the case of Bendell, 80-02 Kew Gardens Road,
Suite 5000, Kew Gardens, NY 11415, telecopy: 718-793-4830, attention: Bruce
Bendell; or, as to either party, at such other address as shall be designated by
such party in a notice to each other party. Except as otherwise provided in this
Agreement, all such communications shall be deemed to have been duly given when
transmitted by telecopier or personally delivered or, in the case of a mailed
notice, upon receipt, in each case given or addressed as aforesaid.
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4.03 Amendments. Except as otherwise expressly provided in
this Agreement, any provision of this Agreement may be modified or supplemented
only by an instrument in writing signed by the Company and Bendell and any
provision of this Agreement may be waived only by an instrument in writing
signed by the party waiving such provision.
4.04 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
4.05 Captions. The captions and section headings appearing
herein are included solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Agreement.
4.06 Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties hereto may execute this Agreement by
signing any such counterpart.
4.07 Governing Law; Submission to Jurisdiction. This Agreement
shall be governed by, and construed in accordance with, the law of the State of
New York.
4.08 Severability. If any provision hereof is invalid or
unenforceable in any jurisdiction, then, to the fullest extent permitted by
applicable law, (a) the other provisions hereof shall remain in full force and
effect in such jurisdiction in order to carry out the intentions of the parties
hereto as nearly as may be possible and (b) the invalidity or unenforceability
of any provision hereof in any jurisdiction shall not affect the validity or
enforceability of such provision hereof in any other jurisdiction.
IN WITNESS WHEREOF, the undersigned have caused this Agreement
to be duly execute and delivered as of the date first above written.
FIDELITY HOLDINGS, INC.
By__________________________________________
Name: Doron Cohen
Title: President, Chief Executive Officer
and Treasurer
--------------------------------------------
BRUCE BENDELL
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EXHIBIT 4.10
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of October 22, 1997
between FIDELITY HOLDINGS, INC., a corporation organized under the laws of the
State of Nevada (the "Company"), BRUCE BENDELL, and CASTLE TRUST AND MANAGEMENT
SERVICES LIMITED, as Trustee (the "Trustee") under The Millenium Trust (the
"Trust") created under that certain Deed of Settlement dated October 2, 1996.
Pursuant to a Warrant Agreement dated as of October 2, 1996 (the
"Original Warrant Agreement") between the Company, Bruce Bendell and Harold
Bendell, which has been amended and restated by an Amended and Restated Warrant
Agreement between such parties dated as of October 11, 1997 (as so amended and
restated, and as further modified and supplemented and in effect from time to
time, the "Amended and Restated Warrant Agreement"). Pursuant to the Amended and
Restated Warrant Agreement, the Company has, among other things, issued to Bruce
Bendell warrants (the "Warrants") to acquire 50,000 shares of the Company's
Common Stock upon the terms and conditions set forth therein.
The Trust holds 125,000 shares of the Company's 1996-MAJOR
Series of Convertible Preferred Stock (the "1996-Major Series"). The shares of
the 1996-Major Series are convertible into shares of the Company's Common Stock
on the terms and conditions set forth in the Company's Certificate of
Designation, Powers, Preferences and Rights of the 1996-MAJOR Series of
Convertible Preferred Stock (as modified and supplemented and in effect from
time to time, the "Certificate of Designation").
The Company is in the process of filing with the Securities and
Exchange Commission a registration statement relating to an offering (the
"Current Offering") of certain shares of its Common Stock to the public. The
Trustee has the right to have registered in connection with the Current Offering
the Common Stock into which the 125,000 shares of the 1996-Major Series held by
the Trust are convertible. Bruce Bendell has the right to have registered in
connection with the Current Offering the Common Stock issuable upon exercise of
the Warrants.
The Company has requested that (a) the Trustee agree to waive
its right to have registered in connection with the Current Offering the Common
Stock into which the 125,000 shares of the 1996-Major Series owned by the
Trustee are convertible and (b) Bruce Bendell agree to waive his right to have
registered in connection with the Current Offering the Common Stock issuable
upon exercise of the Warrants. The Trustee and Bruce Bendell have agreed to
waive such rights upon the condition that the Company enter into this Agreement.
In consideration of the foregoing and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company has agreed to grant to the Trustee certain
registration rights with respect to the shares of Common Stock into which the
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shares of the 1996-Major Series are convertible and to grant to Bruce Bendell
certain registration rights with respect to the shares of Common Stock issuable
upon exercise of the Warrants. Accordingly, the parties hereto hereby agree as
follows:
Section 1. Definitions. As used herein, the following terms have
the following respective meanings:
"Amended and Restated Warrant Agreement" has the meaning
assigned to such term in second paragraph of this Agreement.
"Certificate of Designation" has the meaning assigned to such
term in the third paragraph of this Agreement.
"Commission" means the Securities and Exchange Commission, and
any successor entity.
"Company" has the meaning assigned to such term in the first
paragraph of this Agreement.
"Current Offering" has the meaning assigned to such term in the
fourth paragraph of this Agreement.
"Cutback Registration" means any registration to be effected as
an underwritten Public Offering in with the Managing Underwriter with respect
thereto advises the Company and the Requesting Holders in writing that, in its
opinion, the number of securities requested to be included in such registration
(including the Company's securities that are not Registrable Securities) exceeds
the number which can be sold in such offering without a material reduction in
the selling price anticipated to be received for the securities to be sold in
such Public Offering.
"Demand Registration" means any registration of Registrable
Securities under the Securities Act effected in accordance with Section 2.01
hereof.
"Effective Registration" means a Demand Registration which has
been declared effective or ordered effective in accordance with the rules of the
Commission.
"Indemnified Party" means a Person entitled to indemnification
in accordance with Section 2.05 hereof.
"Indemnifying Party" means a Person obligated to provided
indemnification in accordance with Section 2.05 hereof.
"Losses" has the meaning assigned to such term in paragraph
2.05(a) hereof.
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"Managing Underwriter" means, with respect to any Public
Offering, the underwriter or underwriters managing such Public Offering.
"1996-Major Series" has the meaning assigned to such term in
third paragraph of this Agreement.
"Notice of Piggyback Registration" has the meaning assigned to
such term in Section 2.02(a) hereof.
"Original Warrant Agreement" has the meaning assigned to such
term in second paragraph of this Agreement.
"Person" means any individual, corporation, company, voluntary
association, partnership, joint venture, trust, unincorporated association or
government (or any agency, instrumentality or political subdivision thereof).
"Piggyback Registration" means any registration of securities of
the Company under the Securities Act, whether for sale for the account of the
Company or for the account of any holder of securities of the Company (other
than Registrable Securities).
"Public Offering" means any offering by the Company of any of
its securities to the public, either on behalf of the Company or any of its
securityholders, pursuant to an effective registration statement under the
Securities Act, but excluding the Current Offering.
"Registrable Securities" means (a) any shares of Common Stock
issued upon a conversion of shares of the 1996-Major Series in accordance with
the Certificate of Designation and (b) any shares of Common Stock issued upon
exercise of the Warrants, provided that in each case such Common Stock shall
cease to be Registrable Securities to the extent that (i) a registration
statement with respect to the sale of such Common Stock shall have become
effective under the Securities Act and such Common Stock shall have been
disposed of in accordance with such registration statement, (ii) the shares of
such Common Stock shall have been distributed to the public pursuant to Rule 144
promulgated under the Securities Act or (iii) such Common Stock shall cease to
be outstanding.
"Registration Expenses" means all expenses incident to the
Company's performance or compliance with its obligations hereunder to effect the
registration of Registrable Securities, including, without limitation, all
registration, filing, securities exchange listing and National Association of
Securities Dealers' fees, all registration, filing, qualification and other fees
and expenses of complying with the securities or blue sky laws, all duplicating
and printing expenses, the fees and disbursements of counsel for the Company and
of its independent public accountants, including the expenses of any special
audits or comfort letters required by or incident to such performance and
compliance, and any fees and disbursements of underwriters customarily paid by
issuers or sellers of securities, but excluding underwriting discounts and
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commissions and transfer taxes, if any, in respect of Registrable Securities,
which transfer taxes shall be paid by each holder thereof.
"Registration Request" has the meaning assigned to such term in
Section 2.01(a) hereof.
"Requesting Holders" means, with respect to any registration of
the Company's securities, the holders of Registrable Securities requesting to
have Registrable Securities included in such registration in accordance with the
terms hereof.
"Securities Act" means the Securities Act of 1933, as amended.
"Trust" has the meaning assigned to such term in the first
paragraph of this Agreement.
"Trustee" has the meaning assigned to such term in the first
paragraph of this Agreement.
"Warrants" has the meaning assigned to such term in second
paragraph of this Agreement.
Section 2. Registration Rights.
2.01 Demand Registration.
(a) Demand Registration. At any time, upon the written request
of the holders of all, but not less than all, of the Registrable Securities
requesting that the Company effect the registration under the Securities Act of
all or part of such holders' Registrable Securities and specifying the number of
Registrable Securities to be registered and the intended method of disposition
thereof (a "Registration Request"), the Company will thereupon will use its best
efforts to effect the registration under the Securities Act of the Registrable
Securities to the extent requisite to permit the disposition (in accordance with
the intended methods thereof) of the Registrable Securities so to be registered.
If requested by the holders of the Registrable Securities requested to be
included in any Demand Registration, the method of disposition of all
Registrable Securities included in such registration shall be an underwritten
offering effected in accordance with Section 2.04(a) hereof. Subject to
paragraph (e) of this Section 2.01, the Company may include in such registration
other securities for sale for its own account or for the account of any other
Person. If any security holders of the Company (other than the holders of
Registrable Securities in such capacity) register securities of the Company in a
Demand Registration in accordance with this Section 2.01, such holders shall pay
the fees and expenses of their counsel and their pro rata share, on the basis of
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the respective amounts of the securities included in such registration on behalf
of each such holder, of the Registration Expenses if the Registration Expenses
for such registration are not paid by the Company for any reason.
(b) Limitations on Demand Registrations. Notwithstanding
anything herein to the contrary, the Company shall not be required to honor a
request for a Demand Registration if:
(i) the Company has previously effected an Effective
Registration;
(ii) such request is received by the Company less than 90 days
following the effective date of any previous registration statement
filed in connection with a Demand Registration, regardless of whether
any holder of Registrable Securities exercised its rights under this
Agreement with respect to such registration.
(c) Registration Statement Form. Demand Registrations shall be
on such appropriate registration form promulgated by the Commission as shall be
selected by the Company, and shall be reasonably acceptable to the holders of
the Registrable Securities to which such registration relates, and shall permit
the disposition of such Registrable Securities in accordance with the intended
method or methods specified in their request for such registration.
(d) Registration Expenses. The Company will pay all Registration
Expenses incurred in connection with a Demand Registration.
(e) Priority in Cutback Registrations. If a Demand Registration
becomes a Cutback Registration, the Company will include in any such
registration to the extent of the number which the Managing Underwriter advises
the Company can be sold in such offering (i) first, Registrable Securities
requested to be included in such registration by the Requesting Holders, pro
rata on the basis of the number of Registrable Securities requested to be
included by such holders and (ii) second, other securities of the Company
proposed to be included in such registration, allocated among the holders
thereof in accordance with the priorities then existing among the Company and
the holders of such other securities; and any securities so excluded shall be
withdrawn from and shall not be included in such Demand Registration.
2.02 Piggyback Registrations.
(a) Right to Include Registrable Securities. If at any time the
Company proposes to register any of its securities under the Securities Act, it
will each such time give prompt written notice (a "Notice of Piggyback
Registration"), at least 30 days prior to the anticipated filing date, to all
holders of Registrable Securities of its intention to do so and of such holders'
rights under this Section 2.02(a), which Notice of Piggyback Registration shall
include a description of the intended method of disposition of such securities.
Upon the written request of the holders of all, but not less than all, of the
Registrable Securities made within 15 days after receipt of a Notice of
Piggyback Registration (which request shall specify the Registrable Securities
intended to be disposed of and the intended method of disposition thereof), the
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Company will use its best efforts to include in the registration statement
relating to such registration all Registrable Securities which the Company has
been so requested to register. Notwithstanding the foregoing, if, at any time
after giving a Notice of Piggyback Registration and prior to the effective date
of the registration statement filed in connection with such registration, the
Company shall determine for any reason not to register or to delay registration
of such securities, the Company may, at its election, give written notice of
such determination to each holder of Registrable Securities and, thereupon, (i)
in the case of a determination not to register, shall be relieved of its
obligation to register any Registrable Securities in connection with such
registration (but not from its obligation to pay the Registration Expenses in
connection therewith), and (ii) in the case of a determination to delay
registering, shall be permitted to delay registering any Registrable Securities
for the same period as the delay in registering such other securities.
(b) Registration Expenses. The Company will pay all Registration
Expenses incurred in connection with each registration of securities.
(c) Priority in Cutback Registrations. If any such registration
of securities becomes a Cutback Registration, the Company will include in such
registration to the extent of the amount of the securities which the Managing
Underwriter advises the Company can be sold in such offering:
(i) if such registration as initially proposed by the Company
was solely a primary registration of its securities, (x) first the
securities proposed by the Company to be sold for its own account, (y)
second, any Registrable Securities requested to be included in such
registration by the Requesting Holders, pro rata on the basis of the
number of Registrable Securities requested to be included by such
holders, and (z) third, any other securities of the Company proposed to
be included in such registration, allocated among the holders thereof
in accordance with the priorities then existing among the Company and
such holders; and
(ii) if such registration as initially proposed by the Company
was in whole or in part requested by holders of securities of the
Company, other than holders of Registrable Securities in their
capacities as such, pursuant to demand registration rights, (x) first,
such securities held by the holders initiating such registration and,
if applicable, any securities proposed by the Company to be sold for
its own account, allocated in accordance with the priorities then
existing among the Company and such holders, and (y) second, any
Registrable Securities requested to be included in such registration by
the Requesting Holders, pro rata on the basis of the number of
Registrable Securities requested to be included by such holders, and
(z) third, any other securities of the Company proposed to be included
in such registration, allocated among the holders thereof in accordance
with the priorities then existing among the Company and the holders of
such other securities;
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and any securities so excluded shall be withdrawn from and shall not be included
in such registration.
2.03 Registration Procedures. If and whenever the Company is
required to use its best efforts to effect the registration of any Registrable
Securities under the Securities Act pursuant to Section 2.01 or 2.02 hereof, the
Company will use its best efforts to effect the registration and sale of such
Registrable Securities in accordance with the intended methods of disposition
thereof specified by the Requesting Holders. Without limiting the foregoing, the
Company in such case will, as expeditiously as possible notify each holder of
Registrable Securities covered by such registration statement, at any time when
a prospectus relating thereto is required to be delivered under the Securities
Act, of the happening of any event as a result of which any prospectus included
in such registration statement, as then in effect, includes an untrue statement
of a material fact or omits to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
The Company may require each holder of Registrable Securities as
to which any registration is being effected to, and each such holder, as a
condition to including Registrable Securities in such registration, shall,
furnish the Company with such information and affidavits regarding such holder
and the distribution of such securities as the Company may from time to time
reasonably request in writing in connection with such registration.
Each holder of Registrable Securities agrees by acquisition of
such Registrable Securities that upon receipt of any notice from the Company of
the happening of any event of the kind described in the second sentence of this
Section 2.03, such holder will forthwith discontinue such holder's disposition
of Registrable Securities pursuant to the registration statement relating to
such Registrable Securities until such holder's receipt of the copies of a
supplemented or amended prospectus and, if so directed by the Company, will
deliver to the Company (at the Company's expense) all copies, other than
permanent file copies, then in such holder's possession of the prospectus
relating to such Registrable Securities current at the time of receipt of such
notice.
2.04 Underwritten Offerings.
(a) Underwritten Demand Offerings. In the case of any
underwritten Public Offering being effected pursuant to a Demand Registration,
the Managing Underwriter and any other underwriter or underwriters with respect
to such offering shall be selected, after consultation with the Company, by the
holders of all of the Registrable Securities, which consent shall not be
unreasonably withheld. The Company shall enter into an underwriting agreement in
customary form with such underwriter or underwriters, which shall include, among
other provisions, indemnities to the effect and to the extent provided in
Section 2.05 hereof and shall take all such other actions as are reasonably
requested by the Managing Underwriter in order to expedite or facilitate the
registration and disposition of the Registrable Securities. The holders of
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Registrable Securities shall be parties to such underwriting agreement. No
Requesting Holder may participate in such underwritten offering unless such
holder agrees to sell its Registrable Securities on the basis provided in such
underwriting agreement and completes and executes all questionnaires, powers of
attorney, indemnities and other documents reasonably required under the terms of
such underwriting agreement. If any Requesting Holder disapproves of the terms
of an underwriting, such holder may elect to withdraw therefrom and from such
registration by notice to the Company and the Managing Underwriter.
(b) Underwritten Piggyback Offerings. If the Company at any time
proposes to register any of its securities and such securities are to be
distributed by or through one or more underwriters, the Company will, subject to
the provisions of paragraph 2.02(c), use its best efforts, if requested by the
holders of all of the Registrable Securities, to arrange for such underwriters
to include the Registrable Securities to be offered and sold by such holders
among the securities to be distributed by such underwriters, and such holders
shall be obligated to sell their Registrable Securities in such registration
through such underwriters on the same terms and conditions as apply to the other
Company securities to be sold by such underwriters in connection with such
registration. The holders of the Registrable Securities shall be parties to the
underwriting agreement between the Company and such underwriter or underwriters.
No Requesting Holder may participate in such underwritten offering unless such
holder agrees to sell its Registrable Securities on the basis provided in such
underwriting agreement and completes and executes all questionnaires, powers of
attorney, indemnities and other documents reasonably required under the terms of
such underwriting agreement. If any Requesting Holder disapproves of the terms
of an underwriting, such holder may elect to withdraw therefrom and from such
registration by notice to the Company and the Managing Underwriter.
2.05 Indemnification.
(a) Indemnification by the Company. The Company shall, to the
full extent permitted by law, indemnify and hold harmless each seller of
Registrable Securities included in any registration statement filed in
connection with the registration of the Company's securities, its directors and
officers, and each other Person, if any, who controls any such seller within the
meaning of the Securities Act, against any losses, claims, damages, expenses or
liabilities, joint or several (together, "Losses"), to which such seller or any
such director or officer or controlling Person may become subject under the
Securities Act or otherwise, insofar as such Losses (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any such registration statement, any preliminary prospectus, final
prospectus or summary prospectus contained therein, or any amendment or
supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein (in the case of a prospectus, in the light of the circumstances under
which they were made) not misleading, and the Company will reimburse such seller
and each such director, officer and controlling Person for any legal or any
other expenses reasonably incurred by them in connection with investigating or
defending any such Loss (or action or proceeding in respect thereof); provided
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that the Company shall not be liable in any such case to the extent that any
such Loss (or action or proceeding in respect thereof) arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in any such registration statement, preliminary prospectus, final
prospectus, summary prospectus, amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
such seller for use in the preparation thereof. Such indemnity shall remain in
full force and effect regardless of any investigation made by or on behalf of
such seller or any such director, officer or controlling Person, and shall
survive the transfer of such securities by such seller. The Company shall also
indemnify each other Person who participates (including as an underwriter) in
the offering or sale of Registrable Securities, their officers and directors and
each other Person, if any, who controls any such participating Person within the
meaning of the Securities Act to the same extent as provided above with respect
to sellers of Registrable Securities.
(b) Indemnification by the Sellers. Each holder of Registrable
Securities which are included or are to be included in any registration
statement filed in connection with a registration of the Company's securities,
as a condition to including Registrable Securities in such registration
statement, shall, to the full extent permitted by law, indemnify and hold
harmless the Company, its directors and officers, and each other Person, if any,
who controls the Company within the meaning of the Securities Act, against any
Losses to which the Company or any such director or officer or controlling
Person may become subject under the Securities Act or otherwise, insofar as such
Losses (or actions or proceedings, whether commenced or threatened, in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any such registration statement, any
preliminary prospectus, final prospectus or summary prospectus contained
therein, or any amendment or supplement thereto, or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein (in the case of a prospectus, in the
light of the circumstances under which they were made) not misleading, if such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by or on behalf of such seller for use in the preparation of such
registration statement, preliminary prospectus, final prospectus, summary
prospectus, amendment or supplement; provided, however, that the obligation to
provide indemnification pursuant to this paragraph (b) shall be several, and not
joint and several, among such Indemnifying Parties on the basis of the number of
Registrable Securities included in such registration statement and the aggregate
amount which may be recovered from any holder of Registrable Securities pursuant
to the indemnification provided for in this paragraph (b) in connection with any
registration and sale of Registrable Securities shall be limited to the total
proceeds received by such holder from the sale of such Registrable Securities.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Company or any such director, officer
or controlling Person and shall survive the transfer of such securities by such
seller. Such holders shall also indemnify each other Person who participates
(including as an underwriter) in the offering or sale of Registrable Securities,
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their officers and directors and each other Person, if any, who controls any
such participating Person within the meaning of the Securities Act to the same
extent as provided above with respect to the Company.
(c) Notices of Claims, Etc. Promptly after receipt by an
Indemnified Party of notice of the commencement of any action or proceeding
involving a claim referred to in the preceding paragraph (a) or (b) of this
Section 2.05, such Indemnified Party will, if a claim in respect thereof is to
be made against an Indemnifying Party pursuant to such paragraphs, give written
notice to the latter of the commencement of such action, provided that the
failure of any Indemnified Party to give notice as provided herein shall not
relieve the Indemnifying Party of its obligations under the paragraph (a) or (b)
of this Section 2.05, as the case may be, except to the extent that the
Indemnifying Party is actually prejudiced by such failure to give notice. In
case any such action is brought against an Indemnified Party, the Indemnifying
Party shall be entitled to participate in and, unless, in the reasonable
judgment of any Indemnified Party, a conflict of interest between such
Indemnified Party and any Indemnifying Party exists with respect to such claim,
to assume the defense thereof, jointly with any other Indemnifying Party
similarly notified to the extent that it may wish, with counsel reasonably
satisfactory to such Indemnified Party, and after notice from the Indemnifying
Party to such Indemnified Party of its election so to assume the defense
thereof, the Indemnifying Party shall not be liable to such Indemnified Party
for any legal or other expenses subsequently incurred by the latter in
connection with the defense thereof other than reasonable costs of
investigation; provided that the Indemnified Party may participate in such
defense at the Indemnified Party's expense; and provided further that the
Indemnified Party or Indemnified Parties shall have the right to employ one
counsel to represent it or them if, in the reasonable judgment of the
Indemnified Party or Indemnified Parties, it is advisable for it or them to be
represented by separate counsel by reason of having legal defenses which are
different from or in addition to those available to the Indemnifying Party, and
in that event the reasonable fees and expenses of such one counsel shall be paid
by the Indemnifying Party. If the Indemnifying Party is not entitled to, or
elects not to, assume the defense of a claim, it will not be obligated to pay
the fees and expenses of more than one counsel for the Indemnified Parties with
respect to such claim, unless in the reasonable judgment of any Indemnified
Party a conflict of interest may exist between such Indemnified Party and any
other Indemnified Parties with respect to such claim, in which event the
Indemnifying Party shall be obligated to pay the fees and expenses of such
additional counsel for the Indemnified Parties or counsels. No Indemnifying
Party shall consent to entry of any judgment or enter into any settlement
without the consent of the Indemnified Party. No Indemnifying Party shall be
subject to any liability for any settlement made without its consent, which
consent shall not be unreasonably withheld.
(d) Contribution. If the indemnity and reimbursement obligation
provided for in any paragraph of this Section 2.05 is unavailable or
insufficient to hold harmless an Indemnified Party in respect of any Losses (or
actions or proceedings in respect thereof) referred to therein, then the
Indemnifying Party shall contribute to the amount paid or payable by the
Indemnified Party as a result of such Losses (or actions or proceedings in
respect thereof) in such proportion as is appropriate to reflect the relative
fault of the Indemnifying Party on the one hand and the Indemnified Party on the
other hand in connection with statements or omissions which resulted in such
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Losses, as well as any other relevant equitable considerations. The relative
fault shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Indemnifying Party or the Indemnified Party and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The parties hereto agree that it would not be just
and equitable if contributions pursuant to this paragraph were to be determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to in the first sentence of
this paragraph. The amount paid by an Indemnified Party as a result of the
Losses referred to in the first sentence of this paragraph shall be deemed to
include any legal and other expenses reasonably incurred by such Indemnified
Party in connection with investigating or defending any Loss which is the
subject of this paragraph.
No Indemnified Party guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
the Indemnifying Party if the Indemnifying Party was not guilty of such
fraudulent misrepresentation.
(e) Other Indemnification. The provisions of this Section 2.05
shall be in addition to any other rights to indemnification or contribution
which an Indemnified Party may have pursuant to law, equity, contract or
otherwise.
Section 3. Miscellaneous.
3.01 Waiver. No failure on the part of either party hereto to
exercise and no delay in exercising, and no course of dealing with respect to,
any right, power or privilege under this Agreement shall operate as a waiver
thereof, nor shall any single or partial exercise of any right, power or
privilege under this Agreement preclude any other or further exercise thereof or
the exercise of any other right, power or privilege. The remedies provided
herein are cumulative and not exclusive of any remedies provided by law.
3.02 Notices. All notices, requests and other communications
provided for herein shall be given or made in writing (including, without
limitation, by telecopy) by the close of business on the day the notice is given
or delivered to the intended recipient at (a) in the case of the Company, 80-02
Kew Gardens Road, Suite 5000, Kew Gardens, NY 11415, telecopy: 718-793-4830,
attention: President, (b) in the case of the Trustee, Suite 932 Europort, P.O.
Box 777, Gibraltar, and (c) in the case of Bruce Bendell, 80-02 Kew Gardens
Road, Suite 5000, Kew Gardens, NY 11415, telecopy: 718-793-4830, attention:
Bruce Bendell; or, as to any party, at such other address as shall be designated
by such party in a notice to each other party. Except as otherwise provided in
this Agreement, all such communications shall be deemed to have been duly given
when transmitted by telecopier or personally delivered or, in the case of a
mailed notice, upon receipt, in each case given or addressed as aforesaid.
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3.03 Amendments. Except as otherwise expressly provided in this
Agreement, any provision of this Agreement may be modified or supplemented only
by an instrument in writing signed by the Company, the Trustee and Bruce Bendell
and any provision of this Agreement may be waived only by an instrument in
writing signed by the party waiving such provision.
3.04 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
3.05 Captions. The captions and section headings appearing
herein are included solely for convenience of reference and are not intended to
affect the interpretation of any provision of this Agreement.
3.06 Counterparts. This Agreement may be executed in any number
of counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
3.07 Governing Law; Submission to Jurisdiction. This Agreement
shall be governed by, and construed in accordance with, the law of the State of
New York.
3.08 Severability. If any provision hereof is invalid or
unenforceable in any jurisdiction, then, to the fullest extent permitted by
applicable law, (a) the other provisions hereof shall remain in full force and
effect in such jurisdiction in order to carry out the intentions of the parties
hereto as nearly as may be possible and (b) the invalidity or unenforceability
of any provision hereof in any jurisdiction shall not affect the validity or
enforceability of such provision hereof in any other jurisdiction.
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IN WITNESS WHEREOF, the undersigned have caused this Agreement
to be duly execute and delivered as of the date first above written.
FIDELITY HOLDINGS, INC.
By__________________________________________
Name: Doron Cohen
Title: President, Chief Executive Officer
and Treasurer
CASTLE TRUST AND MANAGEMENT
SERVICES LIMITED, as
Trustee under The Millenium Trust created
under that certain Deed of Settlement dated
October 2, 1996
By___________________________________________
Title:
---------------------------------------------
BRUCE BENDELL
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AMENDMENT NO. 1 TO CONSULTING AGREEMENT
AMENDMENT NO. 1 TO CONSULTING AGREEMENT dated as of November 7, 1995,
between:
FIDELITY HOLDINGS, INC., a corporation duly organized and validly existing
under the laws of the State of Nevada (the "Company"); and
BRUCE BENDELL, an adult having offices at 43-40 Northern Boulevard, Long
Island City, New York 11367 (the "Consultant").
The Company and the Consultant are parties to an Consulting Agreement
dated as of November 7, 1995 (as heretofore modified and supplemented and in
effect on the date hereof, the "Consulting Agreement"). The Company and the
Consultant wish to amend the Consulting Agreement in certain respects, and
accordingly, the Company and the Consultant hereby agree as follows:
Section 1. Amendments. Subject to the condition precedent set
forth in Section 2 hereof, the Consulting Agreement is hereby amended as
follows:
A. References in the Consulting Agreement to "this Agreement" (and
indirect references such as "hereunder", "hereby", "herein" and "hereof") shall
be deemed to be references to the Consulting Agreement as amended hereby.
B. Clause (b) of paragraph 3 of the Consulting Agreement is hereby amended
by (i) replacing "$.01" in the table therein with "$.10", (ii) replacing "base
salary" in the last sentence thereof with "base compensation" and (iii)
inserting the following sentence at the end thereof:
"For purposes of this clause (b), profits per common share shall be
rounded upwards, if applicable, to the nearest whole cent."
C. The second sentence of Paragraph 7 of the Consulting Agreement is
hereby amended to read in its entirety as follows:
"Nothing contained herein is intended to limit CONSULTANT'S
continuation of existing business activities nor the commencement of
new activities, provided only that such activities are conducted in
compliance with the paragraphs 10, 11 and 12."
D. Clause (a) of the first sentence of paragraph 10 of the Consulting
Agreement is hereby amended by replacing "regarding the conduit pipe" therein
with "regarding COMPANY and the business and assets of COMPANY".
<PAGE>
E. Clause (b) of the first sentence of paragraph 10 of the Consulting
Agreement is hereby amended by deleting "about the conduit pipe" therein.
F. The second sentence of paragraph 10 of the Consulting Agreement is
hereby amended by deleting "regarding the conduit pipe" therein.
G. Clause (a) of paragraph 11 of the Consulting Agreement is hereby
amended to read in its entirety as follows:
"(a) During the term of this Agreement and for a period of one (1)
year after the termination of this Agreement and any extension
thereof, CONSULTANT shall not, within such geographical areas as
COMPANY then conducts business, directly or indirectly, own, manage,
operate, control, be employed by, consult for, participate in, or be
connected in any manner with the ownership, management, operation or
control of any business that offers any products or services that
compete with the products or services offered by the Company at the
time of such termination."
H. Clause (a) of paragraph 12 of the Consulting Agreement is hereby
amended by deleting "relating to the conduit pipe business" therein.
Section 2. Condition Precedent. As provided in Section 1 above, the
amendments to the Consulting Agreement set forth in said Section 1 shall become
effective, as of the date hereof, upon the execution of this Amendment No. 1 to
Consulting Agreement by Company and Consultant.
Section 3. Miscellaneous. Except as herein provided, the Consulting
Agreement shall remain unchanged and in full force and effect. This Amendment
No. 1 to Consulting Agreement may be executed in any number of counterparts, all
of which taken together shall constitute one and the same amendatory instrument
and any of the parties hereto may execute this Amendment No. 1 to Consulting
Agreement by signing any such counterpart. This Amendment No. 1 to Consulting
Agreement shall be governed by, and construed in accordance with, the law of the
State of New York.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 1 to
Consulting Agreement to be duly executed and delivered as of the day and year
first above written.
FIDELITY HOLDINGS, INC.
By: /s/Doron Cohen
Doron Cohen, President
By: /s/Bruce Bendell
Bruce Bendell, Chairman
-3-
<PAGE>
DR. ZVI BARAK AND SARAH BARAK
I IashHafim 46
Raanana, Israel, 43724
7 August 1997
Fidelity Holdings, Inc.
80-02 Kew Gardens Rd., Suite 5000
Kew Gardens, NY 11415
Attention: Mr. Doron Cohen
Dear Mr. Cohen:
SUBJECT: BARAK AGREEMENT WITH FIDELITY HOLDINGS, INC.
Pursuant to the Master Agreement made as of the 18th day of April 1996, (the
"Master Agreement") a payment of $100,000.00 U.S. was to be paid to us on or
before August 8th, 1996. It is acknowledged that Fidelity Holdings, Inc.
(Fidelity) did not make this payment as required.
This will confirm that, subject to the provisions of this letter, we have
agreed to defer and amend the required payment provision pertaining to this
one payment of $100,000.00 U.S. which was due on or before August 8th, 1996,
as follows:
1. The principal amount is reduced to $85,000.00 following Barak payment to
Fidelity of $15,000.00 as cost share of patent infringement.
2. We have agreed to permit Fidelity to pay this sum of $85,000.00 in 12
monthly installments of principal and interest at the rate of 6% per
annum, in an agreed aggregate monthly amount of $7,315.65, the first
payment having been made July 9th, 1997, with 11 subsequent payments
payable on the first day of each month from and including August 1st,
1997 to and including June 1st, 1998, each in the amount of $7,315.65 on
account of principal and agreed interest.
The foregoing amendments do not in any way change or amend any of the other
provisions of the Master Agreement or any document executed between the
parties in connection with the closing of the transaction contemplated by the
Master Agreement. It is further expressly stipulated that if there is any
default at any time on the part of Fidelity in connection with the payment
<PAGE>
terms set out in this letter or in connection with any other provisions of the
Master Agreement or any of the other documents entered into between us in
connection with the transaction contemplated by the Master Agreement, we reserve
the right to cancel the repayment terms (including the reduction of the
principal amount) agreed to in this letter and to rely upon the obligations of
Fidelity to have made the payment of $100,000.00 U.S. on August 8th, 1996, and
to consider the non-payment of same as a further act of default under the Master
Agreement.
If you are in agreement with the terms set out in this letter, please sign and
return a duplicate copy of this letter.
Yours very truly,
/s/ Zvi Barak
Dr. Zvi Barak
/s/ Sarah Barak
Sarah Barak
We hereby agree with the terms set out in this letter.
/s/ Doron Cohen
President
Fidelity Holdings, Inc.
-2-
<PAGE>
AMENDMENT TO PLAN AND AGREEMENT OF MERGER
This is an Amendment to that certain Plan and Agreement of Merger
("Agreement of Merger") by and between Fidelity Holdings, Inc., a Nevada
Corporation ("Fidelity"), Major Automotive Group, Inc., a New York Corporation
(the "Merging Corporation"), Major Acquisition Corp., a New York Corporation
(the "Surviving Corporation") and Bruce Bendel (the "Shareholder of the
Merging Corporation").
BACKGROUND
A. The Merger Agreement was executed by all parties on or about April
21, 1997.
B. Article 1.2 of the Merger Agreement set a closing date on or
before One Hundred Twenty (120) days from the execution of the Merger
Agreement unless such time period was mutually extended.
C. The parties hereto have agreed that it is in their best interest
to mutually extend the closing date to a time and date mutually agreed upon
but in no event beyond One Hundred Twenty (120) days from the effective date
of this amendment, unless further extended by mutual consent.
NOW, THEREFORE, with the foregoing recital paragraphs incorporated
herein by this reference, and for other good and valuable consideration
acknowledged to have been exchanged and received, the parties hereto,
intending to be legally bound, hereby agree as follows:
ARTICLE 1
EXTENSION OF CLOSING DATE
The closing of the transaction contemplated by the Merger Agreement
(the "Closing") shall occur on a mutually agreed upon date at the offices of
Fidelity, which date shall be not more than One Hundred Twenty (120) days from
August 1, 1997 (the 'Extension Date"), unless mutually extended (the "Closing
Date").
<PAGE>
ARTICLE 2
SURVIVAL OF MERGER AGREEMENT TERMS
All of the terms, conditions, liabilities, limitations and
obligations set forth in the Merger Agreement, except as expressly amended in
this Agreement. shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement
effective the 1st day of August 1997.
FIDELITY HOLDINGS, INC.
ATTEST: /s/ Doron Cohen
- --------------------------- ----------------------------
Doron Cohen , President
MAJOR AUTOMOTIVE GROUP, INC.
ATTEST: /s/ Bruce Bendell
- --------------------------- ----------------------------
Bruce Bendell, President
MAJOR ACQUISITION CORP.
ATTEST: /s/ Doron Cohen
- --------------------------- ----------------------------
Doron Cohen, Vice Pres.
As to Article 2
MAJOR CHEVROLET, INC.
ATTEST: /s/ Bruce Bendell
- --------------------------- ----------------------------
Bruce Bendell, President
As to Article 2
Major Dodge, Inc.
ATTEST: /s/ Bruce Bendell
- --------------------------- ----------------------------
Bruce Bendell, President
As to Article 2
Major Subaru, Inc.
ATTEST: /s/ Bruce Bendell
- --------------------------- ----------------------------
Bruce Bendell, President
As to Article 2
Major Chrysler, Plymouth, Jeep, Eagle, Inc.
ATTEST: /s/ Bruce Bendell
- --------------------------- ----------------------------
Bruce Bendell, President
ATTEST: /s/ Bruce Bendell
- --------------------------- ----------------------------
Bruce Bendell
-2-
<PAGE>
LAW OFFICES
COOPER PERSKIE APRIL NIEDELMAN WAGENHEIM & LEVENSON
A PROFESSIONAL ASSOCIATION
1125 ATLANTIC AVENUE - 3rd FLOOR
PO BOX 1125
ATLANTIC CITY, NEW JERSEY 08404-1125
(609) 344-3161
TELECOPIER (609) 344-W39
VOICE MAIL (609) 343-7111
EXECUTIVE PLAZA 1415 ROUTE 70 EAST
2111 NEW ROAD CHERRY HILL PLAZA - SUITE 305
NORTHFIELD, NJ 08225-1836 CHERRY HILL, NJ 08034
(609) 383-1300 (609) 796-8641
TELECOPIER (609) 383-1375
211 NORTH MAIN STREET
SUITE 202
CAPE MAY COURT HOUSE. NJ 08210
(609) 465-3000
TELECOPIER (809) 465-1441
August 26, 1997
Atlantic City
File # 46,195
Doron Cohen, President
Fidelity Holdings, Inc.
80-02 Kew Gardens Road
Suite 5000
Kew Gardens, NY 11415
Bruce Bendell, President
c/o Major Automotive Group
43-40 Northern Boulevard
Long Island City, NY 11101
Re. Amendment to Plan and Agreement of Merger
Dear Gentlemen:
In accordance with my recent discussions with Doron, I have been
advised that you wish to amend the Plan and Agreement of Merger (the
"Agreement") by and between Fidelity Holdings, Inc. ("Fidelity"), Major
Automotive Group, Inc. (the "Merging Corporation"), Major Acquisition Corp.
(the "Surviving Corporation") and Bruce Bendell (the "Shareholder of the
Merging Corporation"). Specifically, subarticles 3.3.3 and 4.2, shall be
deleted in their entirety and replaced with the following:
3.3.3 Fidelity shall not have issued any new shares of stock from the
date of execution hereof through and including the Closing Date other than (a)
preferred shares to the Shareholder of the Merging Corporation pursuant to
Article 4 of this Agreement; (b) common shares in a public offering and (c)
common shares (i) pursuant to the exercise of options or warrants that become
exercisable prior to the Closing Date, (ii)
<PAGE>
Doron Cohen, President
Bruce Bendell, President
Re. Amendment to Plan and Agreement of Merger
August 26, 1997 Page 2
pursuant to the conversion of any shares of Fidelity's 1996-MAJOR Series of
Convertible Preferred Stock or (iii) ownership to which is scheduled to vest
pursuant to agreements heretofore entered into by Fidelity or any of its
subsidiaries.
4.2 Shares. The Shareholders of the Merging Corporation shall be
entitled to receive 1.8 million shares of The 1997-MAJOR Series of Convertible
Preferred Stock (the "1 997 Preferred Stock") of Fidelity. In the event that
1.8 million shares of 1997 Preferred Stock have a value on the Closing Date of
less than Six Million ($6,000,000.00) Dollars, the Shareholders of the Merging
Corporation shall be entitled to that number of shares of 1997 Preferred Stock
which have a value on the Closing Date of Six Million ($6,000,000.00) Dollars,
with any fraction of a share rounded upwards to the nearest whole number (the
"Consideration"). For purposes of this subarticle 4.2, the value assigned
to 1997 Preferred Stock shall equal the mean between the closing bid and asked
prices per share of Fidelity's common stock over the 20 trading days prior to
the Closing Date multiplied by the number of common shares of Fidelity into
which the Shares are convertible. The Consideration shall be allocated among
the Owned Corporations as set forth on the attached Exhibit "D" which is
incorporated herein by this reference.
If you are in agreement with the amendments set forth above, I would
ask that each of you execute the copy of this letter which is enclosed and
return it to me in the envelope provided.
Should you have any questions, please do not hesitate to contact me.
Thank you.
Very truly yours,
/s/ Pacifico Agnellini
-----------------------------
Pacifico S. Agnellini
We, the undersigned, in each of our respective capacities, do hereby
agree to the terms of the Amendment of the Plan and Agreement of Merger as
described above and as set forth above.
ATTEST MAJOR ACQUISITION CORP.
/s/ Robinson Markel By: /s/ Doron Cohen
- ----------------------- --------------------------------
DORON COHEN, VICE PRESIDENT
(SIGNATURES CONTINUED ON NEXT PAGE)
<PAGE>
Doron Cohen, President
Bruce Bendell, President
Re. Amendment to Plan and Agreement of Merger
August 26, 1997 Page 3
ATTEST MAJOR AUTOMOTIVE GROUP, INC.
By: /s/ BRUCE BENDELL,
--------------------------------
Bruce Bendell, PRESIDENT
ATTEST MAJOR ACQUISITION CORP.
/s/ Robinson Markel /s/ Doron Cohen
- -------------------------- --------------------------------
BY: DORON COHEN, VICE PRESIDENT
ATTEST AS To ARTICLE 2
MAJOR CHEVROLET, IN.
/s/ Robinson Markel
- -------------------------- /s/ Bruce Bendell, PRESIDENT
--------------------------------
AS To ARTICLE 2
ATTEST MAJOR DODGE, INC.
/s/ Bruce Bendell
--------------------------------
BY: BRUCE BENDELL, PRESIDENT
AS To ARTICLE 2
ATTEST MAJOR SUBARU, INC.
/s/ Robinson Markel /s/ Bruce Bendell
- -------------------------- --------------------------------
BY: BRUCE BENDELL, PRESIDENT
AS To ARTICLE 2
ATTEST MAJOR CHRYSLER, PLYMOUTH, JEEP, EAGLE, INC.
/s/ Robinson Markel /s/ Bruce Bendell
- -------------------------- --------------------------------
BY: BRUCE BENDELL, PRESIDENT
(SIGNATURES CONTINUED ON NEXT PAGE)
<PAGE>
Doron Cohen, President
Bruce Bendell, President
Re. Amendment to Plan and Agreement of Merger
August 26, 1997 Page 4
WITNESS:
/s/ Bruce Bendell
----------------------
Bruce Bendell
cc: Robert E. Salad, Esquire
Michael Bellucci, Esquire
Michael Dezorett, Esquire
Mr. Geofrey Alexander
<PAGE>
PLAN AND AGREEMENT OF MERGER
EXHIBIT "D"
Major Chevrolet, Inc. 61.0%
Major Dodge, Inc. 16.6%
Major Chrysler Plymouth Jeep Eagle, Inc. 16.6%
Major Suburu, Inc. 5.8%
<PAGE>
MEMORANDUM OF UNDERSTANDING
This memorandum of understanding, made this 9th day of September 1997
by and among Computer Business Sciences, Inc., a New York Corporation with its
principal place of business located at 80-02 Kew Gardens Road, Kew Gardens, New
York 11375 ("CBS"), Nissko Telecom Ltd., a Delaware Corporation with offices
located at 7 West 45, Street, New York, New York 10036 ("LTD") and formed by
Avraham Nissanian, an adult individual residing at 138-34 78th Drive, Flushing,
New York 11367; Yossi Koren, an adult individual residing at 124 Audley
Street, Kew Gardens, New York 11418; and Chmuel Livian, an adult individual
residing at 65 Tennis Place, Forest Hills, New York 11375 (the individuals to be
referred to as "Investors"), Fidelity Holdings, Inc. ("Fidelity"), a Nevada
Corporation with offices at 80-02 Kew Gardens Road, Kew Gardens, New York 11375;
and Robert L. Rimberg ("Rimberg") an adult individual with offices at 600
Third Avenue, New York,New York 10016
WITNESSETH THAT:
WHEREAS, a valid agreement dated March 25, 1996 exists among CBS,
Fidelity and Investors;
WHEREAS, CBS now desires to acquire LTD in a tax free reorganization
which shall include Nissko Telecom LP. ("L.P.") in which LTD is the general
partner;
WHEREAS, LTD desires to be acquired by CBS in a tax free
reorganization;
WHEREAS, Investors agree to the transactions hereby as part of a tax
free reorganization;
NOW THEREFORE, intending to be legally bound, and in consideration of
the mutual promises and covenants confined herein, the parties have agreed as
follows:
CONDITION PRECEDENT
This Memorandum of Understanding and any subsequent final agreement
between the parties shall be null and void if the merger of Major Automotive,
Inc. into Fidelity is not completed.
<PAGE>
LEGAL ENTITIES AND OWNERSHIP
1. Nissko Telecom Associates ("Associates") is a general partnership
with CBS and L.P. as the only partners.
2. Nissko Telecom Associates was created under the agreement dated March
25, 1996 and attached hereto as Exhibit "A".
3. LP owns 55% of Nissko Telecom Associates and CBS owns 45% of Nissko
Telecom Associates.
4. Investors own 55% of LTD and CBS owns 45% of LTD.
5. Investors and Robert L. Rimberg have a 54% limited partnership
interest in LP.
6. LTD is the general partner of LP with a 1% ownership interest.
PARTNERSHIPS WITH ASSOCIATES
7. A copy of the Nissko-Nassim general partnership agreement between
Nissko Telecom Associates and Dr. Roland Nassim and dated October
22, 1996 is annexed hereto as Exhibit "B".
8. A copy of the Thai Tel Communication general partnership agreement
between Nissko Telecom Associates and Wentworth and Stone, Inc. and
dated October 17, 1996 is annexed hereto as Exhibit "C".
TRANSACTIONS TO BE COMPLETED
9. A. It is acknowledged and agreed that there are valid business
purposes for L.P. to be dissolved and accordingly, the assets and
liabilities held by L.P. shall be transferred to LTD in a
transaction which shall equal as a tax free event.
<PAGE>
Given the transactions that will be occurring involving Major
Automotive and Fidelity, the parties involved in financing those
transactions have required that L.P. be consolidated into LTD.
Accordingly, this consolidation will take place as soon as
practicable after the execution of a final agreement between the
parties hereto.
B. As part and parcel of the transaction to be completed, CBS shall
control L.P., Associates Nissko-Nassim and Thai-Tel
Communications.
C. As consideration for the merger of LTD into CBS, CBS shall cause
shares of common stock in Fidelity to be issued to the
shareholders of LTD in a tax free reorganization under section
368 (a) of the Internal Revenue Code of 1986 which shall include
the following;
(i) Upon execution of this Memorandum of Understanding, 520,750 shares
of common stock in Fidelity that has been paid for by the Investors and shall be
distributed as follows:
Yossi Koren or his designee: 173,583
Chmuel Livian or his designee: 173,584
Avraham Nissanian or his designee: 173,583
and 2,250 shares that have been paid for by Rimberg shall be distributed upon
execution of this Agreement to Rimberg during the period of two years that begin
on the date of the signing of a formal Agreement covering the matters in this
memorandum of understanding, none of the above shares shall be transferred in
any manner, otherwise than pursuant to an available exemption from
3
<PAGE>
registration under the Securities Act of 1933 as amended. Any transfers made in
compliance with this restriction shall made subject to the voting rights of
Bruce Bendell under the proxy referred to in paragraph 14 of this memorandum of
understanding. Certificates representing the above shares may be endorsed with
an appropriate legend reflecting the above restriction. These shares are from
exercising a portion of the warrants referred to in the March 25, 1996
agreement as "1996-A Warrants";
(ii) Upon execution of the final agreement among the parties,
Investors, or their designee, shall receive 772,500 shares of common stock in
Fidelity as follows:
Yossi Koren or his designee: 257,500
Chmuel Livian or his designee: 257,500
Avraham Nissanian or his designee: 257,500
and Rimberg, or his designee, shall receive 27,500 shares of common stock in
Fidelity, the restrictions applicable to the shares in clause (i) of this
paragraph 9.C shall also be applicable to the shares in this clause (ii);
(iii) Upon execution of a final agreement among the parties, Investors,
or their designee, shall each have the right to purchase up to one third of
206,750 warrants of the common stock of Fidelity at $1.25 per share as follows:
Yossi Koren or his designee: up to 68,917 warrants
Chmuel Livian or his designee: up to 68,917 warrants
Avraham Nisanian or his designee: up to 68,916 warrants
and Rimberg shall have the right to purchase up to 20,250 warrants of the
common stock of Fidelity at $1.25 per share.
4
<PAGE>
These warrants are the remainder of the warrants referred to in the March 15,
1996 agreement as "1996-A Warrants". All warrants, unless all monies therefor
are paid to Rimberg & Associates, P.C., as escrow agent, shall automatically
expire 30 days after written notification that the Fidelity SB-2 is effective.
The monies for the warrants shall be held in escrow and shall not be paid to
Fidelity until such time as the merger of Major Automotive into Fidelity is
consummated. If, after 180 days following payment for the warrants, the merger
of Major Automotive into Fidelity is not consummated, Investors and Rimberg
shall have the absolute right to receive all monies paid for the warrants
without further delay. The Investors shall have the right to exercise the
warrants in their sole discretion. Notwithstanding the foregoing, if the
Investors do not exercise the warrants, this will not otherwise affect the
transactions contemplated hereby.
(iv) Notwithstanding any provision contained herein, it is agreed that prior to
the issuance of the common stock as provided in 9.C.2 there shall be a full
accounting if any money is owed by any party to any other party in this
Agreement and such monies shall be paid before the issuance of any of the stock.
NISSKO JEWELRY TRADING
10. On various dates and in various agreements, Investors and Nissko
Jewelry Trading, Inc., acting as guarantor and/or principal, executed agreements
that were for the benefit of LTD, L.P. and/or Fidelity. Upon execution of this
Memorandum of Understanding, Fidelity shall cause to be placed into escrow with
Rimberg 200,000 shares of common stock in Fidelity as (the "Escrowed Shares)
security for Nissko Jewelry Trading, Inc. Should any attempt be made to collect
any money against Nissko Jewelry Trading, Inc., or if any suit, action or
proceeding of any nature is commenced against Nissko Jewelry Trading, Inc.,
under the various agreements, the Escrowed Shares shall secure Nissko Jewelry
Trading, Inc.
5
<PAGE>
Notwithstanding the foregoing, Fidelity and CBS agrees to hold
harmless, indemnify and defend Nissko Jewelry Trading, Inc., from any and all
lawsuits, claims, proceedings, and action that may arise out of the agreements
as described above.
INVESTOR' OBLIGATIONS
11. Investors represent that Avraham Rachminov has agreed to enter into
a partnership with CBS for Moscow, Russia regarding telephony computer
equipment. Investors further represent that Avraham Rachminov has agreed to lend
$300,000 for his participation in the partnership with CBS. As security for the
loan of Avraham Rachminov, Investors shall place in escrow with Rimberg &
Associates, P.C. 25,000 shares of Fidelity's stock and Fidelity shall cause
Doron Cohen and Bruce Bendell to place in escrow with Rimberg & Associates, P.C.
50,000 shares of Fidelity's stock.
INDEMNIFICATION
12. To the fullest extent permitted by law, Fidelity and CBS shall
indemnify, defend, protect, and hold harmless Investors and Rimberg from and
against all liabilities, damages, loses, claims, demands, lawsuits, proceedings,
arbitrations, and actions of any nature whatsoever connected with L.P. and/or
LTD.
AGREEMENT DATED MARCH 25, 1996
13. At such time as the final agreement between the parties is executed
or the completion of the merger of Major Automotive, Inc. into Fidelity,
whichever is later, the Agreement dated March 25, 1996 and attached as Exhibit
"D" shall be deemed null and void and all parties shall be released of any and
all obligations, rights by investors to warrants and any stock held as
collateral/security pursuant to the March 25, 1996 agreement shall be released
that may have arisen thereunder.
6
<PAGE>
PROXY
14. Investors hereby agree that they shall give Bruce Bendell a proxy
to vote up to 500,000 shares of the stock being issued under this Agreement for
a period of not less than two (2) years from the execution of this Agreement.
FINAL AGREEMENT
15. This Memorandum of Understanding shall be replaced within thirty
(30) days of its execution by final agreement executed by all parties in
interest.
IN WITNESS WHEREOF the parties have hereunto executed this document the
day and year first above written
Attest: Computer Business Science, Inc.
By: /s/ Doron Cohen
- ------------------------ ----------------------------------------
Doron Cohen
By: /s/ Avraham Nissanian
- ------------------------ ----------------------------------------
Attest: Avraham Nissanian
By: /s/ Yossi Korne
- ------------------------ ----------------------------------------
Attest: Yossi Koren
By: /s/ Chmuel Livian
- ------------------------ ----------------------------------------
Attest: Chmuel Livian
7
<PAGE>
Fidelity Holdings, Inc.
By: /s/ Doron Cohen
- ------------------------ ----------------------------------------
Attest: Doron Cohen
By: /s/ Robert L. Rimberg
- ------------------------ ----------------------------------------
Robert L. Rimberg
Attest: Nissko Telecom, L.P.
By: Nissko Telecom Ltd.
By: /s/ Avraham Nissarian
- ------------------------ ----------------------------------------
Avraham Nissarian
Attest: Nissko Telecom, Ltd.
By: /s/ Avraham Nissarian
- ------------------------ ----------------------------------------
Avraham Nissarian
8
<PAGE>
Fidelity Holdings, Inc.
80-02 Kew Gardens Road
Kew Gardens, NY 11415
(718) 520-6500
Fax (718) 793-4841
September 18, 1997
To: The Shareholders of Lichtenberg Robbins Buick, Inc.
d/b/a Lichtenberg Buick,
and Lichtenberg Motors Inc. d/b/a Lichtenberg Mazda,
listed on the signature pages hereof:
Re: Proposal by FIDELITY HOLDINGS, INC. or one of its wholly-owned
subsidiaries ("FDHG") to purchase all of the issued and
outstanding voting capital stock of Lichtenberg Buick and
Lichtenberg Mazda (collectively, the "Dealer")
Gentlemen:
1. This letter (the "Letter of Intent" or "LOI") shall serve to
confirm our proposed transaction (the "Transaction" regarding the purchase by
Fidelity Holdings, Inc., or one of its wholly-owned subsidiaries and the sale
by all shareholders of the Dealer (the "Sellers") of all of his, its or their
shares of Common Stock of Dealer (herein referred to as the "Common Stock" or
the "Shares"). The purchase price for all of the shares of Common Stock of
Dealer shall be equal to 8X pro forma after tax earnings of Dealer for the 12
months ended December 31, 1997 (determined as if the Dealer was a tax paying
"C" corporation for federal and state tax purposes) determined by applying
generally accepted accounting principles ("GAAP") as certified by Dealer's
independent accountants, subject to adjustments for normalization of salaries
and perquisites, rents and other extraordinary expenses of operations of the
Dealer, and adjustments for any reserves for chargebacks, and used car
reserves, payable seventy-five (75) percent in the stock of FDHG and
twenty-five (25) percent in cash at the Closing, subject to appropriate
reserves for post-closing purchase price adjustments. In the event that,
pursuant to the above formula, the purchase price is less than $1.8 million,
either FDHG or the Sellers shall have the right to terminate the Transaction.
In no event will the cash portion of the purchase price be less than $500,000.
The purchase price shall be allocated between Lichtenberg Buick and
Lichtenberg Mazda as agreed by the parties prior to Closing.
2. The market value of the FDHG Common Stock delivered to the
Stockholders would be based upon the average of the closing sale prices of
FDHG Common Stock on NASDAQ, as reported in the Wall Street Journal, during
the twenty (20) trading days ending five (5) full trading days prior to the
closing of the Transaction (the "Closing"). This purchase price assumes that
the Net Working Capital (as hereinafter defined) of Dealer as of the Closing
is not less than an amount mutually agreed upon by FDHG and the Sellers (which
amount shall be set forth in the Agreement, as hereinafter defined), and that
there is no material decrease in the current fiscal year in revenues or
operating earnings as compared to the prior year. For purposes of this Letter
of Intent, "Net Working Capital" shall mean the net working capital of Dealer
(i.e., total current assets less total current liabilities), further reduced
by any long-term debt of Dealer. The purchase price may be adjusted downward
in the event that any of such assumptions proves incorrect.
<PAGE>
3. Seventy-five (75) percent of the purchase price, consisting of
two-thirds of the Shares and all of the cash, shall be payable at Closing with
the remainder of the Shares to be held in escrow by counsel for Sellers
pending determination of the purchase price, inclusive of any post-closing
adjustments, as contemplated under paragraph 2 hereof. Once such determination
has been completed, (a) the Sellers shall be obligated to repay 25% of any
downward adjustment in the purchase price in cash, (b) stock representing 5%
of the purchase price shall remain in escrow, (c) the balance of the purchase
price, as adjusted, shall be released from escrow and paid to the Sellers, and
(d) any remaining Shares shall be returned to FDHG. The remaining escrowed
Shares shall continue in escrow until the first anniversary of the Closing as
a reserve against any undisclosed liabilities of the Dealer.
4. The Sellers acknowledge that the Shares issued will not be
registered with the SEC for resale and that they will be acquiring the Shares
for investment purposes and not with any present intent to sell, pledge or
otherwise dispose of the Shares. As such, the Shares will be subject to
restrictions on their transfer and, in all likelihood, will not be saleable
for at least one (1) year from the date of Closing. The Company will attempt
to make available to the Sellers piggy back registration rights for the
Shares, subject to the approval of the underwriter in any underwritten
offering of the Company's common stock.
5. As is customary in transactions of this kind, consummation of the
proposed purchase is subject to the satisfactory completion of a due diligence
investigation and will be conditioned upon several factors, including but not
limited to the following:
A. Preparation and execution of a definitive stock purchase
agreement (the "Agreement") and other closing documents, which Agreement and
other closing documents shall contain the terms and provisions expressed
herein, together with such further terms and conditions as are customary in a
transaction as contemplated. In the Agreement, the Stockholder will make
certain representations, warranties and covenants as to the title to the
assets of the Companies, collectability of receivables, inventories (new and
used), charge backs, warranty claims, absence of undisclosed litigation,
claims against or liabilities of the Companies, existence of insurance
coverage, correctness of the financial statements, absence of any material
adverse change in the Companies' business or financial condition since
December 31, 1996, and as of the date of Closing, and any other
representations, warranties and covenants as are customary in a transaction as
contemplated. These representations, warranties and covenants will survive the
Closing for a period of two years, except with respect to (i) specifically
identified items and (ii) additional income tax liabilities, which will
survive the Closing as mutually agreed or through the term of the statutes for
the applicable income tax filings, respectively.
B. The acquisition by FDHG of the Shares must represent one
hundred percent (100%) of the issued and outstanding Common Stock of Dealer at
the Closing, free and clear of any and all liens, claims or encumbrances of
any nature whatsoever.
C. The cancellation at or prior to the Closing, of any stock
options of Dealer outstanding, at no cost to FDHG.
<PAGE>
D. Letters of resignation from all of Dealer's directors,
effective as of the Closing.
E. Certain key employees (mutually agreed upon by FDHG and
Sellers), shall have agreed to remain in the employ of the Dealer. Peter
Lichtenberg's employment agreement will be for a term of five (5) years from the
date of Closing with base compensation of $150,000 per annum plus profit
participation incentives. The scope and duration of the restrictive covenants
contained in Peter Lichtenberg's agreement shall be dependent upon whether or
not the Company offers him continued employment on at least comparable terms at
the expiration of his employment agreement. If he is offered such employment but
elects not to accept it, he shall be prohibited from directly or indirectly
participating in the sale of new or used cars within the five Boroughs of New
York City for a period of three years following the termination of his
employment and shall be prohibited from servicing or soliciting any customers of
Dealer or hiring any employee of Dealer for a period of three years following
termination of his employment. If the company does not offer Peter Lichtenberg
continued employment on the basis contemplated above, the scope of the foregoing
restriction on competition shall be reduced to the Boroughs of Queens and
Brooklyn.
F. All liens and security interests securing debts of Dealer
which have been paid in full prior to or at the Closing shall have been fully
released to the reasonable satisfaction of FDHG and all Uniform Commercial
Code financing statements covering such debts shall have been terminated.
G. All obligations of Dealer which are not being retired or
satisfied by the Sellers prior to or at the Closing will be modified in such a
manner that their covenants, repayment schedules, and other provisions will be
upon terms reasonably satisfactory to FDHG. If the Sellers are personal
guarantors of any of such obligations and the Company is not successful in
eliminating such guarantees, the Company will indemnify the Sellers against
any damages they suffer arising out of or related to such guarantees.
H. FDHG shall have received from counsel for Dealer and the
Sellers an opinion in scope and substance reasonably satisfactory to FDHG and
its counsel dated as of the date of Closing.
I. FDHG shall be satisfied in its sole discretion with the
results of its continuing legal, financial and business due diligence
investigations of Dealer.
J. No unsatisfied liens for the failure to pay taxes of any
nature whatsoever shall exist against Dealer, or against or in any way
affecting any of the Shares.
K. All officers and directors of Dealer and each of the
Sellers shall have repaid in full all debts or other obligations, if any, owed
to Dealer at or prior to the Closing. Obligations of Dealer, if any, owed to
Sellers will be assumed by FDHG or renegotiated at closing.
L. No material adverse change, as determined in FDHG's sole
discretion, shall have occurred in Dealer's business or its future business
prospects.
<PAGE>
M. No customer or customers representing a significant
amount in the aggregate of Dealer's business shall have materially curtailed
or terminated its or their relationship with Dealer.
N. FDHG shall have received from Dealer audited balance
sheets, income statements and statements of cash flows for the years ended
December 31, 1995 and December 31, 1996, unless FDHG's independent auditors
determine that, for SEC filing purposes, audited statements of Dealer are
required, in which event the historical financial statements of the Dealer
must, in the opinion of FDHG's independent public accountants, be suitable or
readily adaptable for incorporation in the registration statements,
prospectuses and annual reports to be filed by FDHG with the Securities and
Exchange Commission ("SEC") under applicable federal securities laws and
regulations.
O. Jeffrey Lichtenberg shall have covenanted that he will
not, for a period of two (2) years from the date of Closing (i) compete within
the five Boroughs of New York City, (ii) service or solicit any customers of
Dealer, or (iii) recruit any employee of Dealer.
P. Since December 31, 1996, Dealer shall have made no
dividend, consulting or other payment to the Sellers except for salaries (not
to exceed current compensation) approximately $72,000 in one-time bonuses and
distributions to cover their personal federal and state income obligations
arising due to the Sub-Chapter "S" status of Dealer.
Q. Dealer shall be required to deliver to FDHG the financial
and other information listed on Exhibit "A" hereto on an monthly basis from
the date of execution of this Letter of Intent until the date of Closing.
R. Sellers shall have assumed and/or discharged all deferred
taxes of Dealer.
S. Sellers shall take all necessary actions, including
joining in the required election, so that FDHG may obtain a stepped-up basis
in all of the assets of Dealer (i.e., a successful Section 338(h)(10)
election, no cash-to-accrual liability to FDHG or Dealer shall be created upon
the sale of the stock, and all deferred taxes on the books of Dealer shall
have been eliminated). The Company shall reimburse (as additional purchase
price) the Sellers in cash on any after-tax basis for any additional taxes
payable by the Sellers in connection with this Transaction as a result of such
Section 338(h)(10) election.
T. The Transaction shall have received all necessary
approval of shareholders and directors of FDHG (or the purchasing entity, if
not FDHG) and the Sellers.
<PAGE>
U. FDHG shall have successfully completed its contemplated
public offering of securities and, in connection therewith, shall have
received net proceeds therefrom of a minimum of $6.9 million.
V. Appropriate arrangements for all premises contemplated to
be utilized by Dealer in its operations following the Closing shall have been
entered into on terms satisfactory to FDHG and sellers.
6. Immediately upon your acceptance of this Letter of Intent, our
counsel shall be instructed to prepare the Agreement, and Sellers shall cause
Dealer to provide to FDHG and its designated representatives complete access
at the offices of Dealer's accountants to all the books, records and documents
(financial and otherwise) of Dealer, and to further cause the directors,
officers and employees of Dealer to cooperate with and assist FDHG and its
representatives in conducting their examination of Dealer. In connection
therewith, FDHG agrees not to contact any lender, customer, or other person
associated in business with Dealer without first obtaining the consent of
Dealer. Sellers will permit representatives of FDHG to have access at
reasonable times, and in a manner so as not to interfere with the normal
business operations of Dealer, to the headquarters office of Dealer.
7. During FDHG's on-site investigation of Dealer, FDHG shall not
discuss any aspects of the operation of Dealer with any employee of Dealer,
and FDHG shall direct all requests for information and material only through
Mr. Peter Lichtenberg or his designated representatives, unless otherwise
agreed to by FDHG and the Dealer. Furthermore, and in addition to the
provisions above, Dealer shall arrange with FDHG a mutually agreeable time and
place at which FDHG may conduct interviews in a format and covering subjects
reasonably acceptable to Dealer with key customers and employees of Dealer
mutually agreed to by FDHG and the Sellers.
8. The Agreement shall specify a closing date, which may be extended
to March 30, 1998 by FDHG or to a later day by the mutual written consent of
all the parties, contingent, of course, upon any required approvals of
manufacturers, governmental authorities or agencies, and all other
contingencies provided herein. We would like the Agreement to be executed no
later than October 31, 1997, and the final closing and consummation of the
transactions contemplated herein and therein to occur on or before January 31,
1998.
9. Effective upon execution of this Letter of Intent, the Sellers
will cause Dealer to:
A. carry on its business in substantially the same manner as
heretofore and not introduce any material new method of management, operation
or accounting;
B. maintain its properties, facilities and equipment and
other assets in as good working order and condition as at present, ordinary
wear and tear excepted;
C. perform all its material obligations under debt and lease
instruments and other agreements relating to or affecting its assets,
properties, equipment and rights;
<PAGE>
D. subject to paragraph 5.V. hereof, maintain present debt
and lease instruments and not enter into new or amended debt or lease
instruments other than in the ordinary course of business, without the
knowledge and consent of United;
E. keep in full force and effect present insurance policies
or other comparable insurance coverage;
F. use its best efforts to maintain and preserve its
business organization intact, retain its present employees and maintain its
relationship with suppliers, customers and others having business relations
with the Dealer;
G. not effect any change in the capital structure of the
organizations, including, but not limited to, the issuance of any option,
warrant, call, conversion right or commitment of any kind with respect to the
Dealer's capital stock or the purchase or other reacquisition of any
outstanding shares for treasury stock;
H. not materially increase present salaries and commission
levels for all officers, directors, employees and agents;
I. prohibit expenditures outside the normal course of
business, and prohibit capital expenditures in excess of $10,000 per
expenditure or $50,000 in the aggregate without the prior approval of FDHG;
J. maintain compliance with all permits, laws, rules and
regulations, consent order, etc.;
K. maintain its present agreements with manufacturers and
perform according to the terms of such agreements; and
L. not, without the knowledge and consent of FDHG, declare
any dividends nor pay out extraordinary bonuses, fees, commissions or any
other unusual distributions to any Seller, directors, management or other
personnel between the date of the Letter of Intent and the Closing.
10. Each party shall bear its own fees and expenses, including any
investment banking fees. Each party represents and warrants to the others that
they have not utilized the services of any broker in connection with the
transactions contemplated by this Agreement and that such parties shall not be
liable for any fees or expenses due or payable to any broker by reason of any
such transactions.
<PAGE>
11. In consideration of the substantial expenditures of time, effort
and money to be undertaken by FDHG in connection with the preparation and
execution of the Agreement and the various reviews, investigations and
verifications referred to above, Sellers and Dealer shall hereby undertake and
agree (i) that during the term of this Letter of Intent, Sellers and Dealer,
neither individually or collectively, shall enter into or conduct any
discussions with any other person for the purchase of any of the Shares or any
of Dealer's assets (except for acquisition or disposition of assets in the
ordinary course of business as permitted hereby, and (ii) individually and
collectively, to negotiate in good faith in an attempt to successfully
conclude the Transaction. In addition, pending execution and delivery of the
Agreement (or the earlier termination of this Letter of Intent), Dealer will
not and will not permit its representatives to solicit or encourage (including
by way of furnishing any non-public information concerning Dealer's business,
properties or assets) any acquisition proposal and will terminate all
negotiations relating to an acquisition proposal that may exist as of the date
of this Letter of Intent. In the event an acquisition proposal is received,
Dealer shall promptly notify FDHG. As used in this Letter of Intent,
"acquisition proposal" means any proposal for a merger or other business
combination involving Dealer or for the acquisition of an equity interest in,
or a substantial portion of the assets of, Dealer other than pursuant to the
Transaction.
12. Dealer and Sellers each agree that he, she or it will not make
any public disclosure of this Letter of Intent or the execution of the
Agreement without FDHG's prior approval. Prior to issuing any press release or
public statement concerning the Transaction, a copy shall be made available to
the other parties for their comments. If the proposed Transaction is not
consummated for any reason whatsoever, the respective parties hereto shall
keep confidential any information (unless ascertainable from public or
published information or trade sources) concerning the business or operations
of the parties hereto.
13. FDHG will hold and will cause its employees, representatives,
consultants and advisors to hold in strict confidence, unless compelled to
disclose by judicial or administrative process, or by other requirements of
law, all documents and information concerning Dealer to FDHG in connection
with the Transaction (except to the extent that such information can be shown
to have been (a) previously known by FDHG and where the disclosure of which is
not in violation of an obligation of FDHG, (b) in the public domain through no
fault of FDHG, or (c) later lawfully acquired by FDHG from other sources
unless FDHG knew such information was obtained in violation of an agreement of
confidentiality) and will not release or disclose such information to any
other person, except its auditors, attorneys, financial advisors and other
consultants and advisors in connection with the Agreement (it being understood
that such persons shall be informed by FDHG of the confidential nature of such
information and shall be directed by FDHG to treat such information
confidentially).
14. It is acknowledged that, between the date hereof and the
execution and delivery of the Agreement, the Transaction is subject, as to
structure only, to the parties' reasonable satisfaction with respect to the
corporate and tax consequences thereof, including but not limited to the
issues contemplated in Paragraph 5.S hereof. While it is not the parties'
intention to renegotiate the financial terms of the Transaction, as described
in this Memorandum of Agreement, the parties merely wish to reserve their
right to be reasonably satisfied that the structure of the Transaction will
effectuate the intentions of the parties hereto without material adverse
consequences to them from a corporate or legal point of view. In connection
therewith, at the election of FDHG, the parties will use their best efforts to
restructure the Transaction as a purchase of assets rather than stock.
<PAGE>
15. It is, of course, understood that the respective rights and
obligations of Sellers and FDHG remain to be defined in the Agreement into
which this Letter of Intent and all prior discussions shall merge; provided
however, that the respective obligations of the Sellers and FDHG described in
paragraphs 7, 8 and 10-14 hereof shall be binding upon each, respectively,
when this Letter of Intent is executed and delivered to FDHG.
If the foregoing meets with your approval, you should each execute
and return a copy of this Letter of Intent, whereupon this letter shall
constitute a Letter of Intent between FDHG and the Sellers in accordance with
the terms and conditions set forth herein. This letter of Intent may be
executed in one or more counterparts, each of which shall be deemed an
original but all of which together shall constitute one and the same
instrument. A facsimile signature by any Party on a counterpart of this Letter
of Intent shall be binding and effective for all purposes. Such party shall,
however, subsequently deliver to the other party an original executed copy of
this Letter of Intent. Whether or not the Transaction is consummated, each
Party shall pay their own expenses in connection therewith. Unless otherwise
agreed to in writing by the FDHG, each of the Sellers and Dealer, this Letter
of Intent will terminate in accordance with its own terms if the Agreement is
not executed on or before October 31, 1997.
THIS OFFER MADE BY FDHG IN THIS LETTER OF INTENT SHALL REMAIN OPEN
UNTIL 5:00 P.M. SEPTEMBER 19, 1997, AT WHICH TIME IF EXECUTED SIGNATURE PAGES OF
THIS LETTER OF INTENT HAVE NOT BEEN DELIVERED BY PERSONS REPRESENTING ONE
HUNDRED PERCENT (100%) OF THE ISSUED AND OUTSTANDING COMMON STOCK, ALL OFFERS
AND AGREEMENTS MADE BY FDHG HEREIN SHALL BECOME IMMEDIATELY NULL AND VOID
UNLESS AN AGREEMENT TO THE CONTRARY IS EVIDENCED IN WRITING BY FDHG.
Very truly yours,
FIDELITY HOLDINGS, INC.
By: /s/ Doron Cohen
------------------------
Name: Doron Cohen
Title: President
ACCEPTED AND AGREED THIS ____ DAY OF SEPTEMBER 1997.
LICHTENBERG BUICK
By: /s/ Peter Lichtenberg
--------------------------------
Name: Peter Lichtenberg
Title: President
LICHTENBERG MAZDA
By: /s/ Peter Lichtenberg
--------------------------------
Name: Peter Lichtenberg
Title:President
/s/ Peter Lichtenberg
- --------------------------------
PETER LICHTENBERG, Seller
/s/ Jeffrey Lichtenberg
- --------------------------------
JEFFREY LICHTENBERG, Seller
<PAGE>
Ronald Shapss Corporate Services, Inc.
Mergers and Acquisitions
75 Montebello Road
Suffern, NY 10901-3746
Phone (914) 368-3449
Fax (914) 368-3432
February 18, 1997
Mr. Jeffrey Alexander
Fidelity Holdings, Inc.
80-02 Kew Gardens Rd., #5000
Kew Gardens, NY 11415
Dear Jeff:
The following represents our understanding of terms and conditions
for my consulting with Fidelity Holdings/Canterbury.
1. Upon execution of an agreement. Fidelity/Canterbury will sell to
Shapss, for the price of $ 0.01 per share, 50,000 shares of Fidelity and, at
no cost to Shapss, 150,000 options to purchase an additional 150,000 shares at
Four and One Half (4 1/2 ) Dollars per share, The stock options will vest as
follows: 50,000 after 90 days; 100,000 12 months thereafter. The parties
recognize the need and agree to make any necessary registrations as required
by law. If for any reason Fidelity is unable to issue said options, an amount
equal to the value of said options will be paid to Shapss in either stock or
cash at the Company's choice.
2. Six months from the date of signing our agreement if the parties
mutually agree to proceed, Fidelity shall sell to Shapss, for the price of
$0.01 per share, an additional 100,000 shares. If the parties elect not to
proceed, Shapss shall retain his 50,000 shares and 50,000 options. All shares
will have the right to "piggyback" any subsequent public offering subject to
normal restrictions imposed by the underwriters. The remaining 100,000 options
will not vest and shall revert back to Fidelity.
Fidelity will pay all reasonable business, travel and entertainment
expenses of Shapss to offset business expenses incurred related to his
fulfilling the provisions hereof.
For discussed equity participation, Shapss will perform the
following:
1) Assist Fidelity with viable merger targets and financial institutions to
accomplish the growth strategy of the Company.
<PAGE>
2) Provide follow-up assistance via phone, visits and in writing as directed
by Fidelity. Fidelity would expect approximately 50% of Shapss time during the
term of this agreement. The term of the agreement shall be six months. If
paragraph 2 is exercised, it shall be for an additional term of twelve (12)
months.
3) Assist Fidelity in understanding the consolidation concept and aiding in
the preparation of business plan, documentation, meetings and presentations.
4) Provide advice and help in drafting of documents for the Company.
5) Shapss will not transfer any rights hereunder other than to family members
without the prior approval of Fidelity.
If this letter accurately outlines our understanding, we may either enter into
a formal Agreement or an officer of Fidelity may execute this letter as our
understanding. Alternatively, kindly make any necessary changes that reflect
our discussion and we will make the appropriate modifications.
Yours truly,
/s/ Ronald Shapss
- -----------------------
RONALD I. SHAPSS
Agreed and Accepted
this 27th day of February, 1997
By: /s/Bruce Bendell
- --------------------------
Bruce Bendell
Title COB
<PAGE>
Marine Midland Bank
Member HSBC Group
RETAIL & WHOLESALE DEALER'S AGREEMENT
<PAGE>
RETAIL & WHOLESALE DEALER'S AGREEMENT
This Dealer's Agreement is entered into this 30th day of March, 1995
between Marine Midland Bank ("the Bank") and the dealer ("Dealer") whose name
and address are set forth on the last page of this Agreement. The Bank and
Dealer hereby agrees as follows:
RETAIL PROGRAM
1. Purchase of Retail Contracts. The Bank may purchase from Dealer
retail installment contracts, conditional sales contracts, security agreements
or other documents (collectively "Contracts") designated by the Bank as
eligible for purchase hereunder. Each of the Contracts represents the
indebtedness of a customer ("Customer") of the Dealer with respect to all or
part of the purchase price of a new or used motor vehicle ("Contract Vehicle")
purchased by the Customer from the Dealer. All purchases of Contracts will be
made on a nonrecourse basis except as provided in a Supplementary Dealer's
Agreement applying to a specific Contract, or as provided in Section 10 or
Section 11 below. The Bank will purchase a Contract only after the Contract
has been accepted in accordance with the procedures described in Sections 2
and 3 below. The Bank's purchase of Contracts shall include the purchase and
assignment to the Bank of all security interests and liens securing the
payment of the Contracts together with all guarantees and other documents
supporting the payment of the Contracts.
2. Credit Application. When a Dealer wishes the Bank to consider the
purchase of a Contract, the Dealer will submit to the Bank a Customer credit
application ("Credit Application") in a form and containing the information
concerning Customer as specified by the Bank. Credit Applications shall be
submitted by facsimile transmission or other means acceptable to the Bank.
Following receipt and review by the Bank of any Credit Application, the Bank
will notify Dealer whether the Bank has accepted or rejected the Credit
Application and in the case of a rejected Credit Application will specify the
basis of that rejection. The Dealer will make no representation whatsoever
regarding the Bank's acceptance or rejection of any Credit Application except
that following the Bank's advice to Dealer of the Bank's decision to accept
the Credit. Application, the Dealer may so advise the Customer.
3. Retail Contract Submission. Following acceptance by the Bank of
the related Credit Application, the Dealer shall submit to the Bank with
respect to each Contract offered by Dealer for purchase hereunder, the
following:
a. A completed Contract signed by the Customer and endorsed
by an authorized representative or officer of the Dealer containing the terms
and provisions specified by the Bank.
<PAGE>
b. Copies of all documents which shall have been submitted
by Dealer for filing and recording as necessary with the appropriate
government agency, required under the Uniform Commercial Code, certificate of
title statutes and other applicable laws to convey to the Bank the Contract,
and/or to perfect a valid and enforceable first priority security interest in
the related Contract Vehicle in favor of the Bank.
If the Contract arises from the sale to a Customer of a new
motor vehicle, a copy of the invoice reflecting the sale of the Contract
Vehicle to the Dealer, and if the Contract arises from the sale to Customer of
a used motor vehicle, such evidence as the Bank may request reflecting the
sale of the Contract Vehicle to the Dealer.
d. Documentation describing the nature and Dealer's cost of
all accessories and other items installed by the Dealer in the Contract
Vehicle.
e. Copies of all service contracts, extended warranty
policies or other insurance policies, if any, issued with respect to the
Contract Vehicle.
f. Any other documents, information and/or verifications
which are requested by the Bank.
Following its receipt and review of the foregoing documents, the Bank will
purchase the Contract if the documents are in a form and substance
satisfactory to the Bank and if they comply with the credit consideration and
contract eligibility requirements that the Bank may take into account in the
evaluation of the Contract. The purchase will be made by remitting to the
Dealer as provided in Section 5 below, the purchase price for the Contract.
The purchase price for any Contract purchased by the Bank shall be the "total
amount financed" or other similar amount as determined by the Bank for the
Contract.
4. Insurance, Service Contracts, and Dealer Installed Options. The
"total amount financed" or other similar amount described in any Contract
purchased by the Bank under the terms of this Agreement may include, with the
Bank's prior approval, the price of all Dealer installed accessories and
options and other items sold by Dealer in conjunction with the related
Contract Vehicle, including but not limited to credit life and disability
insurance, and mechanical breakdown protection contracts and service
contracts, in each case with terms and issued by a firm satisfactory to the
Bank, and subject to cancellation by the Bank if the Customer is in default
under the Contract or the Contract is for any reason terminated. The Bank may
limit the amount of any accessories, options and other items that may be
financed under the Contract.
5. Dealer Payments. The Bank will pay for Contracts purchased
hereunder upon its determination that the Contracts and additional
documentation conform with the Bank's requirements. If the Bank determines
that the documents fail to satisfy the Bank's requirements or if the Bank
otherwise determines not to complete the purchase, then the documents will be
returned to Dealer and no payments will be made.
6. Dealer Finance Participation. Contracts purchased by the Bank
under the terms of this Agreement must bear interest at a rate per annum
("Contract Rate") equal to or greater than the rate per annum specified by the
Bank as the minimum acceptable rate ("Buy Rate") for Contracts with similar
terms, payment schedules and other credit characteristics. Subject to
applicable usury limits, the Dealer may enter into Contracts having Contract
Rates in excess of the applicable Buy Rates then in effect; provided, however,
that the Bank shall have the right, upon notice to Dealer, to limit its
purchase of Contracts to those that do not exceed the maximum Contract Rates
established by the Bank. If the Contract Rate for any Contract purchased by
the Bank exceeds the applicable Buy Rate then in effect, Dealer shall earn
with respect to those Contracts a finance participation ("Finance
Participation"). The Finance Participation shall be computed and paid to
Dealer in accordance with payment procedures specified by the Bank in a Dealer
Reserve Supplement Letter or other notice as provided by the Bank. However,
except as the Bank may otherwise agree in writing or elect, no Finance
Participation will be earned by the Dealer with respect to any Contract for a
term of less than twelve months, or covering an employees, partners, officer's
or owner's demonstrator, or covering a vehicle purchased by an employee,
partner, officer or owner. In the case of the Customers, default under any
contract purchased by the Bank, the Dealer will be obligated to remit the
total Finance Participation which was paid to the Dealer by the Bank for such
Contract, in an amount not exceeding the Bank's loss, actual or prospective,
with respect to such Contract. If any Contract purchased by the Bank hereunder
is prepaid in part or in full prior to its stated maturity, Dealer will be
obligated to remit to the Bank that portion of the Finance Participation paid
by the Bank for the Contract that the Bank determines is unearned as a result
of the prepayment. This payment obligation will be determined and paid in
accordance with programs and procedures specified by the Bank.
7. Reserve Account. The Bank will credit to a Reserve Account in the
Dealer's favor the amounts of any Finance Participation which are earned by
the Dealer pursuant to Section 6 above. Whenever, as a result of charges
against the Reserve Account, the Reserve Account has a negative balance, the
Dealer will, upon the Bank's demand, pay the Bank that amount necessary to
increase the Reserve Account balance to zero; For all active Reserve Accounts,
the Bank will issue periodic Reserve Account statements at intervals
determined by the Bank.
8. Insurance and Service Contract Cancellations. Upon the
cancellation by the Bank, the Customer or the issuing firm of any credit life
insurance, mechanical breakdown protection contract or other service contract
financed under any Contract purchased by the Bank hereunder, whether as a
result of the prepayment of the Contract or otherwise, Dealer shall remit to
the Customer, the Bank or any third party, as directed by the Bank, any
portion of the unearned charge for the insurance contract, mechanical
breakdown protection contract or other service contract required to be
refunded pursuant to the terms of the Contract or applicable law.
9. Representation and Warranties. As to each Contract sold by the
Dealer to the Bank under the terms of this Agreement, the Dealer represents
and warrants that as of the time of sale:
<PAGE>
a. All business permits and other operating authorizations necessary
in connection with Dealer's execution of the Contract and sale thereof to the
Bank, are in full force and effect in all necessary jurisdictions.
b. The Contract and all other agreements or other documents executed
by Customers and/or the Dealer in connection with the sale of the Contract
Vehicle and its financing with the Bank are valid, legal and are binding
obligations of the Customer and/or the Dealer, enforceable against the
Customer and/or the Dealer in accordance with their terms and conditions, and
each signature thereon is the genuine and duly authorized signature of the
person whose signature it purports to be.
c. Information contained in the Contract, and the information
contained in the Credit Application submitted to the Bank in connection with
the Contract, is true and accurate.
d. Immediately prior to the execution of the Contract by the Dealer,
the Dealer was the sole and exclusive owner of the Contract Vehicle and had
the right and authority to dispose of the Vehicle as provided in the Contract.
e. The Dealer has caused title to the Contract to be conveyed to the
Bank and to no other individual, corporation or other entity, and the Contract
and Contract Vehicle are free and clear of any security interest, lien, claim
or encumbrance other than those in favor of the Bank.
f. The Contract accurately describes the Contract Vehicle and
contains all representations, warranties, and agreements made by the Dealer to
the Customer with respect to the Contract Vehicle.
g. There is only one original executed Contract, and at the time the
Contract was executed, each person signing the Contract received a fully
completed and legible copy of the signed Contract.
h. The Dealer has complied with all applicable requirements of the
Federal Truth In Lending Act, the Federal Equal Credit Opportunity Act, the
Fair Credit Reporting Act and all other federal, state and local laws, rules
or regulations applicable to consumer protection or the extension of credit or
otherwise affecting the Contract, the transactions contemplated thereby and
all dealings between the Dealer and the Customer in connection therewith.
i. The Dealer has installed all equipment and accessories, and
performed in a good and workmanlike manner all services as described in the
Contract and has performed all of the Dealer's other obligations under the
Contract, and Customer has not asserted, does not have and will not have, any
defense, offset, counterclaim or right of rescission with respect to the
Contract.
j. The Contract is not in default and has not been subordinated in
whole or in part, satisfied or rescinded, and the lien on the Contract Vehicle
has not been released in whole or in part, and the Dealer knows of no fact or
circumstance which might impair the validity or enforceability of the Contract
or render it less valuable than it appears on its face to be.
<PAGE>
k. All documents required under the Uniform Commercial Code, any
certificate of title statute as in effect in any applicable jurisdiction and
other applicable law to convey the Contract and to perfect a valid and
enforceable first priority security interest in the related Contract Vehicle
in favor of the Bank have been submitted for filing with the appropriate
government agency and all action with respect thereto has been completed.
l. The Contract Vehicle has been delivered to and accepted and
retained by the Customer and when so delivered the Contract Vehicle was new
and unused, except as otherwise stated in the Contract, in good operating
condition and repair and free of all mechanical defects, and met all equipment
requirements of applicable law.
m. Insurance coverage as specified by Section 12 below is in effect
for the Contract Vehicle.
n. The Dealer has not received any funds with respect to the Contract
which Dealer has not remitted to the Bank, properly endorsed to the Bank where
appropriate.
o. Dealer has received the down payment to the extent and in the form
specified in the Contract, and, except to the extent specifically indicated on
the face of the Contract, Dealer has not extended a loan to the Customer or
assisted the Customer in obtaining a loan from any third party other than the
Bank for purposes of paying such down payment or extended any financing for
any other amounts payable by Customer under the Contract, or in connection
with the Contract Vehicle or the purchase thereof, and the "total amount
financed" or other similar amount described therein will be the actual
principal amount owed by Customer with respect to the Contract Vehicle and
services related thereto sold pursuant to the Contract.
p. The Dealer has not modified, extended, waived or otherwise altered
any term of the Contract or any other document executed in connection
therewith or made any representations of a similar nature prior to the sale of
the Contract hereunder.
q. Each registered and legal owner of the Contract Vehicle has signed
the Contract either as a Customer or as an individual, or other entity
granting a security interest in such Contract Vehicle to Dealer or Dealer's
assignee.
r. All parties to the Contract had the capacity to execute the
Contract.
s. The Contract arises from the sale of the Contract Vehicle to a
Customer of the Dealer in the regular course of the Dealer's business.
<PAGE>
10. Contract Repurchase. If: (i) the Bank determines at its sole but
reasonable discretion that the documentation relating to any Contract is
unsatisfactory; or (ii) any representation and warranty made by Dealer with
respect to any Contract is not true and accurate when made; or (iii) the
Dealer breaches any other agreement with respect to the Contract contained
herein, or in any other agreement between Dealer and the Bank; or (iv) a
Customer under a Contract notifies the Bank of a claim or defense against the
Dealer and the Bank in its judgment would, as an assignee of the Contract, be
subject to that claim or defense, and if after notification from the Bank of
the Bank's receipt of notice of such claim or defense, the Dealer does not
within thirty (30) days resolve such dispute, Dealer shall repurchase the
Contract on demand by the Bank for a repurchase price equal to the sum of the
unpaid principal balance of the Contract plus all accrued and unpaid interest,
the amount of any Dealer Finance Participation, and expenses incurred by the
Bank in enforcing its rights under this Agreement. The Bank may deduct the
amount of the repurchase price from the Reserve Account. The Dealer also
agrees that if the Bank holds a dealer sight draft while waiting for the
related Contract or other documentation to be completed or corrected, the
Dealer will indemnity the Bank for any losses or costs the Bank incurs because
of any late return or nonpayment of the sight draft. All repurchases pursuant
to this section shall be without recourse to the Bank and without
representation or warranty by the Bank, express or implied, as to the
repurchased Contract. The foregoing rights are in addition to and not in
limitation of any other rights the Bank may have under this Agreement or any
related agreements, instruments or other documents or under applicable law.
11. Exceptional Contracts, Vehicles and Buyers. Each contract
covering:
a. A commercial vehicle used for long-distance hauling
or of more than two tons capacity,
b. A bus,
c. A vehicle used for taxi, jitney, or "drive-yourself"
service,
d. A used vehicle of a year model more than four years
previous to the then current model year of the same
make, if any, or if none, of any other make, or
e. A vehicle sold to an employee of the Dealer, or to
a relative of one of the Dealer's owners, officers,
partners or stockholders, will be sold to the Bank
subject to the Dealer's agreement to repurchase the
Contract from the Bank, for a repurchase price
equal to the sum of the unpaid principal balance of
the Contract plus all accrued and unpaid interest
and the amount of any Dealer Finance Participation,
if the entire amount unpaid on the Contract becomes
due or at the Bank's option may be declared to be
due. If the Dealer omits to execute a Supplementary
Dealer's Agreement containing the Dealer's Contract
Repurchase Agreement as to such Contract, any of
the Bank's officers or employees may do so in the
Dealer's name and behalf.
12. Insurance. Each Contract Vehicle must be insured at all times
against damage or loss pursuant to a comprehensive property damage insurance
policy containing terms and amounts satisfactory to the Bank. At the time any
Contract is purchased by the Bank hereunder, Dealer will verify that the
Customer has obtained a satisfactory insurance policy covering the related
Contract Vehicle.
<PAGE>
13. Contract Forms. The Bank shall be in no way liable or responsible
for the legal validity or sufficiency of any form or Contract or other
instrument which the Bank may furnish to the Dealer which is assigned to
anyone other than the Bank. The Dealer agrees not to use forms that the Bank
furnishes the Dealer pursuant to this Agreement for any purposes other than
the assignment of Contracts to the Bank.
14. Retail Program Covenants. As long as the Bank shall own any
Contract purchased from the Dealer under the terms of this Agreement, the
Dealer will:
a. Take any action that is necessary or that the Bank may
request to evidence and perfect the Bank's interest in each Contract purchased
by the Bank under the terms of this Agreement, the Contract Vehicle related to
that Contract and all proceeds of the foregoing.
b. Comply with the Dealer's record retention obligations
under the Equal Credit Opportunity Act and any other federal or state law with
respect to Contracts, Credit Applications, and their related documents.
c. Neither take or omit to take any action, in respect of
any obligation of the Dealer under any Contract, which may give the Customer
with respect to any Contract, any defense, offset or counterclaim as to the
enforcement of that Contract.
d. Neither repossess nor accept redelivery of a Contract
Vehicle related to a Contract purchased by the Bank under the terms of this
Agreement, without the prior written consent of the Bank.
WHOLESALE PROGRAM
1. Program Initiation and Advances by the Bank. The Dealer will
advise the Bank when the Dealer elects to participate in the wholesale program
and the Bank will then determine, at its sole option, if the Dealer is
eligible for participation. The Bank may make advances, in each case at its
sole option, to or for the benefit of the Dealer, repayable on demand, in such
amounts as the Bank may determine ("Advances"). Any Advances made by the Bank
to Dealer are made exclusively to allow Dealer to finance the purchase of new
or used motor vehicles designated by the Bank as eligible for wholesale
financing under the terms of this Agreement. Any such vehicle is referred to
hereafter as an "Eligible Vehicle." Any eligible Vehicles against which an
Advance has been made and remains unpaid is referred to hereafter as a
"Financed Vehicle."
2. Security Interest. To secure Dealer's obligation to repay the
Advances and Dealer's other payments and performance obligations under this
Agreement, the Dealer shall execute security agreements ("Security Agreement")
in a form and containing terms specified by the Bank, and any other agreements
the Bank may request.
<PAGE>
3. Monthly Statements and Promissory Notes. The indebtedness of the
Dealer relating to the Advances shall be evidenced by entries made on the
Bank's books and records in accordance with the Bank's customary accounting
practices. The Bank will send to Dealer on a monthly basis a statement
reflecting the amounts of all Advances made, all interest and other charges
accrued and all payments received from the Dealer since the date of the
preceding monthly statement. Dealer shall have (15) calendar day following the
receipt of each monthly statement to review the statement and to deliver to
the Bank in writing any objections to its contents, specifying in reasonable
detail the basis for the Dealer's objections. If Dealer fails to object within
the fifteen-day period the statement shall constitute an account stated
between the Bank and the Dealer. The demand nature of the advances shall not
be affected by any partial billing by the Bank, which billings are made only
for the convenience of the parties. Dealer will, on the Bank's request,
execute one or more promissory notes in form and substance satisfactory to the
Bank to further evidence any indebtedness of Dealer relating to the Advances.
4. Interest Rate. Dealer shall pay interest as billed by the Bank on
the outstanding principal amount of each Advance from the date of the Advance
until the Advance is paid in full at the rates specified by the Bank. If any
Advance is not paid by the Dealer when due under the terms of this Agreement,
interest shall accrue from and after the due date until that Advance is paid
in full at a rate specified by the Bank for late payments. Interest shall be
computed daily on the basis of a 360-day year and actual days elapsed. The
interest rate charged pursuant to the terms of this Agreement shall not exceed
the highest rate permissible under any law which a court of competent
jurisdiction shall in a final determination, deem applicable to this
Agreement. If a court determines that the Bank has received interest under the
terms of this Agreement in excess of the highest applicable rate, the Bank
shall promptly refund the excess interest to Dealer. All payments by Dealer
under this Agreement shall be made in accordance with the procedures and
requirements specified by the Bank.
5. Preconditions to Each Advance. The Bank will make Advances under
this Agreement only if: (i) prior to the initial Advance the Bank shall have
received a Security Agreement executed by Dealer together with any additional
agreements, instruments, approvals, opinions or other documents (collectively
"the Other Documents") the Bank may request; (ii) prior to any Advance
including the initial Advance, the Bank shall have received the manufacturer's
statement of origin for each Financed Vehicle related to the Advance together
with any Other Documents the Bank may request; and (iii) on the date of the
Advance including the initial Advance, the representations and warranties made
by the Dealer in this Agreement shall be true and correct as though made on
and as of such date, and no event of the kind described in the termination
section of this Agreement shall have occurred.
6. Representations and Warranties. Dealer represents and warrants to
the Bank that all of the Financed Vehicles are located at the Dealer's Address
as specified on the last page of this Agreement. The Dealer further warrants
that none of the Financed Vehicles are subject to any security interests,
liens, claims or other encumbrances other than those in favor of the Bank.
These representations and warranties shall be automatically reaffirmed by
Dealer on each day that an Advance is made.
<PAGE>
7. Repayment of Advances. Unless the Bank makes an earlier demand for
repayment, the Dealer shall repay the principal amount of each Advance at the
earliest of the day which shall occur one calendar year after the date of the
Advance, or the day that any Financed Vehicle related to the Advance is sold
by dealer, or the day on which any Financed Vehicle related to the Advance is
materially damaged or removed from the Dealer's Address other than in
accordance with guidelines which the Bank may establish with respect to
demonstrators and customer test drives. If an Advance relates to several
Financed Vehicles, only that portion of the Advance which relates to the sold,
damaged or absent Financed Vehicle must be repaid on the date of such sale,
damage or absence and the balance of the Advance, or portion thereof, shall be
repaid when the related Financed Vehicles are sold, damaged or missing or as
otherwise provided under the terms of this Agreement.
8. Location of Financed Vehicles. The Dealer will, at all times,
maintain each Financed Vehicle in Dealer's possession at Dealer's Address and
at Dealer's sole risk of loss or injury thereto, for the sole purpose of
securing the sale or lease of the Financed Vehicle in the ordinary course of
the Dealer's business. Dealer may use designated Financed Vehicles as
demonstrators and for test drives in accordance with guidelines which the Bank
may establish.
9. Insurance. The Dealer will insure each Financed Vehicle with
insurance companies satisfactory to the Bank and in amounts and against risks
specified by the Bank and will obtain all endorsements required by the Bank to
the policies evidencing the insurance. In the event the Dealer fails to insure
the Financed Vehicles as provided in this Agreement, the Bank shall have the
right, but not the obligation, to obtain the insurance and the dealer agrees
to reimburse the Bank on demand for the premium cost.
10. No Liens. From the date of this Agreement until all Advances plus
unpaid interest and all amounts owed under this Agreement repaid in full and
the Dealer's participation in the wholesale program is terminated, the Dealer
will not, unless the Bank shall otherwise consent in writing and except as
otherwise permitted in this Agreement, create or permit to exist any security
interest, lien , claim or other encumbrances in favor of any party other than
the Bank upon or with respect to any of the Dealer's property that is subject
to a security interest in favor of the Bank, including without limitation any
Financed Vehicles.
MISCELLANEOUS
1. Dealer Representations and Warranties. The Dealer represents
and warrants the following:
a. This Agreement and each other agreement, instrument and
other documents executed by Dealer in conjunction with this Agreement,
including but not limited to the Security Agreement, the Other Documents and
each Contract sold to the Bank hereunder and each other agreement, instrument
or other document executed by Dealer in connection with each Contract sold to
the Bank hereunder is, or when executed and delivered will be, the duly
authorized, valid, legal and binding obligation of the Dealer, enforceable
against Dealer in accordance with its terms.
<PAGE>
b. The Dealer is an entity of the type indicated on the last
page of this Agreement, and to the full extent necessary for an entity of that
type, is duly organized and existing and is duly authorized to transact
business and is in good standing under the laws of the state of Dealer's
Address. The Dealer is also duly authorized to transact business and is in
good standing in all other jurisdictions where the nature of its business
requires it to be so authorized.
c. All Credit Applications submitted to the Bank will
contain an authorization which complies with the Fair Credit Reporting Act,
enabling the Bank to obtain necessary credit information concerning the
Customer.
These representations and warranties will be automatically reaffirmed by
Dealer on each day that an Advance is made by the Bank or a Contract is
purchased by the Bank under the terms of this Agreement.
2. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the Dealer, the Bank and their respective successors
and assigns (including a debtor in possession); provided, however, that Dealer
may not assign any of its rights hereunder or any interest herein without the
prior written consent of the Bank.
3. Agency. The Dealer is not the agent or representative for the Bank
for any purpose. The Dealer has neither the express nor implied right or
authority to bind the Bank in any manner whatsoever. Whenever in this
Agreement reference is made to an agent of the Bank, that reference is
intended to mean any third party that the Bank may from time to time appoint
to fulfill any of its obligations under this Agreement. The Dealer hereby
appoints the Bank as the Dealer's agent and authorizes the Bank in Dealer's or
the Bank's name, to execute and acknowledge an assignment from the Dealer to
the Bank of any Contract purchased hereunder, to execute and file any
financing statements or continuation statements or amendments thereto or
assignments thereof and any other instruments or notice the Bank deems
necessary and appropriate, to endorse in the name of Dealer any check, draft
or other instrument received by Dealer or the Bank representing payment on, or
other proceeds of, any Contract purchased hereunder, or any collateral
securing Dealer's payment and performance obligations hereunder, and to take
any other action the Bank deems necessary or appropriate to preserve, protect
or more fully evidence the Bank's rights under this Agreement, the Security
Agreement or Other Documents, any other agreements related hereto, or thereto
in any Contract purchased under the terms of the Agreement.
4. Additional Procedures and Supplements. In connection with the
retail program, the Bank at its sole discretion will by necessity, establish,
modify and/or amend procedures, requirements, conditions and policies
applicable to those programs. The Bank will advise Dealer of these changes to
procedures, conditions and policies by sending the Dealer bulletins, notices
and other informational documents. The terms and conditions described in those
bulletins, notices and documents will become effective upon receipt by the
Dealer.
<PAGE>
5. Terminating the Relationship. Either the Bank or the Dealer may
terminate this Agreement without cause by giving ten (10) days written notice
to the other of the intent to terminate.
The Bank may terminate this Agreement on notice to Dealer upon the occurrence
of any of the following events:
a. Dealer shall fail to make any payment when due to the
Bank under the terms of this Agreement, the Security Agreement, the Other
Documents, or any other agreements between Dealer and the Bank.
b. Any representation or warranty made by Dealer under this
Agreement, the Security Agreement or Other Documents, or any other agreements
between Dealer and the Bank shall prove to be incorrect when made or
reaffirmed.
c. Dealer shall fail to perform or observe any other term,
covenant or condition contained in this Agreement, the Security Agreement, the
Other Documents, or any other agreements between the Dealer and the Bank.
d. Any default including but not limited to any payment
default, occurring under any agreement or instrument relating to any
indebtedness or obligation of Dealer to any person, corporation or other
entity, other than the Bank and such default shall continue after the
applicable grace period, if any, specified in such agreement or instrument.
e. Dealer shall generally not pay its debts as such debts
become due or shall admit in writing its inability to pay its debts generally,
or shall make a general assignment for the benefit of creditors or any
proceeding shall be instituted by or against Dealer under any bankruptcy or
insolvency law, or any proceeding shall be instituted by or against Dealer
seeking liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or a composition of Dealer or its debts under any law
relating to bankruptcy, insolvency, reorganization or relief of debtors or
seeking the entry of an order for relief or the appointment of a receiver,
trustee, or other similar official for it or for any substantial part of its
property, or the Dealer shall take any action to authorize any of the actions
set forth above in this section.
f. A material adverse change in the Dealer's financial
condition or operations which occurs after the date of this Agreement.
No termination of this Agreement will affect the rights, interests or
obligations of either party hereto which accrued or existed prior to such
termination. The Dealer hereby waives any claim against the Bank for
consequential or punitive damages arising from any act or admission of the
Bank under this Agreement, including but not limited to any termination of
this Agreement by the Bank.
<PAGE>
6. Rights After Termination. At any time on or after the termination
of this Agreement and in pursuing any rights and remedies the Bank may have
under this Agreement, the Security Agreement, the Other Documents, or any
other agreements between Dealer and the Bank, the Bank may declare the
Advances to Dealer, all interest thereon and all other amounts payable under
this Agreement to be immediately due and payable without presentment, demand,
protest, or further notice of any kind, all of which are hereby expressly
waived by Dealer, and the Bank may exercise all the rights and remedies of a
secured party under the Uniform Commercial Code or any other applicable law,
all of which aforesaid rights and remedies shall be cumulative and not
exclusive, to the extent permissible by law. Nothing in this section is
intended to limit any of the Bank's rights prior to any termination of this
Agreement, including but not limited to the Bank's rights to demand payment in
full at any time of any Advance, all interest thereon and any other amounts
payable under this Agreement.
7. Right of Offset. All of the Dealer's payments and performance
obligations under this Agreement shall be secured by all property of Dealer in
which the Bank has been granted a lien or security interest pursuant to the
Security Agreement, the Other Documents or any other agreements executed in
conjunction with this Agreement or otherwise. The Bank shall have at all
times, to the fullest extent permitted by law, a right to offset and apply any
funds, credits or other amounts owing to Dealer or any property of Dealer in
the Bank's possession or control, against any obligation of Dealer to the
Bank.
8. Amendments, Governing Law and Severability. If any term or
provision of this Agreement is deemed invalid or unenforceable, the remainder
of this Agreement shall not be affected thereby and each term and provision
thereof shall be valid and enforceable to the fullest extent permitted by law.
This Agreement shall be construed in accordance with, and governed by, the
laws of the state of New York. All amendments to this Agreement must be in
writing, signed by the Dealer and the Bank, except that the Bank may from time
to time establish procedures, requirements, conditions and policies applicable
to this Agreement, and those procedures, requirements, conditions and policies
shall modify or supplement the relevant terms and provisions of this
Agreement.
9. Indemnifying the Bank. The Dealer shall indemnify the Bank against
all costs, losses and expenses, including but not limited to reasonable
attorney's fees and expenses incurred or suffered by the Bank as a result of
any breach by the Dealer of any term of this Agreement or any agreement,
instrument or other documents executed by Dealer in conjunction with this
Agreement or any action brought by a Customer against the Bank as a
consequence of any actual or alleged act or omission of the Dealer.
10. Inspecting Books, Records and Collateral. The Bank shall have the
right at any time during regular business hours to examine any collateral
securing the Dealer's payment and performance obligations under this Agreement
and to examine and make copies of any or all of the Dealer's books, records
and documents (including but not limited to computer tapes and disks)
concerning Dealer's participation in and transactions related to the wholesale
and retail programs. In addition, the Dealer will deliver to the Bank at such
time and in such form as the Bank shall designate, schedules and reports
relating to matters in connection with the Dealer's participation in and
transactions relating to the wholesale and retail programs, including but not
limited to schedules and reports relating to the wholesale collateral.
<PAGE>
11. Monies and Proceeds Received By Dealer. The Dealer will at
Dealer's risk segregate and hold in trust for the Bank, in the identical form
received, any cash, checks, instruments, or other payments or proceeds
received by Dealer in connection with any Contract purchased by the Bank under
the terms of this Agreement, including but not limited to any Customer
payments and any returned or repossessed Contract Vehicles. Dealer will
promptly provide to the Bank an accounting thereof and upon the Bank's request
deliver any and all such items to the Bank as the Bank may direct, with all
necessary or appropriate endorsements; provided, however, that any cash,
checks, instruments or other payments shall be delivered to the Bank within
one business day after the Dealer's receipt of the cash, checks, or
instruments.
12. Additional Rights of the Bank. The Dealer authorizes the Bank,
its officers or employees, without notice to the Dealer and without limiting
or affecting the Dealer's obligations to the Bank, to:
a. grant to the Customer(s) under any Contract purchased
from the Dealer under this Agreement any indulgence(s) or extension(s) of time
of payment, in whole or in part;
b. discharge, compromise or settle the obligation(s) of (any
of) the Customer(s) under any such Contract; or
c. retake the motor vehicle relating to any such Contract,
or omit to do so, and if retaken, either retain or resell the same, to the
Bank or otherwise, with or without complying with any applicable provisions of
law.
13. Defaults. The Bank may notify the Dealer in writing that a
vehicle has come into the Bank's possession in lieu of delivering it to the
Dealer if the Dealer is in default in the performance of any of the Dealer's
agreements with the Bank or if the Dealer has stopped doing business as a
going concern. The Bank may withhold any payment out of the Reserve Account in
Dealer's favor while the Dealer is in default in the performance of any of the
Dealer's agreements with the Bank or, if the Bank stops buying Contracts from
the Dealer, until all Contracts bought from the Dealer are fully liquidated.
If the Dealer fails to purchase from the Bank and pay the Bank for any
Contract or vehicle in accordance with this Agreement or any other agreement
with the Bank, the Bank may without limiting any other right or remedy,
enforce such Contract and/or sell such Contract or vehicle at public or
private sale (with full right to the Bank to bid and purchase at any public
sale), in which event the Dealer will reimburse the Bank for any difference
between the net proceeds of such enforcement and/or sale and the amount agreed
to be paid by the Dealer to the Bank for such Contract or vehicle.
14. Notices. All notices and communications provided for under the
terms of this Agreement shall, unless otherwise stated herein, be in writing,
including facsimile transmission, and shall be mailed, transmitted or
personally delivered to the Dealer or to the Bank, as the case may be, at its
address set forth on the last page of this Agreement, or at any other address
as may hereafter be designated in writing to the other party. All such notices
and communications shall be effective three business days after being
deposited in the mail if postpaid, and if sent by facsimile transmission, upon
transmission, and otherwise upon receipt.
<PAGE>
15. The Bank Waivers. No failure on the part of the Bank to exercise
and no delay in exercising any right under the terms of this Agreement shall
operate as a waiver of those rights, nor shall any single or partial
exercising of any right under the terms of this Agreement preclude any other
or future exercise of those rights or the exercise of any other right.
16. Returned or Repossessed Vehicles. Upon the Bank's request, Dealer
will store at no expense to the Bank and will recondition for the Bank at the
Dealer's then lowest prevailing rates any returned or repossessed Contract
Vehicle related to the Contract purchased by the Bank under the terms of this
Agreement, provided that the Bank delivers the Contract Vehicle to the
Dealer's Address.
17. Entire Agreement. This Agreement, the Security Agreement, the
Other Documents and the other agreements executed in connection herewith and
therewith and as modified and supplemented from time to time, set forth the
entire Agreement between the Dealer and the Bank with respect to the subject
matter herein and supersedes all prior agreements, proposals and
understandings, whether written or oral relating to the same subject matter.
IN WITNESS WHEREOF, this Dealer's Agreement has been duly executed by
the undersigned.
MARINE MIDLAND BANK Major Fleet & Leasing Corp.
Name of Dealer
43-40 Northern Boulevard
Long Island City, New York 11101
Address of Dealer
BY:/S/ Allen Davis AVP By: /s/ Bruce Bendell
------------------------ -----------------------------
Authorized Bank Signature Bruce Bendell, President
Authorized Dealer Signature and Title
<PAGE>
MANAGEMENT AGREEMENT
THIS MANAGEMENT AGREEMENT, made this 23rd day of August, 1996 by and
between MAJOR FLEET & LEASING CORP., a New York corporation having its
principal office located at 80-02 Kew Gardens Road, Suite 5000, Kew Gardens,
New York 11415 (hereinafter "MF&LC")
AND
BRUCE BENDELL and HAROLD BENDELL, adult individuals with primary
business offices located at 43-40 Northern Boulevard, Long Island City, New
York 11101 (hereinafter jointly "MANAGERS")
WITNESSETH THAT:
WHEREAS, MF&LC has been engaged in the business of supplying and
leasing motor vehicles, in connection with the previously affiliated
businesses of MANAGERS, known as the Major Automotive Group and based at 43-40
Northern Boulevard, Long Island City, New York 11101;
WHEREAS, MF&LC has been acquired by Fidelity Holdings, Inc.
(hereinafter "FIDELITY"), a Nevada corporation with principal offices located
at 80-02 Kew Gardens Boulevard, Suite 5000, Kew Gardens, New York, 11415,
which is a holding company that owns, inter alia, a subsidiary named Computer
Business Science, Inc. which is engaged in telecommunications and requires the
ability to finance leases of its equipment, for which reason it is acquiring
MF&LC;
WHEREAS, the Management of FIDELITY has no experience in the
purchasing, financing, leasing, or otherwise dealing in or with motor
vehicles, but desires to maintain continuity of MF&LC's existing motor
vehicle leasing business, while utilizing MF&LC for the financing of the
leases of its telecommunications equipment, and FIDELITY therefore desires
that MF&LC continue the managerial services of MANAGERS, who have been the
managers of MF&LC prior to the acquisition of the corporation by FIDELITY;
NOW, THEREFORE, intending to be legally bound, and in consideration
of the mutual promises and covenants contained herein, the parties agree as
follows:
1. ENGAGEMENT. MF&LC, under the terms and conditions of this Management
Agreement, hereby appoints, hires, and engages MANAGERS to manage the motor
vehicle operations of MF&LC as heretofore conducted, including but not limited
to the purchase, financing, leasing and sale of motor vehicles. MANAGERS,
under the terms and conditions of this Management Agreement, hereby accept the
appointment and engagement to manage such operations.
<PAGE>
2. NATURE OF-ENGAGEMENT.
(a) This Management Agreement is exclusive with respect to the motor
vehicle operations of MF&LC and MANAGERS shall have the sole right to manage
such operations. For purposes of this Management Agreement, the motor vehicle
operations shall be treated as a separate division within MF&LC.
(b) As heretofore, MANAGERS may deal with and through other entities
which they may own or control or have an interest in, including but not
limited to the Major Automotive Group, and such dealings shall not constitute
a conflict of interest hereunder, FIDELITY recognizing that such other
entities are a primary source for MF&LC's purchases, leases and disposal of
motor vehicles. Furthermore, MANAGERS may use so-called "leased employees"
from the Major Automotive Group, provided that such persons are paid only
from, or their payroll costs are reimbursed only from, revenues generated by
the motor vehicle operations, as hereinafter provided in Paragraph 7.
(c) The parties are separate entities. Except as otherwise resulting
from their managerial relationship, or as specifically described herein,
nothing in this Management Agreement is intended to form a partnership, joint
venture or profit-sharing arrangement between the parties, nor to give any
party an interest in the assets, business, revenues or profits of another.
(d) MANAGERS are independent contractors and shall be responsible for
their conduct of the motor vehicle operations by either "leased employees",
separately compensated by the Major Automotive Group or otherwise with such
compensation being reimbursed only from revenues-generated by the motor
vehicle operations, or employees of MF&LC compensated by MF&LC only from
revenues generated by the motor vehicle operations.
(e) All payroll taxes and costs of fringe benefits for employees in
the motor vehicle operations if paid by the Major Automotive Group or
otherwise shall be reimbursed only from revenues generated by the motor
vehicle operations or if compensated directly by MF&LC shall be paid only from
revenues generated by the motor vehicle operations.
3. TERM. (a) The initial term of this Management Agreement shall
commence contemporaneously with the date of the Closing of the Plan and
Agreement of Reorganization between FIDELITY and the stockholders of MF&LC
and, unless sooner terminated pursuant to Paragraph 10, below, shall end on
December 31, 2001.
(b) Upon the mutual agreement of the parties, this Management
Agreement may be extended for such term as the parties may then determine,
subject to such amendments, if any, as the parties may then agree upon.
4. LICENSE(S), MF&LC has obtained such licenses and regulatory
authorizations as required by governmental agencies to engage in the motor
vehicle operations as presently conducted. MANAGERS shall conduct all motor
vehicle operations in strict accordance with the regulatory requirements of
such licensing agencies and shall maintain such licenses and/or authorizations
in good standing. All costs for obtaining such licenses and/or authorizations,
renewing such licenses and/or
-2-
<PAGE>
authorizations, and maintaining such licenses and/or authorizations (including
any fines, penalties, interest or other assessments imposed by any such agency
or regulatory authority) shall be paid only from revenues generated by the motor
vehicle operations.
5. DUTIES OF MANAGERS,
(a) MANAGERS shall continue the existing motor vehicle operations of
MF&LC, manage such continuing motor vehicle operations, and vigorously seek to
expand such operations to the full extent of available credit lines without
additional or extended personal guarantees consistent with competitive market
conditions, including, but not limited to:
(i) Hiring, firing, training, supervising, setting pay scales
for and paying, all required personnel;
(ii) establishing and enforcing personnel, safety and
environmental policies;
(iii) determining and establishing sources for new and used
vehicles, outlets for vehicles coming out of lease or being
repossessed, sources for credit lines and lease financing,
facilities for the repair and maintenance of leased and
inventoried motor vehicles, etc., with it being understood
that MANAGERS may contract with the Major Automotive Group
to the full extent necessary;
(iv) establishing and applying budgets, cost controls,
performance quotas, lease and rental terms and rates, and
other operational criteria, and maintaining sufficient cash
flow to continue the motor vehicle operations;
(v) maintaining, repairing, refurbishing and replacing all
equipment, machinery, vehicles, fixtures, buildings and
improvements required for the motor vehicle operations and
its personnel, meeting all safety (OSHA) and environmental
requirements, and/or generally for management of the motor
vehicle operations;
(vi) applying for, obtaining, re-applying for, and retaining all
licenses, permits and other authorizations required for the
motor vehicle operations;
(vii) establishing, applying and enforcing all governmental
workplace safety (e.g. OSHA) and environmental regulations
and requirements;
(viii) insuring MF&LC and the motor vehicle operations, including
all leased and inventoried vehicles, against damage or loss
to the extent required by all lenders and credit providers,
but not less than full market value;
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(ix) establishing and maintaining security of the books and
records of the motor vehicle operations; and
(x) establishing credit lines and financial accommodations to
support the motor vehicle operations, including the
purchasing and leasing of motor vehicles, for which purpose
MANAGERS may pledge the credit of MF&LC.
(b) From the revenues generated by the motor vehicle operations,
MANAGERS shall pay all costs and expenses incurred in such operations, as well
as all financing costs and debt service pertaining to the financing obtained
for such operations including the purchase and leasing of vehicles. From such
revenues, MANAGERS shall pay all space and equipment rent, including such
pass-through costs as apportioned real estate taxes, levies and assessments,
insurance, maintenance, etc. and MANAGERS shall keep the areas utilized for
the motor vehicle operations insured.
6. DUTIES OF MF&LC.
(a) MF&LC shall manage its corporate operations and its separate
financing and leasing of telecommunications equipment such that the divisional
autonomy of the motor vehicle operations shall be recognized and protected.
Notwithstanding this provision, however, MANAGERS shall be subject to the
corporate control of the Board of Directors and executive officers of MF&LC
and FIDELITY and shall function consistent with all corporate requirements as
may be imposed from time to time.
(b) MF&LC shall cooperate with MANAGERS to obtain and maintain all
licenses and authorizations required for the motor vehicle operations.
However, MANAGERS shall be responsible for all costs and fees, etc. due under
such licenses and authorizations, as provided in Paragraph 4 and subparagraph
5(a)(vi).
(c) The parties intend, subject to subparagraph 7(h) below, that
MF&LC shall renegotiate and/or replace, with all due speed, with the support
of FIDELITY which shall utilize its own corporate assets and credit as
necessary, all existing credit lines and financial accommodations which
require personal guarantees by either Bruce Bendell and/or Harold Bendell or
guarantee by one or more of the constituent companies of the Major Automotive
Group, so that the motor vehicle operations may utilize credit lines
collateralized by the motor vehicle assets and guaranteed solely by FIDELITY,
if required.
(d) MF&LC shall negotiate and obtain such credit lines and financial
accommodations as may be necessary or desirable for the purchase and leasing
of the telecommunications equipment of "CBS" or other operations of FIDELITY
and the existing credit lines of MF&LC which have the personal guarantees of
Bruce Bendell and/or Harold Bendell or the guarantee of one or more of the
constituent companies of the Major Automotive Group shall not be used by "CBS"
or any other operation of FIDELITY.
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7. COMPENSATION TO MANAGERS
(a) The motor vehicle operations of MF&LC shall be treated as a
separate division for all accounting and bookkeeping purposes and such
division shall be subject to the exclusive control of MANAGERS.
(b) All gross revenues from the motor vehicle operations of MF&LC
shall be subject to the control of MANAGERS, who shall determine the costs of
such operations and shall apply such funds to such costs. None of such
revenues, except as specifically provided herein, shall be subject to the
control of MF&LC otherwise or applied to any other operations of MF&LC.
(c) From the existing credit lines of MF&LC, the credit lines to be
established with respect to the motor vehicle operations and from the gross
revenues from the motor vehicle operations of MF&LC, MANAGERS shall purchase
all required vehicles. Upon disposition of each leased vehicle, MANAGERS shall
pay off all credit lines, notes, liens, debts and liabilities applicable to
such motor vehicle and the balance shall, for purposes hereof and without
regard to tax or GAAP accounting, shall be deemed gross revenues from the
motor vehicle operations.
Likewise, insurance proceeds for any vehicle shall be deemed gross
revenues from the motor vehicle operations.
(d) From the gross revenues from the motor vehicle operations of
MF&LC (including gross proceeds from the disposition of vehicles and insurance
proceeds), the MANAGERS shall service all credit lines financial obligations,
debts, and liabilities now existing or incurred with respect to the motor
vehicle operations, including but not limited to all principal, interest,
points, financing charges, and other such financing costs and charges.
(e) From the revenues from the motor vehicle operations of MF&LC,
MANAGERS shall pay all costs and expenses incurred in such operations of
MF&LC, including but not limited to labor, payroll taxes, fringe benefits,
reimbursement to the Major Automotive Group for "leased employees", insurance
(including automotive and liability insurance required for such motor vehicle
operations), repairs, towing, maintenance, vehicle service including
"loaners", repossessions including related legal fees and costs, other vehicle
costs such as dealer handling and preparation costs, freight in and out,
equipment rentals, travel and entertainment costs and professional fees, as
well as all office and administrative costs attributable to the motor vehicle
operations, including but not limited to furniture, equipment, supplies.
(f) MANAGERS shall pay to MF&LC a corporate management fee in a sum
equal to fifteen percent (15%) of the net income of the motor vehicle
operations treated as a separate division, calculated prior to deduction of
the management fee being determined, which is to reimburse MF&LC for it share
of corporate group costs (e.g., audit costs) and costs incurred on MF&LC's
behalf (e.g., corporate/SEC legal and other professional fees).
(g) The net revenues of the motor vehicle operations shall be (i) the
gross revenues, as defined above, including but not limited to all
lease/rental income, vehicle disposition proceeds and insurance proceeds, less
(ii) the financing costs and costs and expenses of the motor vehicle
operations, as defined above, including the MF&LC corporate management fee.
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(h) The net revenues of the motor vehicle operations shall be
calculated annually by the independent certified public accountants of
FIDELITY as part of the audit of the financial statements of FIDELITY. In
making the calculation, income derived from the block of leases held by MF&LC
as of the date of the acquisition of MF&LC shall be segregated, as owned by
FIDELITY. "Income derived from the block of leases" shall include all items of
income including gains on the disposition of vehicles, financing buy-out
discounts, release of reserves attributable to leased vehicles, as well as the
on-going interest and other income from such leases. The calculation shall
utilize GAAP, following MF&LC's existing accounting procedures and methods
consistently, and shall not be adjusted for other costs, expenses and charges
of MF&LC outside the motor vehicle operations. Prior to such audit, MANAGERS
may withdraw quarterly, as a draw against their anticipated management fee, a
sum not to exceed twenty percent (20%) of the net revenues derived from "new
business" (i.e., not from the block of business as of the date of acquisition
of MF&LC by FIDELITY) calculated on a quarterly, cumulative basis utilizing
the compiled quarterly financial statements. Upon release of the audit, there
shall be first be segregated the income derived from the block of leases held
by MF&LC as of the date of the acquisition of MF&LC ("old" operations). This
portion of the proceeds shall be deposited in the Sinking Fund required under
the Plan of Reorganization for redemption of the Preferred Stock and/or the
Debentures. The balance of such net income less any quarterly draws previously
withdrawn shall be paid over to the MANAGERS as their compensation for the
management of the motor vehicle operations.
In the event that the balance of the net proceeds of the motor
vehicle operations of MF&LC payable to MANAGERS as their compensation are
insubstantial or negative, MF&LC has no obligation to pay any management fee
to MANAGERS, or to assure that MANAGERS achieve any specific level of
compensation, or to reimburse MANAGERS for any loss or deficit in the motor
vehicle operations. If MANAGERS shall have made quarterly withdrawals which
are more than ten percent (10%) greater than the management fee to which they
are entitled, as determined from the audit, MANAGERS shall (a) immediately
(within ten business days after written demand, by MF&LC) repay the excess to
MF&LC and (b) not make further quarterly withdrawals until after a quarterly
profit & loss statement showing that a management fee is being earned.
(j) In the event of a loss or def icit in the motor vehicle
operations, MANAGERS shall be responsible for such and shall pay any unpaid
costs and expenses of the motor vehicle operations. However, in the event of
any such loss or losses, MANAGERS may, in the exercise of their management
authority, in their discretion, determine to terminate the motor vehicle
operations. Such termination shall affect all "new" operations, but MANAGERS
shall continue the operations for the purpose of completing all "old"
operations, as purchased by FIDELITY. MANAGERS shall not be responsible for
any losses with respect to such "old" operations.
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(k) To the extent that any funds remain in the Sinking Fund,
unexpended for the purposes thereof, upon the termination thereof as provided
In the Plan of Reorganization and related documents, MANAGERS shall be
entitled to receive therefrom the reimbursement of all losses or deficits paid
pursuant to subparagraph (j) above.
(1) The calculation in subparagraph (h) above assumes the continuance
of the existing credit lines, guaranteed by or cross-collateralized by
MANAGERS and/or Major Automotive Group. As the existing credit lines and
financial accommodations are assumed by FIDELITY and/or MF&LC without such
guarantees and/or cross collateralization, the parties shall renegotiate the
calculation in subparagraph (h) above to provide FIDELITY and/or MF&LC with
appropriate compensation for the providing of such credit, MANAGERS may, in
their discretion, continue existing or obtain new credit lines or financial
accommodations requiring their guarantees and/or cross collateralization and
not use the new lines, in which event no compensation shall be due to FIDELITY
and/or MF&LC.
8. SIGNING BONUS, (a) As a "signing bonus", to induce MANAGERS to
execute this Management Agreement and undertake the responsibilities herein,
FIDELITY hereby agrees to issue to MANAGERS, 50% / 50% to each, Common Stock
Purchase Warrants exercisable for the purchase of One Hundred Thousand (100,
000) shares of FIDELITY'S Common Stock at an exercise (purchase) price of One
Dollar and Twenty-five Cents ($1.25) per share; (i.e., Fifty Thousand (50,000)
each). Such Common Stock Purchase Warrants shall not be transferable nor
exercisable prior to December 31, 1996. FIDELITY covenants that it will
register sufficient shares of its Common Stock in its proposed SB-2
Registration Statement, expected to be filed in the fourth quarter of 1996,
to permit MANAGERS to exercise such warrants for free trading shares following
effectiveness. The Common Stock Purchase Warrants shall expire at the close of
the business day (5:00 p.m.) six (6) months after effectiveness of the SB-2
Registration Statement. MANAGERS acknowledge awareness that if they exercise
such Common Stock Purchase Warrants prior to the effectiveness of FIDELITY'S
SB-2, they will acquire shares which are restricted as to further transfer
(non-free trading); MANAGERS jointly and severally represent and warrant that
they are acquiring the Common Stock Purchase Warrants and any shares, issued
upon exercise of such warrants prior to effectiveness of the SB-2 for personal
investment purposes and not with a view to resale or distribution; the Common
Stock Purchase Warrants and the certificates for such shares if exercised
prior to effectiveness of the SB-2, shall bear a legend on the face thereof
indicating that such warrants and shares have not been registered under the
Securities Act of 1933 and are restricted as to further transfer.
(b) If MANAGERS breach the terms of this Management Agreement at any
time prior to exercise of the Common Stock Purchase Warrants, and such breach
is material and is uncured within the time period provided, or within a
reasonable time if no time period is provided, such warrants shall be
cancelable by FIDELITY and the value thereof shall be forfeited by MANAGERS.
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9. ENVIRONMENTAL HAZARDS, The motor vehicle operations of MF&LC may
involve certain environmental hazards, such as the removal and disposal of
used motor oil, the replacement of air conditioner gases, and the disposal of
parts containing toxic, hazardous wastes. MANAGERS shall manage the motor
vehicle operations (utilizing the services of Major Automotive Group and
others, as necessary) strictly in conformity with the terms of all permits and
the regulations of all environmental agencies having jurisdiction. MANAGERS
shall establish and maintain strict controls and procedures to protect against
discharge, emission, spillage or other contamination or pollution, whether
deliberate, voluntary, involuntary or accidental. MANAGERS shall establish
and maintain monitoring procedures. In the event of any discharge, spillage,
emission or other contamination, MANAGERS shall (i) comply with all federal,
state, and local reporting requirements, (ii) take all steps to limit the
extent of the contamination and to terminate its source, and (iii) promptly
remediate the contamination in accordance with the requirements of
environmental agencies having jurisdiction.
10. MAINTENANCE OF AND ACCESS To BOOKS AND RECORDS. Although intended
to operate as an autonomous division within MF&LC, the motor vehicle
operations are, in fact, a part of the on-going business of MF&LC which, in
turn, is a wholly-owned subsidiary of FIDELITY, a public company which
anticipates SEC financial filing requirements. During the term of this
Management Agreement, MANAGERS shall:
(a) maintain the books and records of the motor vehicle operations in
a timely, complete and accurate manner, consistent with the existing
accounting procedures and methods, but subject to the requirements of
FIDELITY'S accountants for GAAP and SEC accounting purposes;
(b) give access to the assets, books and records, facilities, files,
documents, and other data depositaries, at any reasonable time and from time
to time, to FIDELITY, MF&LC and their agents and representatives. MANAGERS
shall furnish any and all information in their possession with reference to
the motor vehicle operations that FIDELITY and/or MF&LC may reasonably
request; and
(c) keep such books and records as required by FIDELITY's and/ or
MF&LC's accountants, in compliance with GAAP and SEC requirements and
cooperate fully and in good faith to meet all quarterly and annual filing
deadlines.
FIDELITY shall designate the accountants for the motor vehicle
operations, consistent with the appointment for MF&LC and FIDELITY.
11. TERMINATION. In reliance upon this Management Agreement, and
pending renegotiation and replacement of the existing credit lines and
financial accommodations, MANAGERS are maintaining their personal financial
guarantees and the guarantees of constituent corporations of the Major
Automotive Group, and are continuing (and may expand) the motor vehicle
operations under such credit lines and financial accommodations. Accordingly,
this Management Agreement shall not be subject to termination by MF&LC,
regardless of the violation of this Agreement by MANAGERS and regardless of
MANAGERS' default, until and unless MF&LC shall have made provision for the
assumption, servicing and repayment of all such indebtedness, together with
the release of all such existing guarantors. Subject to such requirement, this
Management Agreement may be terminated:
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(a) By either party upon a material default by the other party which
is not cured within thirty (30) days after notice of such default or, if such
default is not curable within such time, if reasonable efforts to cure such
are not commenced within thirty (30) days after notice of default and
thereafter prosecuted in good faith; or
(b) Mutual agreement of the parties.
12. GOVERNMENTAL REGULATIONS. This Management Agreement is subject to
the terms of all applicable federal, state, and municipal laws, regulations,
and decisions, whether existing or enacted hereafter, including the
regulations and actions of all governmental administrative agencies and
commissions having jurisdiction.
13. ASSIGNMENT AND DELEGATION. Neither party may assign any rights or
delegate any duties hereunder without the express prior written consent of the
other.
14. ENTIRE AGREEMENT. This Management Agreement constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior negotiations and understandings which are deemed to have
been merged herein. No representations were made or relied upon by either
party, other than those expressly set forth herein.
15. MODIFICATION. This writing contains the entire agreement of the
parties and shall be amended only by a further writing. No agent, employee, or
other representative of any party is empowered to alter any of the terms
hereof, including specifically this Paragraph 14, unless done in writing and
signed by MANAGERS and an executive officer of MF&LC.
16. CONSTRUCTION. Whenever required by the context hereof: the
masculine gender shall be deemed to include the feminine and neuter; and the
singular member shall be deemed to include the plural. Time is expressly
declared to be of the essence of this Agreement. This Agreement shall be
deemed to have been mutually prepared by all parties and shall not be
construed against any particular party as the draftsman. 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 of 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, 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.
17. CONTROLLING LAW. The validity, interpretation, and performance of
this Agreement shall be controlled by and construed under the laws of the
State of New York. Venue and jurisdiction of any controversy or claim arising
out of, or relating to this Management Agreement, or the breach thereof, that
cannot be resolved by negotiation, shall be in Queens County, New York. 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.
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18. WAIVER. The failure of any party to object to, or to take
affirmative action with respect to, any conduct of any other party which is in
violation of the terms of this Agreement shall not be construed as a waiver of
such violation or breach, or of any future breach, violation, or wrongful
conduct. No delay or failure by any party to exercise any right under this
Agreement, and no partial or single exercise of that right, shall constitute a
waiver or exhaustion of that or any other right, unless otherwise expressly
provided herein.
19. NOTICES. All notices or other communications to be sent as
provided for by this Management Agreement shall be in writing and shall be
sent by certified mail, postage prepaid, to the persons and addresses herein
designated, or such other persons and/or addresses as may hereafter be
designated in writing by the parties:
If to MF&LC: Doron Cohen, Pres.
Fidelity Holdings, Inc.
80-02 Kew Gardens Boulevard, Suite 5000
Kew Gardens, New York 11415
with a copy to: Richard C. Fox, Esq.
3401 Lakeview Drive
Delray Beach, Florida 33445
if to MANAGERS: Bruce Bendell
Major Chevrolet/Geo
43-40 Northern Boulevard
Long Island City, New York 11101
with a copy to: Robert Salad
Cooper, Perskie, April, Niedelman, Wagenheim & Levinson
1125 Atlantic Avenue
Atlantic City, New Jersey 08401
20. HEADINGS. Headings in this Management Agreement are for
convenience only and shall not be used to interpret or construe its
provisions.
21. COUNTERPARTS. This Management Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
22. BINDING EFFECT. The provisions of this Management Agreement shall
be binding upon and inure to the benefit of each of the parties and their
respective successors and assigns.
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23. COSTS. 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.
IN WITNESS WHEREOF, intending to be legally bound, the parties have
executed this Management Agreement the day and year first above written:
MAJOR FLEET & LEASING CORP.
ATTEST,
BY: /s/ Harold Bendell BY: /s/ Bruce Bendell
Harold Bendell, Secretary Bruce Bendell,President
MANAGEMENT AGREEMENT
MAJOR FLEET & LEASING CORP. - BRUCE AND HAROLD BENDELL Signatures, continued
WITNESSES:
/s/ Anna Torres /s/ BRUCE BENDELL
Anna Torres Bruce Bendell
/s/ E. Davis /s/ HAROLD BENDELL
E. Davis Harold Bendell
JOINDER
For purposes of Paragraph 8 of the foregoing Management Agreement, Fidelity
Holdings, Inc. hereby joins in the agreement, intending to be legally bound by
Paragraph 8.
FIDELITY HOLDINGS INC.
ATTEST: /s/ Doron Cohen
/s/ Richard C. Fox BY: Doron Cohen
Richard C. Fox President
Secretary
<PAGE>
RETAIL LEASE SERVICE PLAN AGREEMENT
PASSENGER CARS AND LIGHT TRUCKS
Agreement executed April 3, 1987 by and between General Motors
Acceptance Corporation ("GMAC") and Major Fleet and Leasing Corp. ("Lessor").
WITNESSETH:
WHEREAS, GMAC will from time to time grant permission to Lessor to
lease to third persons motor vehicles in which GMAC has a security interest
and Lessor desires to obtain the services of GMAC in respect of Lessor's
leasing operation; and
WHEREAS, GMAC is willing to extend the services under the terms and
conditions set forth below;
NOW, THEREFORE, it is agreed that:
A. Scope of Agreement
This Agreement applies to the billing and collection by GMAC of
certain rentals payable under leases (acceptable to GMAC) of motor vehicles,
consisting of eligible passenger cars and light trucks having a gross vehicle
weight of less than 15,000 pounds, in which GMAC has a security interest
pursuant to a Security Agreement in a form acceptable to GMAC.
B. Procedure
Credit investigation - Lessor shall furnish to GMAC the name and
address of each prospective Lessee whose rental payments Lessor desires to be
administered under this Agreement, together with any further information GMAC
may reasonably request to enable it to investigate the credit standing of
Lessee. Upon receipt of the information, GMAC shall conduct a credit
investigation and notify Lessor whether it will administer Lessee's rentals
under this Agreement.
Documentation - Upon notification by GMAC that it will administer the
rentals, Lessor shall furnish GMAC with:
(1) An executed Security Agreement in the form provided by GMAC
covering the motor vehicles leased; and
(2) An executed copy of the completed Non Maintenance Lease Agreement
in the form provided by GMAC together with any attachments; or
<PAGE>
(3) When the Non Maintenance Lease Agreement is not used, an executed
copy of the completed lease agreement, including any attachments, together
with an executed Acknowledgment of Notice of Assignment in the form provided
by GMAC.
GMAC Services
GMAC agrees to:
1. Investigate the credit standing of each prospective Lessee
designated by the Lessor;
2. Bill each Lessee, whose rentals are administered under this
Agreement, in advance for each monthly rental, except for the monthly rental
for the first month of the lease term which will be collected by the Lessor
upon delivery of the vehicle;
3. Collect rentals and follow any Lessee in default for payment of
past due rentals;
4. Notify Lessor of each Lessee in arrears in excess of 45 days;
5. Apply collected rentals, less monthly service charges, to Lessor's
obligations to GMAC under the Security Agreement and remit monthly to the
Lessor any excess as may be applicable to sales taxes and/or insurance
premiums.
6. Repossess a leased motor vehicle, in its own or Lessor's behalf,
if, in the opinion of GMAC, repossession is necessary or desirable by reason
of the Lessee's default under the lease;
7. Return any leased motor vehicle to Lessor within 90 days after
default in payment of the oldest rental payment remaining unpaid on the date
the vehicle is returned to Lessor, provided, however, that GMAC will not be
responsible to repossess and return any leased motor vehicle if it is unable
to repossess the vehicle because of (a) Lessor's failure to have obtained a
proper certificate of title when required by state law, or (b) an alleged
breach by Lessor under its lease with the Lessee. In the event GMAC is unable
to repossess because of any legal proceedings (bankruptcy, receivership,
replevin, or other litigation) the running of the time period shall be
suspended during such period, and
8. In the event of repossession to reduce the Lessor's responsibility
under Provision D for the unpaid balance under the Security Agreement governing
any leased motor vehicle covered by deductible physical damage insurance, where
physical damage in excess of the deductible is incurred prior to repossession,
to the extent of one deductible not to exceed $250 for collision insurance and
$100 for comprehensive insurance.
D. Lessor's Agreements
Lessor understands and agrees that:
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<PAGE>
1. Lessor will forward to the appropriate governmental authorities
promptly when due the sales taxes, if any, remitted to Lessor monthly by GMAC
under Provision C(5) above.
2. Lessor shall pay to GMAC am service charge with respect to each
lease administered hereunder, which fee shall be deducted monthly from the
applicable Lessee's payment prior to application of the surplus thereof as set
forth in Provision C(5). The monthly service charge with respect to each lease
shall be that in effect at the time the lease is accepted for administration
by GMAC and shall not vary during the term of the lease. GMAC shall quote the
fee applicable to new leases from time to time and on request.
3. Lessor shall indemnify GMAC against and hold it harmless from any
and all loss, liability, damages, costs and counsel fees in any way arising
out of any claim or action by I a lessee or other party relating to a breach
or alleged breach by Lessor under a lease covering a vehicle in which ' GMAC
has or had a security interest.
4. GMAC's assumption of responsibility pursuant to Provisions C(6),
C(7) and C(8) is conditioned on the following:
a. That liability insurance coverage acceptable to GMAC with
minimum limits of $100,000/$300,000 for bodily injury and
$25,000 for property damage is provided under the lease
and maintained during the term thereof.
b. That physical damage insurance, acceptable to GMAC and
protecting its interest against the hazards of fire,
theft, and collision, is provided under the lease and
maintained during the term thereof.
c. That the Lessee was of legal age at the time the lease
was executed.
d. That the leased motor vehicle is accurately identified in
the lease.
e. That the security deposit, if any, obtained from the
Lessee under the lease is exactly as specified therein.'
f. That the leased motor vehicle will be used exclusively by
the Lessee or in his own business and not for hire.
g. That all disclosures required by law were made to the
Lessee prior to execution of the lease.
5. Lessor shall pay to GMAC the unpaid balance due under the
applicable Security Agreement promptly upon the earliest of:
a. The 30th day following termination of the lease term
(including extensions thereof approved by GMAC); or
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<PAGE>
b. the 30th day after Lessor obtains possession of the
vehicle for any reason unless the vehicle has been placed
in lease with another Lessee approved by GMAC; or
c. the 30th day after loss of the vehicle by theft or
similar cause if the vehicle is not recovered prior
thereto; or
d. the 30th day after the vehicle is destroyed or so damaged
as to be rendered unsuitable for repair and further
rental; or
e. the sale of the vehicle; or
f. otherwise in accordance with the terms of the Security
Agreement.
E. Payment in Full of Security Agreement
GMAC's assumption of responsibility under this Agreement will
terminate with respect to any leased motor vehicle upon payment in full of
Security Agreement covering said vehicle, in which event GMAC shall reassign
to Lessor its right to any rentals thereof.
F. Substitution for Prior Agreement
This Agreement shall terminate any Retail Lease Service Plan
Agreement for passenger cars and light trucks presently in effect between GMAC
and Lessor, provided that the rights and responsibilities of GMAC and Lessor
under said Retail Lease Service Plan Agreement for passenger cars and light
trucks with respect to rentals being administered thereunder on the date of
this Agreement shall not be affected.
G. Duration of Agreement
This Agreement shall terminate 5 days after receipt by either party
of written notice of termination. Termination shall not affect the rights and
responsibilities of GMAC and Lessor with respect to rentals being administered
under this Agreement at the effective termination date.
MAJOR FLEET & LEASING CORP.
GENERAL MOTORS ACCEPTANCE CORPORATION 1044 NORTHERN BLVD.
ROSLYN, NY 11576
EAB PLAZA - WEST TOWER By: /s/ Bruce Bendell
UNIONDALE, NY 11553 Bruce Bendell, President
By: /s/ R.B. Mayer
R.B. Mayer, ASST. Secretary
Notarized by: /s/ Jacquelynn Bruce
Jacquelynn Bruce, Notary Public
State of New York, No. 41-0463650-
Queens County
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SCHEDULE II
TO
RESELLER AGREEMENT
RESELLER DISCOUNT SCHEDULE
I. Reseller Forecast; Initial Forecast; Discounts
A) Reseller's business plan and Product purchase from is
attached hereto as Attachment A. In accordance therewith,
Reseller forecasts that in the Initial Term, Reseller shall
purchase and take delivery of that quantity of Products,
whose aggregate list price shall be no less than $3,000,000.
B) In consideration of such forecast, all hardware Products on
Purchase Orders placed by Reseller during the initial Term
shall be discounted at a discount percentage of 40%. Programs
and services are not entitled to any discount unless
specifically noted as being eligible therefor on Summa Four's
then current price list.
C) Should this Agreement be extended either monthly or for
additional terms after the Initial Term, the discount
percentage which shall be applied to Hardware Products an all
subsequent Reseller Purchase Orders accepted by Summa Four
shall be that then current discount which Summa Four grants
to other Reseller's which is associated with the actual level
of Aggregate List Price Dollar purchases of Products shipped
to Reseller in the preceding Term. Summa Four's current
Discount Schedule is detailed below.
II. Discount schedule
Aggregate Dollar Volume
of Reseller Purchases In Discount Percentage
Preceding Year On Hardware Purchases
(in $thousands)
------------------------- ---------------------
LESS than $100 0%
$100-500 25%
$500-1500 30%
$1500-3000 35%
$3000+ 40%
<PAGE>
ADDENDUM A
RESELLER SUPPORT OBLIGATIONS
1.0 RESELLER RESPONSBILITIES
RESELLER will be the primary customer contact point for questions, problems
and assistance concerning the Products whether or not Products are under
warranty or extended support from Summa Four. RESELLER shall provide support
Services to its customers for the Products which shall include but not
necessarily be limited to the following:
a) telephone Customer response line to respond to questions regarding
installation and use of the Products;
b) telephone customer response line to respond to customer's suspected
code defects and documentation error regarding installation and
operation of the Products;
c) Product maintenance through Maintenance Modifications to customers;
d) RESELLER personnel are Summa Four support trained:
e) Have available an adequate supply of recommended spare parts;
f) RESELLER to contact Summa Four Technical Support and obtain the
appropriate Return Authorization (RA) prior to returning defective
components, and
g) RESELLER will provide general technical assistance and levels 1& 2
support as set in Section 3.1 and 3.2 below.
2.0 SUMMA FOUR RESPONSIBILITIES
Summa Four will provide Level 3 and general technical assistance as set forth
In Article 3.3, below.
3.0 WORK SPECIFICATIONS
3.1 RESELLER's customers will initiate requests for support by
contacting RESELLER directly. The RESELLER representative
will contact the request originator and initiate remedial
action on the problem. RESELLER will perform the following
Level I and Level 2 support responsibilities:
Level I support is defined as a problem which is completely
disabling a previously working service or one which is
preventing Reseller's customer from using a service. Level I
support includes, but is not limited to:
-2-
<PAGE>
a) create the Problem Description (PD);
b) call the customer and obtain a description of the problem
and verify its severity;
c) search the RESELLER data base for known problems,
d) provide available resolution if known problem;
e) recommend local RESELLER assistance as required;
f) it no resolution, pass PD to Level 2; and update PD,
documenting Level I actions;
Level 2 support Is defined as a problem which is imputing a
Reseller customer's ability to provide a stable service, or
which is preventing the launch of a new service for which
there is no viable workaround. Second level support includes,
but is not limited to:
a) receive the PD from Level 1;
b) analyze the problem symptoms and gather additional data
from customer as required;
c) search the RESELLER database for known problems;
d) provide available resolution if known problem;
e) recommend local RESELLER assistance as required;
f) recreate problem on RESELLER Test System, if possible or
at customer site via remote access;
g) determine if error is due to improper installation of the
Products by the customer;
h) determine if suspected error is due to peripheral or
other 3rd party equipment or software at the customer
location or as part of the integrated system;
i) ttempt bypass at circumvention for high impact problems,
i.e., Severity I and 2;
j) if no resolution and problem appears to be a newly
discovered code or documentation error, create Escalated
Problem Description (EPD) record,
-3-
<PAGE>
k) if suspected error appears to be in a Licensed
Program(s), notify Summa Four of the EPD providing
problem description and supporting documentation and
materials.
l) at Summa Four's request, RESELLER will assist in
obtaining additional information or materials from
customer to support EPD, problem Source Identification
and problem resolution;
m) update EPD documenting Level 2 actions; and
n) RESELLER will provide detailed product and problem
information to Summa Four as a prerequisite to invoking
Level 3 Support. Such information should include, but not
limited to, system serial number, location, problem
description and print out of error log, updated EPD and a
list describing what RESELLER attempts were made to fix
problem.
3.3 Summa Four will perform the following Level 3 support
responsibilities to the extent such Products are under
warranty to RESELLER or covered under an extended support
Agreement with RESELLER.
Level 3 support is defined as a problem which is affecting
(but not preventing) the customer's ability to operate or
support their network and which may be addressed by Summa
Four in a subsequent Program maintenance release, Typically a
functional or configuration matter that can be worked-around
Level 3 support includes but may not be limited to:
a) receive the EPD from RESELLER, supporting documentation
and materials and issue a call ticket number, 30 minute
telephone response time on a 7 day by 24 hours to
emergency calls. The Summa Four support center is staffed
8am to 5pm, Monday through Friday Eastern Time for all
other call requests;
b) analyze the problem symptoms and diagnose the suspected
error;
c) notify RESELLER Level 2 Support if additional information
materials or documentation is required;
d) attempt to recreate the problem on Test System, if
required;
e) assist RESELLER In attempting to develop a workaround or
circumvention for high impact problems e.g., Severity 1
and 2;
f) determine if maintenance modifications are required to
the Licensed Program(s);
-4-
<PAGE>
g) if maintenance modifications are required to the Licensed
Program(s), and such modifications are agreed to be
provided, Summa Four will provide code correction to
RESELLER;
h) return call documentation to RESELLER with one of the
defined PD Closing Codes assigned, including text
describing the resolution of the error. In the event a
code error was found, provide the rational for the
closing of the ticket number;
I) Provide final documentation for the purpose of updating
or closing the trouble ticket, when appropriate;
j) receive from RESELLER technical questions (regardless of
whether severity Level 1, 2 or 3) and supporting
documentation and materials;
k) analyze the technical questions and provide answers;
1) provide technical backup support to RESELLER on Products
including assistance in Problem Determination, Problem
Source Identification and Problem Diagnosis. In addition
Summa Four shall provide assistance in answering
questions that may arise concerning the operation and use
of the Licensed Program(s) that cannot be resolved by
RESELLER;
m) In accordance with Summa Four's then current standard
operating procedures, Summa Four may provide a corrected
version of the Licensed Program(s) that includes all
maintenance modifications to the Licensed Program(s), if
available, Additional corrected versions of the Licensed
Program will be provided as determined by Summa Four and
based upon the severity of the problem.
n) Summa Four will maintain procedures to endeavor to ensure
that new fixes are compatible with previous fixes;
p) packaging of maintenance modifications and migration code
will be done as mutually agreed to by RESELLER and Summa
Four; and
q) If on site Summa Four support is requested by RESELLER,
Summa Four will respond on a best efforts basis but
within two business days, and RESELLER will be billed at
the then current and published rates and charges. Such
response time is limited to critical, Severity I
problems.
-5-
<PAGE>
Effective Date: 3/19/97
Agreement No.: 365
ADDENDUM "B"
TO
RESELLER AGREEMENT
RESELLER ORDERING LOCATIONS
In accordance with section 19 of the above referenced Agreement, the following
Reseller subsidiaries may place orders under this Agreement. As such, each
such subsidiary shall be subject to the terms and conditions of this
Agreement:
1.____________________________________________________________
2.____________________________________________________________
3.____________________________________________________________
4.____________________________________________________________
5.____________________________________________________________
-6-
<PAGE>
Effective Date: 3/19/97
Agreement No.: 365
ADDENDUM C
TO
RESELLER AGREEMENT
INTERNATIONAL TRANSACTIONS
In accordance with Section 20.3 of the above referenced Agreement, the
following international subsidiaries of Reseller which are identified on
Addendum A may place orders subject to the following additional conditions:
1. All Products shall be shipped by Summa Four, EXW Summa Four's
Factory, Manchester New Hampshire.
2. In addition to Reseller's responsibility for all costs, expenses
and charges identified in Section 2.1 of the above referenced
Agreement; Reseller also agrees to be liable for all other costs
and expenses associated with the export or import of such Products
(excluding the cost to obtain any required export licenses from the
United States) including any duties, value added taxes (VAT) or
other local charges,
3. Notwithstanding the payment terms of Section 7 and unless otherwise
agreed by Summa Four all payments shall be made in U.S. dollars
through a confirmed, irrevocable sight letter of credit drawn on a
U.S. bank (of Summa Four's choice) in form and substance
satisfactory to Summa Four.
4. Reseller acknowledges that all Products and/or Proprerty
Information which may be provided hereunder are of United States
Origin and are licensed for use only in the country of original
destination and as such, are subject to all applicable United
States Government Laws and regulations governing or relating to the
export of such Products from the U.S.
Furthermore, Reseller acknowledges that it shall comply fully with
all such export/re-export related laws and regulations (including
local country regulations or other applicable multinational
conventions) which may be applicable to the Reseller's import, use,
resale or re-export of such Products from such country of original
destination.
5. Reseller's obligations stated above shall survive termination or
expiration of this Agreement
-7-
<PAGE>
a. Type Approvals. Reseller acknowledges that Summa Four makes no
representations or warranties that the Products comply with any
local country telecommunications approvals, safety or other
standards (Type Approvals) which may be established from time to
time by the local PTT or other authorities.
-8-
<PAGE>
CONTRIBUTION AGREEMENT
THIS AGREEMENT (this "Agreement") is made as of this 6th day of October,
1997 by and between FIDELITY HOLDINGS, INC., a Nevada Corporation (the
"Company"), DORON COHEN, an individual ("Cohen"), and Bruce Bendell, an
individual ("Bendell").
Recitals
WHEREAS, in connection with that certain Agreement dated March 25, 1996
(the "Master Agent Agreement") by and between Computer Business Sciences, Inc.
("CBS"), Nissko Telecom, Ltd. (the "Agent"), Avraham Nissanian ("Nissanian"),
Yossi Koren ("Koren"), and Chamual Livian ("Livian" and together with Nissanian
and Koren, the "Nissko Principals") under which the Agent has agreed to purchase
certain machines.
WHEREAS, under the terms of the Master Agent Agreement, CBS has agreed
that in the event that the Nissko Principals do not realize certain revenues
from the operations of the machines purchased from CBS that CBS will pay the
shortfall (the "Payment Obligations").
WHEREAS, to secure the Payment Obligations, Cohen and Bendell have each
pledged 500,000 shares of the common stock of the Company (the "Pledged Shares")
to the Nissko Principals.
WHEREAS, in the event that CBS does meet its Payment Obligations and the
Nissko Principals foreclose on the Pledged Shares, the Nissko Principals will be
required to transfer to Cohen and Bendell in equal shares the remaining 55% of
the Agent's issued and outstanding stock (the "Agent's Shares").
WHEREAS, Cohen and Bendell agree that upon receipt of the Agent's Shares,
Cohen and Bendell will contribute the Agent's Shares to the Company in exchange
for reimbursement by the Company to Cohen and Bendell of the value of the
Pledged Shares foreclosed upon by the Nissko Principals.
Terms of Agreement
In consideration of their mutual covenants and other valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties agree as follows:
1. Contribution of Agent's Shares to the Company. The parties agree that,
in the event that the Nissko Principals foreclose upon the Pledged Shares, Cohen
and Bendell will contribute the Agent's Shares received from the Nissko
Principals to the Company in exchange for reimbursement by the Company of the
Fair Market Value (as defined below) of the Pledged Shares.
-1-
<PAGE>
2. Fair Market Value. The parties agree that the "Fair Market Value" of
the Pledged Shares of the Company will be equal to (i) the closing price of the
Company's common stock as reported by the NASDAQ National Market or SmallCap
Market, or other exchange upon which the Company's shares are listed, for the
trading day immediately preceding the date of the foreclosure on the Pledged
Shares or (ii) the mean between the closing bid and asked prices per share of
the Company's common stock over the 20 consecutive days prior to the date of the
foreclosure on the Pledged Shares.
3. Entire Agreement. This Agreement contains the entire agreement among
the parties with respect to the subject matter of this Agreement, and supersedes
all prior agreements, written or oral, with respect thereto.
4. Waivers and Amendments. This Agreement may be amended, superseded or
canceled, and the terms hereof may be waived, only by a written instrument
signed by both parties or, in the case of a waiver, by the party waiving
compliance.
5. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and to be performed entirely within such State.
6. Counterparts. This Agreement may be executed by the parties hereto in
separate counterparts, each of which when so executed and delivered shall be an
original, but all which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
FIDELITY HOLDINGS, INC.
/s/ Doron Cohen
---------------
Doron Cohen
President
/s/ Bruce Bendell
-----------------
Bruce Bendell
/s/ Doron Cohen
---------------
Doron Cohen
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Fidelity Holdings, Inc.
We consent to the use in this amendment no. 1 to the registration statement of
Fidelity Holdings, Inc. on Form SB-2 of our report dated February 27, 1997 on
audit of the consolidated financial statements of Fidelity Holdings, Inc. and
subsidiaries as of December 31, 1996 and 1995 and for the year ended December
31, 1996 and for the period ended December 31, 1995, appearing in the
Prospectus, which is a part of this registration statement, and to the
reference to us under the heading "Experts and Counsel" in such Prospectus.
/s/ Peter C. Cosmas Co., CPA's
----------------------------------
Peter C. Cosmas Co., CPA's
400 Madison Avenue
New York, N.Y. 10017
January 8, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Major Chevrolet, Inc. and Affiliates
New York, New York
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated August 14, 1997 relating to the
financial statements of Major Chevrolet, Inc. and Affiliates, which is contained
in that Prospectus.
We also consent to the reference to us under the caption "Experts and
Counsel" in the Prospectus.
BDO Seidman, LLP
New York, New York
January 8, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF DOANE RAYMOND, INDEPENDENT AUDITORS
The Board of Directors
Fidelity Holdings, Inc.:
We consent to the incorporation by reference in this amendment no.1 to the
registration statement of Fidelity Holdings, Inc. on Form SB-2 of our report
dated January 22, 1997 on audit of the financial statements of 786710 Ontario
Limited as of December 31, 1996 and for the year ended December 31, 1996.
Doane Raymond
Chartered Accountants
January 8, 1998
Suite 400
7030 Woodbine Avenue
Markham, Ontario
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT AUDITOR
The Board of Directors
and Shareholders of
Fidelity Holdings, Inc.:
We consent to the use in this amendment no. 1 to the registration statement
of Fidelity Holdings, Inc. on Form SB-2 of our report dated February 5, 1997 on
audit of the financial statements of Major Fleet & Leasing Corp. as of December
31, 1996 and 1995, and for the years then ended, appearing in the Prospectus,
which is a part of this registration statement, and to the reference to us under
the heading "Experts and Counsel" in such Prospectus.
Marcum & Kliegman LLP
Woodbury, New York
January 8, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SECHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND
RELATED FOOTNOTES OF FIDELITY HOLDINGS, INC. AND SUBSIDIARIES AS OF AND FOR THE
YEAR ENDED DECEMBER 31, 1996 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
FOOTNOTES.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-END> SEP-30-1997 DEC-31-1996
<CASH> 186,814 574,486
<SECURITIES> 0 0
<RECEIVABLES> 1,318,339 179,837
<ALLOWANCES> 0 0
<INVENTORY> 102,511 1,494,020
<CURRENT-ASSETS> 3,615,946 3,826,949
<PP&E> 2,311,506 1,146,852
<DEPRECIATION> (508,051) (123,329)
<TOTAL-ASSETS> 9,085,543 9,316,864
<CURRENT-LIABILITIES> 1,918,981 3,060,920
<BONDS> 1,223,467 1,159,585
0 0
2,500 2,500
<COMMON> 68,777 62,792
<OTHER-SE> 6,469,184 5,178,921
<TOTAL-LIABILITY-AND-EQUITY> 9,085,543 9,316,864
<SALES> 2,752,256 3,175,528
<TOTAL-REVENUES> 3,528,927 3,434,475
<CGS> 622,398 965,792
<TOTAL-COSTS> 2,661,974 2,270,797
<OTHER-EXPENSES> 0 32,410
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 105,505 24,132
<INCOME-PRETAX> 826,038 1,115,966
<INCOME-TAX> 267,000 441,000
<INCOME-CONTINUING> 559,038 675,966
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 559,038 675,966
<EPS-PRIMARY> .07 0.12
<EPS-DILUTED> .07 0.12
</TABLE>
