SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended March 31, 2000 or
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ____________________
Commission File Number: 0-29182
FIDELITY HOLDINGS, INC.
-----------------------
(Exact name of small business issuer as specified in its charter)
Nevada 11-3292094
-------------------------------- ---------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
80-02 Kew Gardens Road, Suite 5000
Kew Gardens, New York 11415
---------------------------
(Address of principal executive offices)
(718) 520-6500
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Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: The number of shares of the
registrant's common stock outstanding as of May 12, 2000 was 25,620,203.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
unaudited audited
ASSETS:
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 9,253,272 $ 6,985,878
Net investment in direct financing leases, current 361,492 411,444
Accounts receivable 10,107,670 6,855,547
Inventories 32,190,756 24,612,800
Other current assets 3,260,973 2,080,662
------------ ------------
Total current assets 55,174,163 40,946,331
Net investment in direct financing leases,
net of current portion 402,971 508,084
Property and equipment, net 5,939,251 5,723,590
Excess of costs over net assets acquired 26,194,508 19,210,352
Notes receivable - officer 1,095,391 517,783
Other assets 948,185 1,668,510
------------ ------------
Total assets $ 89,754,469 $ 68,574,650
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Notes payable - floor plan $ 28,789,135 $ 21,661,654
Accounts payable 5,989,848 7,018,566
Accrued expenses 2,626,354 1,866,197
Current maturities of long-term debt 674,082 758,150
Customer deposits 1,021,831 601,758
------------ ------------
Total current liabilities 39,101,250 31,906,325
Long-term debt, less current maturities 7,385,738 7,436,749
Due to employees 397,302
Minority Interest 190,810 190,810
Other 36,125 127,683
------------ ------------
Total liabilities 46,713,923 40,058,869
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Commitments
Stockholders' equity:
Preferred stock, $.01 par value- 2,000,000 shares
authorized; 500,000 shares issued and outstanding 5,000 5,000
Common stock, $.01 par value- 50,000,000 shares
authorized ; 25,643,397 and 24,029,800 issued in
2000 and 1999 respectively 256,434 240,298
Additional paid in capital 44,966,659 30,513,805
Cumulative translation adjustment (4,733) (6,204)
Retained earnings (1,919,234) (1,973,538)
Treasury stock, at cost; 23,427 shares in 2000 and
1999 respectively (263,580) (263,580)
------------ ------------
Total stockholders' equity 43,040,546 28,515,781
------------ ------------
Total liabilities and stockholders' equity $ 89,754,469 $ 68,574,650
============ ============
</TABLE>
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
<S> <C> <C>
Revenues:
Automotive division $67,667,856 $45,842,659
Computer products and
telecommunications equipment 560,859 475,266
----------- -----------
Total revenues 68,228,715 46,317,925
Operating expenses:
Cost of sales - automotive division 56,780,109 38,792,945
Cost of sales - computer products and
telecommunications equipment 263,792 359,719
Selling, administrative and
development expense 10,598,996 6,415,290
Interest expense 516,378 444,283
----------- -----------
Operating income before income
tax expense 69,440 305,688
Income tax expense 15,136 190,000
----------- -----------
Net income $ 54,304 $ 115,688
=========== ===========
Per common share:
Basic $ 0.00 $ 0.01
Diluted $ 0.00 $ 0.00
Average number of shares used in computation:
Basic 24,604,901 19,112,945
Diluted 27,291,031 25,806,159
</TABLE>
<PAGE>
FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net income $ 54,304 $ 115,688
Adjustments to reconcile net income
to net cash (used in) provided by operating
activities:
Amortization of intangible assets 220,615 146,812
Depreciation 126,377 106,945
Noncash item-stock-based compensation 46,922 196,142
(Increase) decrease in assets:
Net investment in direct financing leases 49,952 137,526
Notes receivable (577,608)
Accounts receivable (3,252,123) (6,071,129)
Inventories (7,577,956) (3,280,750)
Other assets 1,085,674 (348,829)
Increase (decrease) in liabilities:
Accounts payable (1,028,718) 3,859,579
Accrued expenses 760,157 517,345
Floor plan notes payable 7,127,481 4,578,306
Customer deposits 420,073 343,148
----------- -----------
Net cash provided by (used in)
operating activities (2,544,850) 300,783
----------- -----------
Cash flows used in investing activities:
Additions to property and equipment (342,038) (197,621)
----------- -----------
Net cash used in investing activities (342,038) (197,621)
----------- -----------
Cash flows from financing activities:
Repurchase of common stock -- (65,596)
Line of credit -- (450,000)
Payments of long-term debt (135,079) (164,408)
Proceeds from convertible debentures -- 2,750,000
Increase in due from shareholders -- (150,000)
Net proceeds from issuance of common stock and
exercise of warrants 5,287,890
----------- -----------
Net cash provided by (used in)
financing activities 5,152,811 1,919,996
----------- -----------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Effect of exchange rates on cash 1,471 1,121
----------- -----------
Net increase (decrease) in cash and cash equivalents 2,267,394 2,024,279
Cash and cash equivalents, beginning of period 6,985,878 977,134
----------- -----------
Cash and cash equivalents, end of period $ 9,253,272 $ 3,001,413
=========== ===========
Supplemental Disclosures Of Cash Flow Information:
Cash paid during the period for:
Interest $ 516,378 $ 444,283
Income taxes $ 0 $ 501,500
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion of the operations, financial condition, liquidity
and capital resources of Fidelity Holdings, Inc. and its subsidiaries ("we" or
"the Company") should be read in conjunction with our unaudited Consolidated
Financial Statements and related notes thereto included elsewhere herein.
This discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results could differ significantly from the results discussed in the
forward-looking statements.
The Company
On May 14, 1998, the Company, a holding company involved in the
acquisition and development of synergistic technological and telecommunications
businesses and the regional consolidation of the retail automotive industry,
acquired, from a related party, the Major Automotive Group of dealerships
("Major Auto") and related real property and leases. We operate in two
divisions: Automotive and Technology. The Automotive division consists of retail
automotive dealerships, the Company's subsidiary Major Fleet and Leasing, Inc.
("Major Fleet") and related entities. The Technology division is comprised of
all non-automotive operations including our subsidiaries Computer Business
Sciences, Inc. and IG2, Inc.
Results of Operations - Three Months Ended March 31, 2000 and Three Months Ended
March 31, 1999
Revenues. Revenues for the three-month period ended March 31, 2000
increased to approximately $68.2 million, which is $21.9 million, or 47.3%, over
the prior comparable period's revenues of $46.3 million. Such increase was
solely attributable to the revenues of Major Auto, which were approximately
$67.7 million for the 2000 quarter, an increase of almost $22 million, or 48.2%,
over the prior year's comparable quarter's revenue of $45.7 million. Of this
increase, approximately $4.7 million relates to revenues generated by Compass
Lincoln Mercury, a dealership we acquired in September 1999. The primary reasons
for the significant growth in revenues were both increased unit sales and
increased average sales price per unit. New car unit sales increased by 90 units
in the first quarter of 2000 from the first quarter of 1999, while used car unit
sales increased 949 units in the 2000 first quarter over the prior year's
comparable quarter. Management believes that the increase in unit sales is
primarily attributable to Major Auto's successful efforts in selling used
vehicles at its expansive facility in Long Island City, New York. An average of
more than 700 used vehicles were sold during each of the months in the 2000
period. Major Auto's sales efforts included extensive Internet promotions, local
advertising in all media and the branding of its used car operation as "Major
World." Management believes that market acceptance of its Major World brand was
a strong contributor to the 2000 sales volume performance. Additionally, the
average sales price per vehicle for both new and used vehicles increased by
almost $1,500 in the 2000 period compared with the 1999 period. Increased sales
of luxury or "high line" used cars contributed significantly to the average used
vehicle sales price increase.
Cost of sales. The cost of sales increase of almost $17.9 million, or
45.7%, to $57.0 million in the first quarter of 2000 from $39.2 million for the
three months ended March 31, 1999 is solely attributable to Major Auto's
operations, which had a cost of sales of $56.8 million in the current period,
compared with $38.8 million in the 1999 period, an increase of $18.0 million, or
46.4%. This increase is consistent with the increased sales volume in terms of
units and reflects a small decrease of $43.00 in the average unit cost of new
cars and, more significantly, a $375.00 increase in the average unit cost of
used vehicles.
<PAGE>
Gross profit. Of the total gross profit of almost $11.1 million for the
three months ended March 31, 2000, Major Auto generated approximately $11.0
million, of which Compass Lincoln Mercury generated $800,000. In the first
quarter of 1999, gross profit for Major Auto was approximately $7.1 million.
This increase in gross profit was attributable to (i) the increase in units
sold; (ii) the gross profit as a percentage of sales for Major Auto as a whole
during the 2000 first quarter, which was 15.6%, compared with 15.1% in the
comparable 1999 period; and (iii) the change in revenue percentage mix. Revenues
went from 43.5% of total revenues generated by new vehicle sales and 50.7%
generated by used vehicles sales in the first quarter of 1999 to 35.9% of total
revenues generated by new vehicle sales and 59.3% generated by used vehicle
sales in the first quarter of 2000.
Selling, general and development expenses. In the three months ended March
31, 2000, selling, general and development expenses ("S, G & D") increased
approximately $4.1 million to approximately $10.5 million, from $6.4 million.
Approximately $3.1 million of this increase is attributable to our automotive
division, the S, G & D of which aggregated $8.7 million in the first quarter of
2000, compared with $5.6 million in the comparable prior period, an increase of
56.5%. This increase is primarily attributable to the costs associated with
increased sales efforts and results, principally, advertising and compensation.
S, G & D attributable to our technology division increased approximately $1.0
million to $1.8 million, or 117%, from $800,000 in the prior comparable quarter,
primarily as a result of IG2 Inc.'s development activities.
Interest expense. Interest expense had a net increase of $72,000 to
$516,000 in the first quarter of 2000 from interest expense of $444,000 incurred
in the comparable prior period. This is primarily related to the increase in
floor plan interest based on the higher levels of Major Auto's inventories and
higher interest rates during the first quarter of 2000 as compared with the
first quarter of 1999.
Results of Operations - Three Months Ended March 31, 1999 and Three Months Ended
March 31, 1998
Revenues. Revenues for the three-month period ended March 31, 1999
increased to approximately $46.3 million or $45.8 million over the prior
comparable period's revenues of $496,000. Such increase was almost solely
attributable to the revenues of Major Auto, which were $45,672,235 for the 1999
quarter. There was no comparable amount in the corresponding period in 1998
because the Major Auto was not acquired until May 14, 1998 and, in conformity
with generally accepted accounting principles, its results of operations could
only be consolidated with ours since the date of acquisition. A comparison of
the average monthly revenue for Major Auto for the seven and one-half month
period it was owned by the Company in 1998 with the average monthly revenue
generated by Major Auto during the first three months of 1999 shows an
approximate 17% increase. Management believes that this increase in average
monthly sales is primarily attributable to Major Auto's successful efforts in
selling used vehicles at its expansive facility in Long Island City, New York.
More than 400 used cars were sold during each of the months in the 1999 period.
Major Auto's initiatives included extensive Internet promotions, local
advertising in all media and the branding of its used car operation as "Major
World." Additionally, the relatively mild winter in the New York Metropolitan
area contributed to increased sales during these months when automotive sales,
traditionally, decrease. The results of this quarter are not necessarily
indicative of the results for any future period or the full year of 1999.
Cost of sales. The cost of sales of $39.2 million for the three months
ended March 31, 1999 is solely attributable to Major Auto's operations, which
had a cost of sales of $38.8 million in the current period. There is no
comparable amount for the prior year.
Gross profit. Of the total gross profit of almost $7.2 million for the
three months ended March 31, 1999, Major Auto generated $6.9 million. Gross
profit as a percentage of sales for Major Auto during the
<PAGE>
1999 first quarter was 15.1%. Although there was no comparable amount for the
first quarter of 1998, the gross profit percentage for Major Auto in 1998 during
the seven and one-half months since its acquisition on May 14, 1998 was 13.8%.
Management believes that the increase in gross profit percentage is primarily
attributable to the increased volume of used vehicle sales as a percentage of
total sales during the first quarter of 1999, as compared with the seven and
one-half month 1998 period.
Selling, general and development expenses. In the three months ended March
31, 1999, S, G & D increased almost $6.0 million to approximately $6.4 million,
from $443,000. Substantially all of this increase resulted from the acquisition
of Major Auto. S, G & D attributable to Major Auto aggregated $5.1 million in
the first quarter of 1999. S, G & D attributable to the Technology division
increased approximately $650,000, or 331%, from the prior comparable quarter,
primarily as a result of IG2 Inc.'s development activities.
Interest expense. Interest expense had a net increase of $418,000 to
$444,000 in the first quarter of 1999 from interest expense of $26,000 incurred
in the comparable prior period. This is primarily related to the floor plan
interest of $178,000 and interest incurred in financing the acquisition of Major
Auto amounting to $188,000 and, to a lesser extent, $50,000 of interest accrued
on outstanding convertible debentures.
Assets, Liquidity and Capital Resources - March 31, 2000
At March 31, 2000, our total assets were almost $90 million, an increase of
approximately $21.2 million from December 31, 1999. This increase is primarily
related to the increase in Major Auto's accounts receivable of approximately
$3.2 million, the increase in Major Auto's inventories of approximately $7.6
million, a net increase in cash of approximately $2.3 million and an increase in
goodwill of approximately $7.0 million. The increase in accounts receivable and
inventories is directly related to Major Auto's increased sales levels during
the first quarter of 2000. The increase in cash is primarily attributable to the
proceeds from the issuance of our common stock and exercise of warrants
aggregating $5.3 million. The increase in goodwill relates to acquisitions in
the first quarter of 2000.
The Company's primary source of liquidity for the three months ended March
31, 2000 was $5,152,811 from its financing activities. This was the net effect
of $4,542,802 of net proceeds from the private placement of 316,667 shares of
our common stock and $745,088 of net proceeds from the exercise of warrants for
398,443 shares of our common stock, as offset by payments of outstanding debt of
$135,079.
The net decrease in cash from operating activities of $2,544,850, was
further decreased by the cash used in investing activities of $342,038 for the
net additions to property, plant and equipment.
The foregoing activities, i.e. financing, operating and investing, plus an
exchange rate cash effect increase of $1,471, resulted in a net cash increase of
$2,267,394 for the three months ended March 31, 2000.
We believe that the cash generated from existing operations, together with
cash on hand, available credit from its current lenders, including banks and
floor planning, will be sufficient to finance our current operations and
internal growth for at least the next twenty-four months. Our Automotive
division will require additional financing in connection with future planned
acquisitions and our Technology division will require additional funding to
proceed with its development and implementation plans. There can be no assurance
that, for additional growth, such funding will be available. We are exploring
financing alternatives with respect to our projected cash requirements.
<PAGE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Risk
Although we develop technology products in the United States, Canada and
Israel, substantially all our revenues come from sales of vehicles in the United
States. Consequently, foreign sales constitute a minimal amount of our revenues.
Even so, our financial results could be affected by changes in foreign currency
exchange rates or weak economic conditions in foreign markets. Because
substantially all our revenues are currently denominated in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. Due to the nature of our investments and operations, we believe that
there is not a material risk exposure.
Interest Rate Risk
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since all of our investments are in short-term
instruments, including money market funds. Our interest rate expense is also
sensitive to changes in the general level of U.S. interest rates because the
interest rate charged varies with the prime rate. Due to the nature of our
operations, we believe that there is not a material risk exposure.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not engaged in any litigation other than as previously reported.
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27. Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIDELITY HOLDINGS, INC.
Date: May 15, 2000 /s/ Doron Cohen
---------------
Doron Cohen
President and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND
RELATED FOOTNOTES OF FIDELITY HOLDINGS, INC. AND SUBSIDIARIES AS OF AND FOR THE
THREE MONTHS ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS AND FOOTNOTES.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 9,253,272
<SECURITIES> 0
<RECEIVABLES> 10,107,670
<ALLOWANCES> 0
<INVENTORY> 32,190,756
<CURRENT-ASSETS> 55,174,163
<PP&E> 7,466,465
<DEPRECIATION> (1,527,214)
<TOTAL-ASSETS> 89,754,469
<CURRENT-LIABILITIES> 39,101,250
<BONDS> 7,385,738
0
5,000
<COMMON> 256,434
<OTHER-SE> 42,779,112
<TOTAL-LIABILITY-AND-EQUITY> 89,754,469
<SALES> 68,228,715
<TOTAL-REVENUES> 68,228,715
<CGS> 57,043,901
<TOTAL-COSTS> 10,598,996
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 516,378
<INCOME-PRETAX> 69,440
<INCOME-TAX> 15,136
<INCOME-CONTINUING> 54,304
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,304
<EPS-BASIC> .00
<EPS-DILUTED> .00
</TABLE>
