UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A-1
(Mark One)
|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 1998
|_| 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.
(Name of Small Business Issuer in Its Charter)
Nevada 11-3292094
------ ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
80-02 Kew Gardens Road, Suite 5000
Kew Gardens, New York 11415
--------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code (718) 520-6500
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of Class)
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 |_|
<PAGE>
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
Issuer's revenues for its most recent fiscal year: $99,667,822.
The approximate aggregate market value of the Company's common stock held
by non-affiliates, computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, as of April 8, 1999 was
$59,000,603. The number of shares outstanding of the Company's common stock on
April 8, 1999, was 8,522,121 shares.
<PAGE>
PART I
Item 1. Description of Business.
The statements which are not historical facts contained in this Annual Report
are forward looking statements that involve risks and uncertainties, including,
but not limited to, possible delays in the Company's expansion efforts,
divestiture efforts, changes in automotive, telephony and communication markets
and technologies, government regulation, the nature of possible supplier or
customer arrangements which may become available to the Company in the future,
possible technological obsolescence, uncollectible accounts receivable, slow
moving inventory, lack of adequate financing, increased competition and
unfavorable general economic conditions. The Company's actual results may differ
materially from the results discussed in any forward looking statement.
Reclassification of Financial Statements
On February 7, 2000, the Company announced that its Board of Directors had
determined to continue the development of the Company's non-automotive
operations which had previously been classified in its financial statements as
discontinued operations for financial reporting purposes. Pursuant to Emerging
Issues Task Force ("EITF") 90-16: Accounting for Discontinued Operations
Subsequently Retained, the Company is filing this amendment to its Form 10-KSB
for the fiscal year ended December 31, 1998 to reflect the reclassification of
its financial statements in connection with its decision to continue the
Company's non-automotive operations.
General
Fidelity Holdings, Inc. ("the Company") was incorporated in Nevada on
November 7, 1995. The Company historically has operated as a holding company
and, accordingly, derived its revenues solely from its operating subsidiaries.
The Company's first full year of operations was 1996. The operating subsidiaries
of the Company have been grouped into two divisions: Automotive and Technology.
The Automotive Division operates through Major Automotive Group ("Major Auto"),
a leading consolidator of automobile dealerships in the New York Area which
operates through five retail automobile dealerships. The operations of the
Company's Leasing division are included in the Automotive Division and consist
of providing leases and other financing. Such activities are directed primarily
toward the automotive vehicle market. The Technology Division has operated
through voice processing and computer telephony technology divisions. Unless
otherwise indicated, all references to the Company include reference to the
subsidiaries of the Company.
Through its Technology Division, the Company has provided a broad range of
telecommunications services. Included in its telecommunications product lines
are its (i) proprietary software which enables consumers to place long-distance
telephone calls at discounted rates and (ii) a variety of sophisticated
interactive voice response applications. This division also developed, and
presently markets and sells, a proprietary computer software system that
provides multi-lingual accounting and business management applications.
Included in the Technology Division is the Company's plastics and utility
products operations which currently consists of a development-stage company
which was acquired in 1996. Its proprietary prototypes 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.
In December 1998, the Company announced its intention to explore the
possible divestiture of its non-automotive activities, specifically, its
Technology Division, by way of sale, merger, consolidation or otherwise. On
February 7, 2000, the Company announced that its Board of Directors had
determined to continue the development of the Company's non- automotive
operations which had previously been classified in its financial statements as
discontinued operations for financial reporting purposes.
<PAGE>
Automotive Division
Major Auto Acquisition
On April 21, 1997, the Company and its wholly-owned subsidiary, Major
Acquisition Corp., entered into a merger agreement (the "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
44.14% of the Company's outstanding common stock. Mr. Bendell owned 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, operated five franchised automobile dealerships
(collectively, the "Major Auto Group").
On May 14, 1998, pursuant to the Merger Agreement, Bruce Bendell
contributed 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. then acquired 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. Major Acquisition Corp. purchased the
remaining 50% of the issued and outstanding shares of common stock of Major
Dodge and Major Chrysler, Plymouth, Jeep Eagle from Harold Bendell, Bruce
Bendell's brother, for $4 million in cash pursuant to a stock purchase
agreement. In addition, Major Acquisition Corp. acquired two related real estate
components (the "Major Real Estate", defined hereinafter) from Bruce Bendell and
Harold Bendell (collectively "the Bendells") for $3 million.
The preferred stock issued to Bruce Bendell is designated as the
"1997-MAJOR Series of Convertible Preferred Stock." It has voting rights and is
convertible into the Company's common stock (the "Common Stock'). The number of
shares of Common Stock into which the 900,000 shares of 1997-MAJOR Series of
Convertible Preferred Stock issued to Mr. Bendell is convertible is 1.8 million
shares. The foregoing acquisitions from Major Auto and Harold Bendell are
collectively referred to herein as the "Major Auto Acquisition."
The Merger Agreement allocated the value of the consideration paid 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 allocated the value of the consideration
paid to Harold Bendell 50% to each of Major Dodge and Major Chrysler, Plymouth,
Jeep Eagle.
To finance the cash portion of the Major Auto Acquisition, aggregating $7
million ($4 million for Harold Bendell and $3 million to purchase the Major Real
Estate), Major Acquisition Corp. borrowed $7.5 million from Falcon Financial,
LLC ("Falcon") pursuant to a loan and security agreement dated May 14, 1998, for
a 15 year term at an interest rate of 10.18%. Prepayment is not be permitted for
the first five years, after which time prepayment may be made, in full only,
along with the payment of a premium.
The collateral securing the Falcon loan transaction includes the Major
Real Estate and, subject to the interests of any current or prospective "floor
plan or cap loan lender," the assets of Major Acquisition Corp. Major
Acquisition Corp. is required to comply with certain financial covenants related
to net worth and cash flow. In addition, the Company provided an unconditional
guarantee of the Falcon loan pursuant to a guarantee agreement dated May 14,
1998.
General
Major Auto 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 (v) Subaru. Major Auto also distributes
General Motors vehicles in the Ukraine. 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 27 years
experience in the automobile industry. He began
<PAGE>
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 $150
million in revenues (including revenues of approximately $98 million since May
14, 1998, the date of its acquisition by the Company) and 175 employees in 1998.
Industry Background
Automobile manufacturers distribute their new vehicles through franchised
dealerships. According to industry data from the National Automobile Dealers
Association ("NADA data"), in 1998, total dollar sales, consisting of the sale
of all new and used vehicles and service and parts, of all franchised new-car
dealerships increased 11% to a record high of approximately $560 billion.
Franchised dealerships located in the New York State had an estimated total
dollar sales of $25.3 million.
According to NADA data, on average, in 1998 new vehicle sales constitute
59% of a franchised dealership's total sales. Unit sales of new vehicles rose
7.3% in 1998 to a total of 16.2 million units sold. At an average retail selling
price of $23,633 per vehicle, new vehicle sales totaled approximately $383
billion in 1998. From 1993 to 1998 sales revenue from the sale of new vehicles
increased approximately 51%. The annual net profit of the typical United States
franchised dealer's new vehicle department is estimated to be $50,173 retailed.
According to NADA data, on average in 1998, used vehicle sales constitute
29.4% of a franchised dealerships' total sales. In 1998, franchised new vehicle
dealers sold 12.2 million retail used vehicles. At an average selling price of
$12,501 per vehicle, used vehicle sales totaled approximately $153 billion in
1998. From 1993 to 1998 sales revenue from the retail sale of used vehicles
increased approximately 69% and the combined sales revenue from the retail and
wholesale sale of used vehicles increased approximately 56%. The annual net
profit of the typical United States franchised dealer's used vehicle department
is estimated to be $154,311 including wholesale and retail. The NADA data cites
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. No assurance can be given that results of Major Auto's operations will
conform to NADA's industry data.
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>
1993 1994 1995 1996 1997 1998
------- ------- ------- ------- ------- -------
(Units in millions; dollars in billions)
<S> <C> <C> <C> <C> <C> <C>
New vehicle unit sales 13.9 15.1 14.8 15.1 15.1 16.2
New vehicle sales revenue(1) $ 253.0 $ 290.0 $ 303 $ 328.0 $ 338.2 $ 383.0
Used vehicle unit sales-retail 9.9 10.9 11.4 11.9 12.0 12.2
Used vehicle retail sales revenue $ 90.4 $ 111.0 $ 126.0 $ 137.0 $ 145.2 $ 153.0
Used vehicle unit sales-wholesale 6.4 6.8 7.0 7.2 7.1 7.1
Used vehicle wholesale sales
revenue $ 24.0 $ 27.7 $ 30.3 $ 33.4 $ 34.6 $ 35.7
</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 Automobile Dealers Association (NADA) Data 1999 (1998 data preliminary
and estimated).
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 3% in 1998 for franchised dealerships, a portion
of which is accounted for by the increase in the amount of used vehicle
-3-
<PAGE>
reconditioning. Revenue from parts and services constitutes, on average,
approximately 11.6% of a franchised dealership's total sales and generates an
annual net profit of approximately $150,000.
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 1998, total franchised dealership gross
profits were, on average, $3.1 million with an average net profit of $403,000.
To reduce the costs of owning a new vehicle, automobile manufacturers in
recent years have offered favorable short- term lease terms. This has attracted
consumers to short-term leases and has resulted in consumers returning to the
new vehicle market sooner than if they had purchased a new vehicle with
longer-term financing. In addition, this has provided new car dealerships with a
continuing source of off-lease vehicles and has also enabled dealerships' parts
and service departments to provide repair service under factory warranty for the
lease term.
The automotive dealership industry has been consolidating in recent years.
Until the 1960s, automotive dealerships were typically owned and operated by a
single individual who controlled a single franchise. However, because of
competitive and economic pressures in the 1970s and 1980s, particularly the oil
embargo of 1973 and the subsequent loss of market share experienced by United
States automobile manufacturers to imported vehicles, many automotive
dealerships were forced to close or to sell to better-capitalized dealer groups.
Continued competitive and economic pressure faced by automotive dealers and an
easing of restrictions imposed by automobile manufacturers on multiple-dealer
ownership have led to further consolidation. According to NADA data, the number
of franchised dealerships has declined from 36,336 in 1960 to 22,400 at the
beginning of 1998.
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, management believes that General
Motors Corporation is implementing a strategy to reduce its franchised
dealerships by 1,500 from 8,400 by the year 2000. Ford Motor Co. has also been
trying to reduce the number of its franchises as part of a campaign to upgrade
its retail networks and make these dealers that remain more profitable. 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 continually increase customer
satisfaction and loyalty and to increase operating efficiencies. Key elements of
this operating strategy are as follows:
Major World Branding. Major Auto has established its Major World brand and
www.majorworld.com Internet brand for its current used car operations and those
of Major Auto's participating regional dealerships. With centralized buying and
advertising as its focus, Major World is a natural extension of the Company's
efforts in its regional acquisition strategy and its accomplishments in used car
sales through its dealerships in the metropolitan New York area.
Internet Sales and Other 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 increased its revenue to a present level of more than $1
million each month from its Internet website, www.majorworld.com and other
electronic media such as Bloomberg. 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 (see "Computer Telephony and
Telecommunications Division -- Talkie"), 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-
<PAGE>
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.
Focus on Used Vehicle Sales. A key element of Major Auto's operating
strategy is to focus on the sale of used vehicles. In 1998, approximately 12.2
million used cars were sold retail by dealers, more than fifty percent more than
the number of such sales in 1980. Sales of used vehicles are generally more
profitable than sales of new vehicles. Management believes that the New York
metropolitan area is one of the largest markets for used car sales in the United
States and that Major Auto sells more used cars in the New York metropolitan
area than any other automobile dealership or dealership group. Major Auto
strives to attract customers and enhance buyer satisfaction by offering multiple
financing and leasing options and competitive warranty products on every used
vehicle it sells. Major Auto believes that a well-managed used vehicle operation
affords it an opportunity to: (i) generate additional customer traffic from a
wide variety of prospective buyers; (ii) increase new and used vehicle sales by
aggressively pursuing customer trade-ins; (iii) generate incremental revenues
from customers financially unable or unwilling to purchase a new vehicle; and
(iv) increase ancillary product sales to improve overall profitability. To
maintain a broad selection of high-quality used vehicles and to meet local
demand preferences, Major Auto acquires used vehicles from trade-ins and a
variety of sources nationwide, including direct purchases from individuals and
fleets, and manufacturers' and independent auctions. Major Auto believes that
the price at which it acquires used vehicles is the most significant factor
contributing to the profitability of its used vehicle operations. Major Auto
believes that, because of the large volume of used vehicles that it sells each
month and the more than 27 years of experience in the used vehicle business of
its senior management, 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 an extensive selection of new and used
cars and light trucks, vehicle financing, replacement parts and service. At its
four locations, Major Auto offers, collectively, six makes of new vehicles,
including Chevrolet, Chrysler, Plymouth, Dodge, Jeep and Subaru. In addition,
Major Auto sells a 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 broad cross section of customers, minimizes dependence on any
one automobile manufacture, and helps reduce its exposure to supply problems and
product cycles.
Operate Multiple Dealerships in Target Market. Major Auto's goal to become
the leading automotive dealer in its target market by operating multiple
dealerships in that market. To accomplish this, Major Auto seeks to acquire new
franchises in its existing market and to expand its existing franchises to new
markets. This strategy 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.
Leverage the Sale of International Calling Time. Major Auto offers customers
pre-paid international telephone calling time in connection with the purchase or
lease of its automobiles. To accomplish this, Major Auto utilizes the Company's
proprietary Talkie technology, which is able to provide users with international
calling time at sharply discounted rates. Because Major Auto purchases telephone
time from the Company at below-market rates, the cost to Major Auto of
<PAGE>
implementing this program is minimal compared with the savings 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 adds value to its customers and thereby increase customer
satisfaction and loyalty.
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.
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 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 expending cash, incurring debt or issuing equity
securities, which could have a dilutive effect on the then outstanding capital
stock of the Company. The Company, like all other automotive dealership holding
companies, will continue to be subject to the requirement of obtaining prior
approval for each acquisition from the appropriate automotive manufacturer.
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." No assurance can be given that the Company
will successfully locate suitable acquisition candidates, or even if such
candidates are located and acquired, that such acquisitions will ultimately
prove profitable to the Company.
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. The Company and Mr.
Bendell are currently negotiating a letter of intent concerning the Company's
acquisition of Oyster Bay Nissan. See "Proposed Acquisitions." 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."
<PAGE>
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 six makes of new vehicles:
Chevrolet, Chrysler, Plymouth, Dodge, Jeep 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 Bendell and Harold
Bendell, on a weekly basis.
Bruce Bendell and Harold Bendell are responsible for senior-level
management of the dealerships. The Bendell brothers' management control is
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 which
commenced 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 and Subaru. For the period from May 14, 1998
(date of acquisition) through December 31, 1998, Major Auto's dealerships sold
1,995 new vehicles generating total sales of approximately $47,000,000, which
constituted approximately 48% of Major Auto's total revenues. Major Auto's gross
profit margin on new vehicle sales for the period from May 14, 1998 (date of
acquisition) through December 31, 1998, was approximately 9.4% which is higher
than the industry average for all of 1998 of 6.5%. The relative percentages of
Major Auto's new vehicle sales among makes of vehicles for the period from May
14, 1998 (date of acquisition) through December 31, 1998, was as follows:
Percentage of
Manufacturer New Vehicle Sales
------------ -----------------
Chevrolet 36%
Chrysler, Plymouth
and Jeep 32%
Dodge 26%
Subaru 6%
The following table sets forth information with respect to Major Auto's
new vehicle sales for the period May 14, 1998 (date of acquisition) through
December 31, 1998:
NEW VEHICLE SALES
(dollars in thousands)
Unit sales 1,995
Sales revenue $47,000
Gross Profit $ 4,400
Gross Profit Margin 9.4%
<PAGE>
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 pursuant to which Major Auto distributes in the
Ukraine new vehicles manufactured by General Motors. Major Auto generally
receives a deposit on the purchase price of the vehicle from the Ukrainian
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. To facilitate this facet of its
operations, the Company recently entered into a consulting agreement with
Clemont Investments Ltd. ("Clemont"), a consulting firm which provides business
advisory services regarding the establishment in Europe of branches or
operations of U.S. based companies. See "Certain Relationships and Related
Transactions."
Used Vehicle Sales. Major Auto offers a wide variety of makes and models
of used vehicles for sale. For the period from May 14, 1998 (date of
acquisition) through December 31, 1998, Major Auto sold 3,177 used vehicles
generating total sales of approximately $44,000,000, which constituted
approximately 45% of Major Auto's total revenues. Major Auto's gross profit
margin on used vehicle sales for the period from May 14, 1998 (date of
acquisition) through December 31, 1998, was approximately 14.8% as compared with
the industry average for all of 1998 of 10.8%. Major Auto believes it is the
largest seller of used vehicles (based on unit sales and sales revenue) in the
New York metropolitan area.
Major Auto has consolidated its used vehicle operations for its various
dealerships at a single site. Major Auto acquires the used vehicles it sells
through customer trade-ins, at "closed" auctions which may be attended by only
new vehicle dealers and which offer off-lease, rental and fleet vehicles, and at
"open" auctions which offer repossessed vehicles and vehicles being sold by
other dealers.
Major Auto believes that the market for used vehicles is driven by the
escalating purchase price of new vehicles and the increase in the quality and
selection of used vehicles primarily due to an increase in the number of popular
cars coming off short-term leases.
The following table sets forth information with respect to Major Auto's
used vehicle sales for the period from May 14, 1998 (date of acquisition)
through December 31, 1998:
USED VEHICLE SALES
(dollars in thousands)
Unit sales 3,177
Sales revenue $43,900
Gross Profit $6,500
Gross Profit Margin 14.8%
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.
For the period from May 14, 1998 (date of acquisition) through December 31,
1998, Major Auto's parts and service operations generated total revenues of
approximately $6,700,000, which constituted approximately 7% of Major Auto's
total revenues at a gross profit margin of approximately 37%.
The increased use of electronics and computers in vehicles has made it
difficult for independent repair shops to retain the expertise to perform major
or technical repairs. In addition, because motor vehicles are increasingly more
complex and there are longer warranty periods, Major Auto believes that repair
work will increasingly be performed at dealerships, which have the sophisticated
equipment and skilled personnel necessary to perform the repairs.
<PAGE>
Major Auto considers its parts and service department to be an integral
part of its customer service efforts and a valuable opportunity to strengthen
customer relations and deepen customer loyalty. Major Auto attempts to notify
owners of vehicles purchased at its dealerships when their vehicles are due for
periodic service, thereby encouraging preventative maintenance rather than
post-breakdown repairs.
Major Auto's parts and service business provides a stable, recurring
revenue stream to its dealerships. In addition, Major Auto believes that, to a
limited extent, these revenues are countercyclical to new vehicle sales, since
vehicle owners may repair their existing vehicles rather than purchasing new
vehicles. Major Auto believes that this helps mitigate the effects of a downturn
in the new-vehicle sales cycle.
Major Auto does not operate a body shop, but instead contracts with third
parties for body repair work.
The following table sets forth information with respect to Major Auto's
sales of parts and services for the period from May 14, 1998 (date of
acquisition) through December 31, 1998:
SALES OF PARTS AND SERVICES
(dollars in thousands)
Sales Revenue $6,700
Gross Profit $2,500
Gross Profit Margin 37%
Vehicle Financing. Major Auto provides a wide variety of financing and
leasing alternatives for its customers. Major Auto believes that its customers'
ability to obtain financing at its dealerships significantly enhances Major
Auto's ability to sell new and used vehicles. Major Auto believes that its
ability to provide its customers with a variety of financing options provides
Major Auto with an 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 believes 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 which 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.
<PAGE>
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 1998 was
approximately $428. Notwithstanding that advertising costs in the New York
metropolitan area are generally higher than the national average, Major Auto's
cost of marketing and advertising per vehicle sold have consistently been less
than the national average. These lower costs result from the fact that Major
Auto: (i) has favorable contracts with four major area daily newspapers; (ii)
advertises in lower-cost niche markets (such as local ethnic markets, employee
purchase programs and discount buying services); and (iii) utilizes telephonic
marketing and electronic marketing via services such as the Internet and
Bloomberg.
Relationships with Manufacturers
Each of Major Auto's dealerships operates under a separate franchise or
dealer agreement which governs the relationship between the dealership and the
relevant manufacturer. In general, each dealer agreement specifies the location
of the dealership for the sale of vehicles and for the performance of certain
approved services in the specified market area. The designation of such areas,
the allocation of such areas and the allocation of new vehicles among
dealerships is discretionary with the relevant manufacturer. Dealer agreements
do not generally provide a dealer with an exclusive franchise in the designated
market area. A dealer agreement generally requires that a dealer meet specified
standards regarding showrooms, the facilities and equipment for servicing
vehicles, the maintenance of inventories, the maintenance of minimum net working
capital, personnel training and other aspects of the dealer's business. The
dealer agreement also gives the relevant manufacturer the right to approve the
dealer's general manager and any material change in management or ownership of
the dealership. The dealer agreement provides the relevant manufacturer with the
right to terminate the dealer agreement under certain circumstances, such as :
(i) a change in control of the dealership without the consent of the relevant
manufacturer; (ii) the impairment of the financial condition or reputation of
the dealership; (iii) the death, removal or withdrawal of the dealership's
general manager; (iv) the conviction of the dealership or the dealership's
general manager of certain crimes; (v) the dealer's failure to adequately
operate the dealership or to maintain wholesale financing arrangements; (vi) the
bankruptcy or insolvency of the dealership; or (vii) 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 if ever Major Auto proposes to sell its Chevrolet
dealership, it must first offer General Motors the opportunity to purchase that
dealership.
The dealership agreement with General Motors imposes several additional
restrictions on the Company. As a consequence 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's voting
stock or that the actions in question will not occur.
In addition, the General Motors dealer agreement requires 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 be 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
<PAGE>
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.
Competition
The market for new and used vehicle sales in the New York metropolitan area
is one of the most competitive in the nation. In the sale of new vehicles, Major
Auto competes with other new automobile dealers that operate in the New York
metropolitan area. Some competing dealerships offer some of the same makes as
Major Auto's dealerships and other competing dealerships offer other
manufacturer's vehicles. Some competing new vehicle dealers are local,
single-franchise dealerships, while others are multi-franchise dealership
groups. In the sale of used vehicles, Major Auto competes with other used
vehicle dealerships and with new vehicle dealerships which also sell used cars
that operate in the New York metropolitan area. In addition, Major Auto competes
with used car "superstores" that have inventories that are larger and more
varied than Major Auto's.
Major Auto believes that the principal competitive factors in vehicle sales
are the marketing campaigns conducted by automobile manufacturers, the ability
of dealerships to offer a wide selection of popular vehicles, pricing (including
manufacturers' rebates and other special offers), the location of dealerships,
the quality of customer service, warranties and customer preference for
particular makes of vehicles. Major Auto believes that its dealerships are
competitive in all of these areas.
In addition, Major Auto, due to the size and number of automobile
dealerships it owns and operates, is larger than most of 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 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.
<PAGE>
As with automobile dealerships generally, and parts and service operations
in particular, Major Auto's business involves the use, handling and contracting
for recycling or disposal of hazardous or toxic substances or wastes, including
environmentally sensitive materials such as motor oil, waste motor oil and
filters, transmission fluid, antifreeze, freon, waste paint and lacquer thinner,
batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels.
Accordingly, Major Auto is subject to Federal, state and local environmental
laws governing health, environmental quality, and remediation of contamination
at facilities it operates or to which it sends hazardous or toxic substances or
wastes for treatment, recycling or disposal. Major Auto believes that it is in
material compliance with all environmental laws and that such compliance will
not have a material adverse effect on its business, financial condition or
results of operations.
Leasing Operations
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.
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.
Proposed Acquisitions
The Company and Mr. Bendell are currently negotiating a letter of intent
concerning the Company's acquisition of Oyster Bay Nissan. 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 material impact on
the financial positions 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.
In January 1999, Fidelity Holdings and Major Auto entered into an agreement
with Universal Ford, Inc. to acquire Universal Kia, a Kia automobile dealership
located in Long Island City, New York. The purchase price of Universal Kia is
based on Universal Kia's historical operating results and is expected to
aggregated less than $200,000.
Also in January 1999, the Company signed a letter of intent to acquire the
80% of the Long Island, New York based Major of the Five Towns (formerly
Nissanland and Kialand), currently doing business as Major Nissan and Major Kia,
that is owned by the Company's Chairman and CEO, Bruce Bendell. The purchase
price is $1,250,000 subject to receiving a fairness opinion from an independent
appraiser. This dealership has three separate showroom locations. Nicholas
Guadagno, who is President and a 20% shareholder of Major of the Five Towns,
will continue to manage day-to-day operations after the completion of this
acquisition.
<PAGE>
No assurance can be given that the Company will successfully consummate
any or all of the aforementioned potential acquisitions, or, if consummated,
that such acquisitions will ultimately prove profitable to the Company.
In February 1999, the Company signed a contract to acquire, for $800,000,
subject to certain adjustments, in cash ($300,000) and stock ($500,000), Compass
Lincoln-Mercury and Compass Dodge (collectively, "Compass"), both of which are
based in Essex County, New Jersey. This acquisition will enable the Company to
enter the Northern New Jersey market and thus expand Major Auto's regional
presence in the retail automobile sales industry in keeping with one of the
Company's key corporate objectives. It is also expected that after the
acquisition of Compass, Arthur Picon, currently President of the two
dealerships, will remain with the Company. It is expected that, with the more
than thirty years experience Mr. Picon has in the area, and with the resources
of Major Auto, he will be helpful in expanding its operations. The Company is
planning to change the name of these dealerships to Major Lincoln-Mercury and
Major Dodge. It will then utilize its "Major World" brand of marketing at these
two dealerships. This transaction was consummated in September 1999.
Technology Division
In December 1998, the Company announced its intention to explore the
possible divestiture of its non-automotive activities, specifically, its
Technology Division, by way of sale, merger, consolidation or otherwise. On
February 7, 2000, the Company announced that its Board of Directors had
determined to continue the development of the Company's non- automotive
operations which had previously been classified in its financial statements as
discontinued operations for financial reporting purposes.
The Company, through Computer Business Sciences, Inc., a Delaware
corporation ("Computer Business Sciences" or "CBS"), 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)"), Reynard Service Bureau, Inc., a Florida
corporation ("Reynard") and IG2(TM), Inc., a Delaware corporation ("IG2(TM)"),
the five wholly-owned subsidiaries (provided that certain outside investors have
warrants to purchase shares of CBS common stock, See "Recent Developments.")
comprising its Computer Telephony and Telecommunications operations, 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 is planning to exploit its technological capabilities in
telephony by emphasizing high speed, broadband, multimedia transmission over
telephone, including voice, data, video conferencing and other areas, in order
to enhance the Technology Division's value to potential acquirors. See "Planned
Activities."
The Company originally acquired the technology for its telecommunications
products (see "Talkie" below) in April 1996 through its acquisition from Dr. Zvi
Barak and Sarah Barak (the "Baraks") of all of the issued and outstanding
capital stock of Info Systems. A portion of the purchase price for such capital
stock consists of twenty monthly installment payments of $15,000 each 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 capital stock of Info
Systems and the other assets purchased by the Company from the Baraks. On
December 31, 1998 the Company entered into a definitive agreement with the
Baraks regarding payment of all amounts due them. The agreement calls for a
series of payments ranging in amounts from $20,000 to $45,000 to be made to the
Baraks over the period December 31, 1998 through May 18, 1999. The Company has
made all payments as of the date of this Annual Report as scheduled. To secure
its obligations the Company has deposited with an escrow agent $50,000 plus
140,000 shares of its common stock. Additionally, in satisfaction of certain
adjustments to their employment agreements and out-of-pocket expenses incurred
by them, the Company issued to the Baraks 11,960 shares of common stock. The
Baraks have the right to sell such shares back to the Company for a price per
share of $5.00 at any time up to one year from the date of issuance, March 3,
1999.
<PAGE>
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.
Historically, the Company, through its subsidiary Computer Business
Sciences, sold the Talkie Power Web Line Machines to various service providers
(known as "master agents"). A master agent then established a telephone
connection between a foreign country and the Talkie Power Web Line Machine,
which is located at the Company's offices in Kew Gardens, New York. This
connection is typically a dedicated telephone line that runs from the Talkie
Power Web Line Machine to certain equipment located in the foreign country that
is used to connect the dedicated line to the local telephone lines. The master
agent typically leased 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 generated revenues by selling the available telephone time
generated by the Talkie Power Web Line Machine to callers in the foreign
country. There were 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 charged the caller in the
foreign country a 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,
generally, was 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 arranged for a certain
monthly volume of calls from a given foreign
<PAGE>
country, the master agent recouped the cost of the dedicated telephone line to
that foreign country and thereafter generated profits.
The Company has decided to acquire from all of its master agents their
rights to their respective territories and the Talkie Power Line Web Machines
previously sold to them. The Company believes that it can maximize its
profitability by selling for itself the telephone minutes to the existing and
additional territories. Negotiations are continuing with each of the Company's
master agents to finalize the memoranda of understanding with respect to these
acquisitions. See also "Arrangements with Nissko" below.
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, a former director of
the Company, 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 a 55%
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.
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, 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 (which have since expired by their terms), 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. (See "Restructuring of Nissko
Arrangements" below.)
To secure certain payments under the master agent agreement with the Agent,
Bruce Bendell, the Company's Chairman and Chief Executive Office, and Doron
Cohen, the Company's President and Treasurer, have each pledged to the Agent
500,000 shares of the Company's Common Stock. In the event that certain
financial covenants are not met or superseded by definitive documentation
resulting from the MOU (as hereinafter defined), 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 amounts 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 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
<PAGE>
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, formerly a director of the Company.
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. Subsequently, the parties agreed to remove the contractual
two-year restriction on sales of these shares to make such restriction
consistent with current restrictions under the Securities Act of 1933.
The MOU provides that upon execution of definitive documentation containing
the terms and conditions outlined in the MOU, (i) each of the Nissko Principals
will receive 257,500 shares of the Company's Common Stock and Mr. Rimberg will
receive 27,500 shares of the Company's Common Stock, resales of all of which
shares will be subject to restrictions on transfer and voting that are identical
to those described immediately above, and (ii) each of the Nissko 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. 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. Of these warrants representing 227,000 shares of the Company's Common
Stock, warrants for 144,714 shares, in the aggregate, were exercised ratably by
the Nissko Principals in December 1998, leaving a balance of 82,286 shares
represented by such warrants.
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 account to secure this indemnification obligation.
Upon the effectiveness of the definitive documentation relating to the
transactions contemplated by the MOU the Agent's master agent agreement will
terminate 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.
It is the Company's intention to reacquire the territorial rights and Talkie
Power Line Web Machines from its other master agents in exchange for shares of
Common Stock at fair value. The Company has reached tentative agreement with
each such agent and is presently negotiating definitive memoranda of
understanding. The Company concluded its arrangements with Nissko in December
1999.
Interactive Voice Response Software Programs
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 "0" 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.
<PAGE>
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:
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.
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 disconnects 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.
<PAGE>
Talkie-Globe is sold by the Company through Info Systems.
Marketing and Sales
Historically, the Company's strategy with respect to the Talkie Power Web
Line Machine has been threefold. First, it sold additional machines through its
existing master agents as they expanded their businesses by providing telephone
service to additional foreign markets. Second, as demand for the machines
increased, it intended to add additional master agents and/or replace any
existing master agents who were not complying with their master agent agreements
and to enter into strategic partnerships with such new and replacement master
agents that would permit the Company to share in the revenue generated by the
master agents' sale of telephone time. Third, it intended continually to adapt
advancing computer and telecommunications technology to improve and customize
the performance of the machines. Currently, the Company is in the process of
acquiring the territorial rights and equipment from its master agents and
intends to operate its Talkie Power Web Line Machines on its own behalf in
preparation for these activities to be divested. The Company consummated such
arrangements with Nissko in December 1999 and anticipates consummating all other
such arrangements in the first quarter of 2000.
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. Historically, for these services, the Company received 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 customized the
performance of the machines for the respective master agents and for use in
particular countries, for which it has received 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 have been 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 has
provided services for the various other Talkie products and for the Business
Control Software, if requested by the users.
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
$1,295. Each of the off-the-shelf applications costs an additional $795. The
Company intends to maintain and enhance this facet of its business in
preparation for its planned divestiture. As such, its plans include a focus of
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 in order to maximize its value
to potential acquirors. 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 sells for approximately $25,000.
The Company realized gross revenues of $844,000 during 1997 and $1,089,000
during 1998 from the sale of its Talkie interactive voice response software
programs and of Talkie-Globe (excluding intercompany sales). The Company's gross
profit margin on sales of its Talkie products, including interactive voice
response software programs was approximately 28% for 1997 and approximately 35%
for 1998.
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
<PAGE>
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.
Plastics and Utility Products Operations
The Company, through its subsidiary Premo-Plast, Inc. ("Premo-Plast"), is
currently: (i) prototyping and tooling for a line of spa and bath fixtures for
use in whirlpool baths, spas, tubs and swimming pools and (ii) seeking ways to
exploit its proprietary 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 and has began tooling for
their production.
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 smooths 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 through its acquisition from Mr. John Pinciaro of all of his right, title
and interest therein and two United States patent applications (which have been
subsequently granted) related thereto. It is expected that the Company and Mr.
Pinciaro will participate jointly in exploitation of the fixture installation
method. In October 1997, the Company formed a new subsidiary, Maxflo, Inc.,
("Maxflo") whose shares are 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
<PAGE>
that technology and has designed and produced working prototypes of the various
fixtures for use in connection with such method. The Company has completed basic
testing on the prototype fixtures and installation method. In addition, the
Company has finalized a limited number of components and beta testing has been
completed. Production tooling has begun and, given the availability of funding,
it is anticipated that commercial sales of Maxflo's spa and bath fixtures could
commence by the second quarter 2000.
Company's Strategy with respect to Spa and Bath Fixture Technology
The Company, based on its own research, believes that approximately 250,000
whirlpool baths and spas and approximately 600,000 tubs are sold annually.
Management of Premo-Plast estimates that each whirlpool bath requires
approximately 35-45 fixtures and that 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 threefold 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 as a result of above-ground vibrations and stresses, and, unless
installed at the proper depth, 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 prefabricated 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.
<PAGE>
Potentially, the design of the armored conduit offers several advantages
over other types of conduit. First, because the armored conduit system is
assembled from pre-fabricated pieces, if there is a problem with a single piece,
only that piece, rather than the entire conduit system, needs to be replaced.
The problem piece will be replaced with a replacement piece that has a top and
bottom half. The bottom half of the replacement piece will first be put in place
and coupled to the pieces on either side. The wires will then be placed in the
bottom half of the interior tube. The top half of the replacement piece will
then cover the wires and be coupled to the pieces on either side. Second, the
linear ribs on the exterior of the pre-formed shells increase the structural
strength of the shells and permit them to be interlocked when stacked for
storage or shipment, thereby reducing the risk of damage. Third, the outer
plastic shell of the armored conduit system protects it from water, chemicals
and other elements to which underground conduit systems are exposed. As a result
of all of these advantages, the armored conduit system can be expected to be
more durable than existing types of conduit.
The Company has been engaged in limited research and development activities
relating to the armored conduit, and expects, given the availability of funding,
to continue these activities.
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 approximately $207,000 and $300,000 on research and
development in 1997 and 1998, respectively, with respect to such division.
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 approximately $33,750 and
$200,000 respectively, in 1997 and 1998 on research and development with respect
to such division. Such division currently has no customers.
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.
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 for which it received a
patent. 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. 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
Although the Company has many competitors, many of which enjoy greater
resources than it, the Company believes its Talkie Power Web Line Machine has
certain technological features providing it with advantages over its
competitors' products and services. While other companies manufacture and sell
traditional telephone switching equipment, such
<PAGE>
equipment is expensive to purchase and maintain as compared to the Talkie Power
Web Line Machine. Moreover, the Company believes that 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. There can be no assurance that the Company will be able to
maintain such technological advantages, if any, in the future.
The Company will compete, after the acquisition of the territorial rights
and equipment of its master agents, 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. The Company
believes that the use of the Talkie Power Web Line Machine, which is less costly
to purchase and maintain than traditional switching equipment, will enable it to
offer telephone calling time at lower rates than competitors whose rate
structure must account for the higher cost of such traditional switching
equipment. 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, the Company may face
increasing competition which could adversely affect the Company's gross margins
on phone services sold for its own account and, thereby, reduce the Company's
income.
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 callback products sold by approximately six other
entities.
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.
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.
Planned Activities
In February 1999, CBS launched IG2(TM) (Internet Generation Two), a
multimedia network platform that is expected
<PAGE>
to provide high speed Internet access, e-Commerce capabilities, local and long
distance service, television quality video conferencing and television
programming through existing telephone wires already installed in the customer's
home and/or small business. IG2(TM) is believed by the Company to be the next
generation platform in Internet and communications delivery. The Company expects
to price IG2(TM) services at a substantial discount over current rates charged
for telephone, cable and Internet access combined. IG2(TM), Inc., a subsidiary
of CBS, was designated to deploy IG2(TM) services.
The initial trial rollout, Phase I, presently projected for the third
quarter of 1999, targets twenty-two cities and expands to sixty-three cities by
the end of that year. Phase I, using an asynchronous transport mode ("ATM")
technology, is expected to offer guaranteed quality of service, carrier
class-level voice over internet ("Voice/IP") long distance service at
aggressively competitive rates. Phases II and III of this enterprise, utilizing
state-of-the-art digital subscriber line ("DSL") equipment, are expected to
provide a wide array of Voice/IP services including local dial tone, call-back,
dial-around, traditional long distance and high speed internet access.
Additionally, because this technology permits broadband service over existing
copper wires, the Company's Technology Division is positioning itself to offer,
at very competitive prices, additional services such as virtual private networks
("VPN"), movies on demand and pay TV, home shopping, banking, telemarketing,
tele-medicine, video conferencing and distance learning, to enhance its value in
the event of divestiture.
Also in February 1999, CBS received approval to operate as a
facilities-based Carrier of Telecommunications Services and Intrastate
Interexchange Services in New York, Florida and California. This will enable CBS
through IG2(TM) to provide XDSL services in these states.
No assurance can be given that the Company will be successful in developing
the foregoing products or services, or that if successfully developed, such
products or services will result in revenues to the Company or be attractive to
potential acquirors of this operation.
Recent Developments
In January 1999 the Company and CBS entered into a Securities Purchase
Agreement with certain purchasers named therein (the "Purchasers"), pursuant to
which the Company and CBS agreed to sell up to 2,750 Units (the "Units"), each
Unit consisting of (a) in the first tranche, (i) a 12% Convertible Debenture of
the Company in the principal amount of One Thousand Dollars ($1,000) of the
Company (the "Debentures"), convertible on certain terms and conditions into
shares of the Company's common stock, par value $0.01 per share (the "Common
Stock"), (ii) 36.3636 shares of Common Stock, (iii) warrants (the "Warrants") to
acquire 83.3333 shares of Common Stock and (iv) warrants (the "CBS Warrants") to
acquire 25.4545 shares of common stock, par value $0.01 per share, of CBS (the
"CBS Shares"), and (b), in the second tranche, (i) a Debenture in the principal
amount of One Thousand Five Hundred Sixty-Three and 64/100 Dollars ($1,563.64)
and (ii) Warrants to acquire 130.3030 shares of Common Stock and (c) in the
third tranche, (i) Debentures in an aggregate principal amount of One Thousand
Five Hundred Sixty-Three and 64/100 Dollars ($1,563.64) and (ii) Warrants to
purchase 130.3030 shares of Common Stock. The shares of Common Stock issuable
upon conversion of or otherwise pursuant to the Debentures are referred to
herein as the "Conversion Shares" and the shares of Common Stock issuable upon
exercise of or otherwise pursuant to the Warrants are referred to herein as the
"Warrant Shares." The Company closed on the first tranche of $2.75 million and
issued to the Purchasers, in the aggregate, Debentures in the face amount of
$2.75 million, 100,000 shares of Common Stock, Warrants to acquire 229,167
shares of Common Stock and CBS Warrants to acquire 70,000 CBS Shares.
Consummation of the second and third tranches is conditioned upon, among other
things, achievement by the Company and CBS of certain mutually agreeable
milestones and under certain conditions, approval by the shareholders of
Fidelity.The Debentures are convertible into Common Stock of the Company at any
time after the date of issue (subject to certain volume limitations). Upon
conversion, holders will be entitled to receive a number of shares of Common
Stock determined by dividing the outstanding principal amount of the Debentures
by a conversion price equal to the lesser of 90% of the average closing bid
prices for the Common Stock during a defined period prior to conversion, and
$4.20 (but in no event less than $3.00, and subject to adjustment upon the
occurrence of certain dilutive events). The Warrants are exercisable for shares
of Common Stock of the Company. Upon exercise, holders will be entitled to
receive shares of Common Stock for an exercise price of $4.20 per share. The
Warrants will expire on January 25, 2004. The CBS Warrants are exercisable for
shares of Common Stock of CBS. Upon exercise, holders will be entitled to
receive shares of Common Stock for an exercise price of $0.001 per share. The
CBS Warrants will expire on January 25, 2004.In connection with this
transaction, the Company also entered into a Registration Rights Agreement with
the Purchasers under which the Company is required to file a registration
<PAGE>
statement on Form S-3 by March 11, 1999, subject to certain specified
exceptions, which have been met, covering resales of the Conversion Shares and
the Warrant Shares (the "Resale Registration Statement"). Under the Registration
Rights Agreement, the Company may be required to make certain payments to
holders of the Debentures as partial damages if, among other things, the Resale
Registration Statement has not been declared effective by the Securities and
Exchange Commission on or before July 9, 1999, subject to certain specified
exceptions. In connection with the placement of the Debentures, the Company paid
to Zanett Securities Corporation, the placement agent for the transaction (the
"Placement Agent") a fee and non-accountable expense allowance of 6.9%, and the
Company also issued to the Placement Agent, and its assignees, 50,000 shares of
the Company's Common Stock, 30,000 shares of CBS Common Stock and warrants to
purchase an aggregate of 114,583 shares of Common Stock at an exercise price
equal to $4.20 per share. All such Debentures were redeemed in June 1999. See
below. See also "Management's Discussion and Analysis of Financial Condition."
On June 24, 1999, Fidelity Holdings, Inc. (the "Company") entered into an
agreement with three investors, pursuant to which the Company has the right or
obligation to sell, under certain circumstances, in a series of private
placement transactions, up to $20.0 million of the Company's common stock (the
"Common Stock") and warrants in three tranches. Pursuant to a series of
Securities Purchase Agreements (the "Agreements"), the first tranche closed on
June 24, 1999 and the Company sold an aggregate of 285,714 shares of common
stock for an aggregate of $6,000,000 or $21 per share. On December 8, 1999, a
portion representing three-sevenths of the second tranche closed and the Company
sold an aggregate of 176,472 shares of common stock for an aggregate of
$3,000,000 or $17 per share. On February 8, 2000, a portion representing
four-sevenths of the second tranche closed and the Company sold an aggregate of
266,667 shares of common stock for an aggregate of $4,000,000 or $15 per share.
Shares issued upon closing of subsequent tranches, if any, will be priced at
105% of the average closing bid price of the Common Stock for the five trading
days preceding the applicable closing date. Under the terms of the Agreement and
the adjustable warrant issued in connection with the Agreement, the purchasers
will be entitled to acquire additional shares exercisable at $.01 per share,
pursuant to a "reset" formula which takes into account the market price of the
Common Stock at future dates, commencing 40 trading days after the date on which
the purchasers may resell the shares pursuant to a registration statement. In
addition, the Company issued warrants to the purchasers enabling them to
purchase up to an aggregate 285,714 shares of common stock at a purchase price
of $23 per share, 176,472 shares of common stock at a purchase price of $17.25
per share, and 266,667 shares of common stock at a purchase price of $16.00 per
share, exercisable for a five-year period. If specified closing conditions are
satisfied, the Company and the purchasers will be entitled upon satisfaction of
certain milestones to be established with respect to tranche three, to effect
three investments during applicable periods ending 100 trading days after the
expiration date for adjustable warrants issued in the preceding tranche. The
amount of the investment in tranche three would be $7 million. The Company has
entered into a Registration Rights Agreement with the purchasers requiring the
Company to register shares purchased by the purchasers pursuant to the Agreement
under the Securities Act of 1933, as amended, as well as the shares issuable
pursuant to the exercise of the warrants issued to the purchasers. The
Registration Rights Agreement contains provisions for the payment of certain
liquidated damages by the Company in the event of failure to comply with certain
of its terms. The Company has agreed to pay legal expenses of the purchasers
incurred in connection with the private placement, not to exceed $20,000 with
respect to each bringdown. A finder's fee of up to 5% of the purchase price,
payable 2.5% in cash and 2.5% in Common Stock is being paid to International
Securities Corporation in connection with the transaction. The sale was effected
to the purchasers in reliance upon exemptions provided under Section 4(2) of the
Securities Act of 1933, as amended, and Regulation D and Rule 506 promulgated
thereunder. The Company has granted a right of first refusal in favor of the
purchasers with respect to below-market, non-public issuances of its securities
during the period which commenced on December 8, 1999. Securities not subject to
the right of first refusal include securities issued under the Company's stock
option plans, shares issued upon exercise of currently outstanding warrants and
securities issued in connection with strategic transactions involving the
Company or in connection with certain commercial financings. The right of first
refusal shall expire with respect to any purchaser who ceases to own at least
20% of the Common Stock issued on December 8, 1999 and the Common Stock issuable
upon exercise of the warrants purchased by it. The Company used the net proceeds
from the Offering to redeem 85% of its outstanding $2,750,000 principal amount
of 12% convertible subordinated term debentures issued in January 1999 and
intends to use the balance for developmental activities in its
telecommunications and plastics divisions, and also for working capital purposes
of the Company and its subsidiaries, including the possible acquisition of
additional car dealerships.
Item 2. Description of Property.
Major Auto owns an approximately 12,000 square foot facility consisting of
office and automobile showroom space
<PAGE>
in Long Island City, New York, as well as an approximately 40,000 square feet
service facility in Long Island City, New York, both of which it acquired in the
Major Auto Acquisition. Apart from the foregoing, neither the Company nor any of
its subsidiaries owns any real estate or plants. All other operations of the
Company and its subsidiaries are conducted from locations leased from
unaffiliated third parties.
The Company leases approximately 6,800 square feet on two floors in Kew
Gardens, New York. The lease for the floor that the Company currently uses for
executive offices and to house the Talkie Power Web Line Machines consists of
approximately 2,800 square feet and expires on March 31, 2001, but the Company
has the option to extend the lease for one additional five-year term. The
current annual rent under such lease is $69,448.50, but will be increased by
3.5% on a compounded and cumulative basis each lease year. If the Company elects
to extend such lease, the base rent for the extension period will be the greater
of the base rent on March 31, 2001 at the termination of the original lease
period or the then fair market rental of the premises.
The lease for the other floor in Kew Gardens, New York consists of
approximately 4,000 square feet and is occupied pursuant to the terms of a
sublease between Major Fleet, as lessee, and an unrelated third party, as
lessor. The lease expires on January 14, 2000 and contains no renewal
provisions. The current annual rent under such lease is $73,992. Pursuant to an
informal arrangement, (i) Computer Business Sciences pays such rent on behalf of
Major Fleet, (ii) a portion of the leased space is used by Computer Business
Sciences for additional office space and (iii) a portion of the leased space is
used by Associates to operate the customer service division of its reselling
operations.
The Company believes that its current facilities are suitable and adequate
for its current needs, but could require additional facilities to accommodate
any future 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 expired on
October 31, 1998, but Info Systems renewed 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 expired on January 31, 1998 but is continuing on a month-to-month basis.
The current annual rent under such lease is $114,000.
The Company has an interest in the following leases, under which Major Auto
presently pays aggregate annual rental payments of $423,000:
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 for an annual rental of $90,000. 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 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
$33,000. 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 Chevrolet leases from an unrelated third party, for $300,000 annually,
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.
<PAGE>
Item 3. 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.
On February 4, 1997, the defendants filed a counterclaim against the Company
and its subsidiaries seeking damages of $50,000,000 of compensatory and punitive
damages for breach of contract and violation of the Lanham Act. The defendants
allege in their counterclaim that the Company, Computer Business Sciences and
Info Systems 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 Company, Computer Business Sciences and Info Systems have filed a Motion
to Dismiss Marom and MMT's counterclaims for failure to state a cause of action.
While there was minimum opposition, Marom and MMT did cross move to amend their
answer and counterclaims to include thirteen causes of action. The Company has
submitted opposition to this amendment attempting to show that the proposed
amended counterclaims have no merit. All papers in the action have been recently
submitted and the Company is awaiting a decision from the Court. The Company and
its litigation counsel believe that the Company and its wholly owned
subsidiaries have a good basis to oppose Marom's and MMT's counterclaims.
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 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 Operations."
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 an
additional 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
<PAGE>
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, assuming it is successful in the prosecution of this
litigation, 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.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Market Information
On October 7, 1998, the Company's Common Stock was approved for trading on
the NASDAQ SmallCap Market System. From the time of the listing through April 8,
1999, the high bid price was $18.50 and the low bid price was $3.375;
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
March 31, 1999 $18.50 $6.125
December 31, 1998 $6.5625 $3.375
September 30, 1998 $5.8125 $3.625
June 30, 1998 $4.875 $4.125
March 31, 1998 $4.625 $4.0625
December 31, 1997 $5.375 $4.00
September 30, 1997 $4.375 $3.50
June 30, 1997 $5.50 $4.00
Shareholders
As of April 8, 1999 there were 739 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.
Recent Sales of Unregistered Securities
The securities described below of the Company were sold by the Company
during 1998 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
<PAGE>
evaluating the merits and risks connected with the applicable investment.
1. In April 1998, the Company issued $600,000 principal amount of its 10%
Convertible Subordinated Debentures due 1999 (the "Debentures") to one
institutional investor and two accredited investors, for aggregate proceeds to
the Company of $600,000.
2. In April 1998 the Company issued 350,000 shares to Omni-Teleservices,
Inc. at a per share price of $3.28 in consideration for the acquisition of
telephony territories and equipment.
3. In June 1998 the Company issued 10,500 shares to Filas Group, Inc. at a
per share price of $3.15 in consideration for services rendered.
4. In July 1998 the Company issued 17,000 shares to 170 Major Auto
employees at a per share price of $2.98 in consideration for services rendered.
5. In July 1998 the Company issued 3,000 shares to Stephen Glicker at a
per share price of $2.98 in consideration for services rendered.
6. In August 1998 the Company issued 18,000 shares to Pinky Gems Export
Co., Ltd. at a per share price of $3.28 in consideration for consulting and
telephony services and equipment.
7. In August 1998 the Company issued 150,000 shares to Robert LaRea at a
per share price of $3.28 in consideration for services rendered.
8. In October 1998 the Company issued 187,500 shares to Clemont Investment
at a per share price of $3.19 in consideration for consulting services.
9. In October 1998 the Company issued 40,000 shares to S & L Telecom at a
per share price of $3.19 in consideration for services and equipment.
10. In October 1998 the Company issued 50,000 shares to Robert Kaszovitz
at a per share price of $3.19 in consideration for services and equipment.
11. In October 1998 the Company issued 50,000 shares to Riki Roth at a per
share price of $3.19 in consideration for services rendered.
12. In October 1998 the Company issued 100,000 shares to TULA Business at
a per share price of $3.19 in consideration for consulting services.
13. In December 1998 Nissiko Partners exercised warrants to purchase
144,814 shares at a per share price of $1.25.
14. In December 1998 the Company issued 19,800 shares , in the aggregate,
to all of the Company's employees at a per share price of $3.48 as a year-end
bonus.
Item 6 - 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 the Company and its subsidiaries should be read in
conjunction with the Company's audited Consolidated Financial Statements and
related notes thereto included elsewhere herein.
This annual report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ significantly from the results discussed in the
forward-looking statements.
The Company
<PAGE>
On May 14, 1998, the Company, a holding company whose primary purpose is
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 estate for approximately $14
million in cash and stock.
As a result of the acquisition of Major Auto, which, together with the
Company's automotive leasing subsidiary, Major Fleet and Leasing, Inc. ("Major
Fleet"), represent the Automotive Division of the Company, the Company is now
one of the largest volume retailers in New York City of new and used vehicles.
Major Auto currently maintains the following dealerships, all of which are
located in Queens, New York: (i) Chevrolet; (ii) Chrysler and Plymouth; (iii)
Dodge; (iv) Jeep; and (v) Subaru. The acquisition was accounted for as a
purchase. Accordingly, the consolidated results of operations of the Company
include the results from Major Auto only since the date of acquisition on May
14, 1998. Such results are not necessarily indicative of the results for a full
year.
Results of Operations - Year Ended December 31, 1998 and Year Ended December 31,
1997
Revenues. Revenue for the year 1998 resulted in a net increase of
$95,805,538 or 2,480% to $99,667,822. Revenue for the year 1997 was $3,862,284.
The sources for such increase (decrease) were:
Automotive Division (including Leasing)..................$97,625,937
Computer Telephony and Telecommunications ...............$(1,820,399)
The increase in the Automotive Division's revenues was almost solely
attributable to the sales generated by Major Auto which were $97,587,000 for the
period from May 14, 1998 (date of acquisition to December 31, 1998. Revenues for
Major Fleet increased $39,418(4.1%) to $$992,451 in 1998 from $992,451 in 1997.
The decline of 62.6% in revenues in the Computer Telephony and
Telecommunications Division to $1,088,852 in 1998 from $2,909,251 is primarily
result of a decision made in the third quarter of 1997 to operate Talkie Power
Web Line machines for itself. Consequently, at that time, the Company stopped
the sale of such machines to master agents.
Cost of Sales. The Automotive Division's cost of sales in 1998 of $84.1
million is attributable to Major Auto's operations since its acquisition on May
14, 1998. There is no comparable amount for the prior year.
Cost of sales for 1998 which related to the Computer Telephony and
Telecommunications division, was $706,607 compared with $823,397 in the 1997
period. This is a decrease of $(116,790) or 14.2% and is consistent with the
change in operational direction of this division.
Gross profit. Gross profit showed a net increase of $11.8 million, or
388%, to $14.8 million for 1998 compared with $3,038,887 for 1997. This increase
is substantially attributable to the Automotive Division operations and
particularly to Major Auto, the gross profit of which was $13.5 million since
its acquisition on May 14, 1998. Gross profit as a percentage of sales for Major
Auto in 1998 was 13.8%. Management of the Company believes that Major Auto's
profitability during 1998 was enhanced as a result of a strike by the employees
of General Motors Corporation (the "GM strike") which took place near the time
that Major Auto was acquired by the Company. The Company believes that because
Major Auto's Chevrolet dealership had a substantial inventory of new cars at
that time while there was generally a shortage of such cars elsewhere, the
Company was able to realize greater gross margins than it otherwise would have
in a more competitive situation. Additionally, the Company believes that in
instances where customers at its Chevrolet dealership were resistant to the
price level at that time, Major Auto was able to direct such customers to its
other dealerships where prices for similar vehicles were more competitive, thus
increasing overall sales. It should also be noted that the acquisition of Major
Auto took place at a time during the year where automotive vehicle sales
generally rise and after the winter months when such sales generally decrease.
For all of these reasons, the results for the period May 14, 1998 (date of
acquisition) to December 31, 1998 are not necessarily indicative of the results
for a full year or for any future period within a year. Almost $1 million of the
gross profit of the Automotive Division is attributable to Leasing operations.
<PAGE>
Gross profit for the Computer Telephony and Telecommunications division in
1997 was $382,245, which represented a decrease of $1,703,609 or (81.6%) from
the prior year's gross profit of $2,085,854. Additionally, gross profit as a
percentage of the related revenue increased to 35.1% in 1998 from the 71.7%
gross profit percentage in 1997. Both the dollar decrease and the gross profit
percentage of revenues decreases are consistent with the decreased sales levels.
Selling general and administrative ("SG&A") expense. In 1998, SG&A
expenses had a net increase of approximately $10.5 million, or 442%, to $12.9
million from $2.4 million in 1997, almost all as a result of the acquisition of
Major Auto on May 14, 1998. SG&A expenses attributable to Major Auto since that
date aggregated $10.9 million and were partially offset by other SG&A expense
decreases totaling $400,000.
Interest expense. Interest expense had a net increase of $722,350, or
almost 600%, to $843,355 in 1998 from interest expense of $121,005 incurred in
1997. This increase is primarily related to the floor plan interest of $203,998
and interest incurred in financing the acquisition of Major Auto amounting to
$473,429 and, to a lesser extent, $43,806 of interest accrued on outstanding
debentures.
Results of Operations - Year Ended December 31, 1997 and Year Ended
December 31, 1996
Revenues. Revenue for the year 1997 resulted in a net increase of $427,809
or 12.5% to $3,862,284. Revenue for the year 1996 was $3,434,475. The sources
for such increase (decrease) were:
Computer Telephony and Telecommunications ............. $(266,277)
Leasing .................................................$ 694,086
The 1997 amounts reflect a full year of operations for both divisions,
whereas in 1996 the Computer Telephony and Telecommunications division only
began operations during the second quarter and the Leasing operations were not
acquired until the beginning of the fourth quarter. Also, it should be noted
that, during the third quarter, as a result of a decision to operate Talkie
Power Web Line machines for itself, the Company stopped the sale of such
machines to master agents.
Cost of sales. Cost of sales for 1997, all of which relates to the
Computer Telephony and Telecommunications division, was $823,397 compared with
$965,792 in the 1996 period. This is a decrease of $(142,395) or 14.7% and is
consistent with the change in operational direction of this division.
Gross profit. Gross profit for the Computer Telephony and
Telecommunications division in 1997 was $2,085,854, which represented a decrease
of $123,882, or 6% from the prior year's gross profit of $2,209,736.
Additionally, gross profit as a percentage of the related revenue increased to
71.7% in 1997 over the 69.6% gross profit percentage in 1996. Both the dollar
decrease and the gross profit percentage of revenues increases are consistent
with the decreased sales and increased operating efficiencies.
SG&A Expense. SG&A expenses increased a total of $790,023 to $1,916,924 in
1997 from $1,126,901 in 1996. Of this increase, $165,035 relates to the Computer
Telephony and Telecommunications division and $624,988 is from the Leasing
operations. Operating expenses for the Computer Telephony and Telecommunications
division increased from $935,529 for 1996 (this division commenced operations in
the second quarter of 1996) to $1,100,564 for 1997, a 17.6% increase. This
increase is reflective of an almost full level of normal activity in 1997
compared with the start-up activities in 1996. The increase in SG&A expense for
the Leasing division in 1997 is the result of a full year of activity in this
division which was not acquired until the fourth quarter of 1996.
Interest expense. Interest expense was $121,092 for the year ended
December 31, 1997 compared with $24,132 for 1996. The increase of $96,960
relates primarily to the debt incurred to finance the vehicles and equipment
leased by the Company's Leasing division during the current year. There was no
comparable amount in the prior year.
<PAGE>
Assets, Liquidity and Capital Resources - December 31, 1998
Primarily as a result of the acquisition of Major Auto, the Company's
total assets increased to approximately $50.5 million at December 31, 1998 from
approximately $9.4 million at December 31, 1997. For the same reason,
stockholders' equity increased to approximately $16.5 million from $6.5 million
at December 31, 1997.
The Company's primary source of liquidity for the year ended December 31,
1998 was $2,259,858 from its net income of $528,140, as adjusted by non-cash
charges which aggregated $1,731,718. This net increase in cash from income was
increased by the effect of:
(a) a net decrease in assets of $735,161 (primarily from the decreases
in Major Auto's inventory since its (a) acquisition on May 14, 1998
of $1,698,176 and other assets of $414,668, partially offset by an
increase in Major Auto's accounts receivable of $767,119 and Major
Fleet's increase in financing leases of $622,294; and
(b) the net increase in liabilities, primarily related to an increase in
due to affiliates of $802,859 and a net increase (b0 in accounts
payable and accrued expenses of $198,648.
The decrease in inventories cited in (a) above, is primarily due to the
relatively high levels of inventory being maintained by Major Auto at the time
of its acquisition by the Company which was immediately prior to the GM strike.
As discussed above under "Gross profit," this inventory was subsequently sold
and inventory was allowed to return to more normal levels.
The Company's investing activities had a net use of cash of $(1,080,126).
The most significant component of this use was the acquisition of Major Auto,
which used cash, net of cash acquired in the transaction of $(1,018,432).
Additionally, cash of $(2,112,246) was used in financing activities, principally
to pay down Major Auto's floor plan notes. The reduction of such notes of a net
$(2,892,917) is related to the decrease in inventory. This use of cash in
financing activities was partially offset by (1) the proceeds of $600,000 from
the sale of convertible, subordinated debentures to a limited number of
accredited investors; (2) net proceeds from long-term debt of $429,599; and (3)
an increase in lines of credit of $300,000.
The foregoing activities, i.e. operating, investing and financing,
resulted in a net cash increase of $759,943 for the year ended December 31,
1998.
The Company believes that the cash generated from existing operations,
together with existing cash, available credit from its current lenders,
including banks and floor planning, will be sufficient to finance its current
operations, planned expansion and internal growth for at least the next
twenty-four months.
Year 2000 Issue
The Year 2000 issue arises because many computerized systems use two
digits rather than four to identify a year. Date sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 dates are processed. In addition, similar problems may arise in
some systems that use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 issue may be experienced before, on or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failures which
could affect an entity's ability to conduct normal business operations.
The Company recognizes the need to ensure its operations will not be
adversely impacted by the inability of the Company's systems to process data
having dates which could be affected by the Year 2000 issue. The Company is
currently addressing the risk with respect to the availability and integrity of
its financial systems and operating systems. While the Company believes its
planning efforts are adequate to address the Year 2000 concerns, there can be no
assurance that the systems of other companies, including suppliers, customers
and others on which the Company's operations rely are, or will be made,
compliant on a timely basis and will not have a material effect on the Company.
However, all such significant systems are being evaluated for compliance. The
cost of the Company's Year 2000 compliance effort is not expected to be material
to the Company's results of operations or financial position.
<PAGE>
Item 7. Financial Statements
The Financial Statements are filed as a part of this Annual Report as
pages F-1 through F-40 following Part IV.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
(a) Previous independent accountants
(i) On February 5, 1999, the Company dismissed Peter C. Cosmas Co., CPAs
as its independent accountants.
(ii) The reports of Peter C. Cosmas Co., CPAs on the consolidated
financial statements for the past two fiscal years contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle.
(iii) The Company's Audit Committee and Board of Directors participated in
and approved the decision to change independent accountants.
(iv) In connection with its audits for the two most recent fiscal years
and through February 5, 1999, there have been no disagreements with Peter C.
Cosmas Co., CPAs on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of Peter C. Cosmas Co., CPAs would have caused them
to make reference thereto in their report on the consolidated financial
statements for such years.
(v) During the two most recent fiscal years and through February 5, 1999,
there have been no reportable events (as defined in Regulation S-K Item
304(a)(1)(v)).
(vi) Peter C. Cosmas Co., CPAs furnished the Company with a letter
addressed to the SEC stating that it agreed with the above statements.
(b) New independent accountants
(i) The Company engaged BDO Seidman LLP as its new independent accountants
as of February 5, 1999. During the two most recent fiscal years and through
February 5, 1999, the Company has not consulted with BDO Seidman LLP on items
which (1) were or should have been subject to SAS 50 or (2) concerned the
subject matter of a disagreement or reportable event with the former auditor,
(as described in Regulation S-K Item 304(a)(2). The Company authorized Peter C.
Cosmas Co., CPAs to respond to any and all inquiries of the successor
accountant.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.
The names, ages and principal occupations of the Directors and Executive
Officers of the Company are as follows:
Name Age Position, Term In Office
- - - ---- --- -------------------------
Bruce Bendell 44 Chairman of the Board and Chief Executive Officer
Doron Cohen 42 President, Treasurer and a Director
David Edelstein 45 Director
Richard L. Feinstein 55 Chief Financial Officer
James Wallick 48 Director
Jeffrey Weiner 41 Director
<PAGE>
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, as its Chief Executive Officer since
May 1998 and as President from May 14, 1998 to December 1998. 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, Treasurer and a director of
the Company since its incorporation in November 1995, except for the period May
14, 1998 through December 18, 1998 during which period Bruce Bendell served as
President of the Company. Mr. Cohen has also served as the president of the
Company's subsidiary, CBS since 1995. From 1991 to 1995, Mr. Cohen served as
President and Chief Executive Officer of Holtman Enterprises, a construction and
interior design company.
David Edelstein. Mr. Edelstein has served as a director of the Company since May
1998. Mr. Edelstein has been in the real estate development business since 1979.
Currently he is the Managing Member of Sutton East Associates LLC, a real estate
development limited liability company and is involved in several sizable real
estate projects in New York and Florida.
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.
James Wallick. Mr. Wallick has served as a director of the Company since May
1998. Mr. Wallick has been in the automotive dealership and financing business
since 1971. He is currently president of MLC Leasing and Apple Chevrolet and
vice president and a director of TecFin Corp.
Jeffrey Weiner. Mr. Weiner has served as a director of the Company since May
1998. Mr. Weiner is a certified public accountant and has been with the
accounting firm of Marcum & Kliegman LLP, where he is currently Managing
Partner, since 1981.
The following persons, although not executive officers of the Company, are
regarded by management as key personnel:
Zvi Barak. Mr. Barak, age 46, 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, age 49, 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.
Harold Bendell. Mr Bendell, age 51, has served as served as a senior
executive of Major Auto since December 1985. He, together with his brother,
Bruce Bendell, is responsible for the day to day operations of Major Auto.
Bruce Hall. Mr. Hall, age 53, has served as Vice President of Operations
of the Company since March 1998. From November 1997 to March 1998, Mr. Hall was
a consultant to the Company. For the thirty years prior to that time, he was
with Bell Atlantic (NYNEX), most recently as their Director of Operations for
the Borough of Queens, New York.
Kimberly R. Peacock. Ms. Peacock, age 33, serves as president of the
Company's Internet technology subsidiary, IG2(TM), Inc. Ms. Peacock has been
associated with the Company in various technical capacities since February 1997.
Prior to such time she worked as an independent technical consultant to several
Fortune 500 companies and helped found two Internet service providers.
<PAGE>
John Pinciaro. Mr. Pinciaro, age 49, 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 formed in October 1997 to exploit the
Company's spa fixture technology. Mr. Pinciaro has served as the Chief Executive
Officer of ThermoSpas, Inc., a manufacturer and distributor of spas, since it
inception in 1983.
Ronald K. Premo. Mr. Premo, age 60, 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.
The term of office of each person elected as a Director will continue
until the Company's next Annual Meeting of Shareholders or until his successor
has been elected.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
(the "SEC"). Officers, directors and greater than ten percent stockholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that during Fiscal 1998, its officers, directors, and greater than ten-percent
beneficial owners have complied with all applicable Section 16(a) filing
requirements with the exception of the following: one late filing on Form 3 was
made by each of Bruce Bendell, Doron Cohen, Richard Feinstein, David Edelstein,
James Wallick and Jeffrey Weiner, and one late filing on Form 4 with respect to
two transactions was made by Jeffrey Weiner.
Item 10. Executive Compensation.
Summary Compensation Table
The following table sets forth information for each of the Company's fiscal
years ended December 31, 1998 and 1997 concerning compensation of (i) all
individuals serving as the Company's Chief Executive Officer during the fiscal
year ended December 31, 1998 and (ii) each other executive officer of the
Company whose total annual salary and bonus equaled or exceeded $100,000 in the
fiscal year ended December 31, 1998:
<TABLE>
<CAPTION>
Annual Compensation
-------------------
All
Other Other
Name and Principal Position Year Salary($) Bonus($) ($)Annual
<S> <C> <C> <C> <C> <C>
Compensation($)
Doron Cohen(1) 1998 246,500 0 0 0
President and Treasurer 1997 206,500 0 0 0
Bruce Bendell(2) 1998 248,530 127,437 0 0
Chairman and Chief Executive 1997 178,080 0 0 0
Officer
Bruce Hall(3) 1998 135,000 0 6,000 0
1997 11,250 0 500 0
Richard Feinstein(4) 1998 125,000 0 3,166 0
1997 35,000 0 0 0
Zvi Barak(5) 1998 150,000 0 23,000 0
Director of Research and Development 1997 150,000 0 23,000 0
</TABLE>
(1) Salary in 1998 includes $150,000 from the Company (subsequently paid through
the issuance of 39,024 shares of the Company's Common Stock). Mr. Cohen waived
his salary from the Company for the years ended December 31, 1997. This salary
will not accrue. Mr. Cohen was paid a salary in 1997 of $56,500 from Computer
Business Sciences.
(2) Salary in 1998 includes $150,000 from the Company (subsequently paid through
the issuance of 39,024 shares of the
<PAGE>
Company's Common Stock). Mr. Bendel received $81,250 in salary and $127,437 in
bonus from Major Auto since its acquisition on May 14, 1998. Mr. Bendell waived
his consultant's fee from the Company for the years ended December 31, 1997 and
1996. This fee will not accrue. Mr. Bendell received $17,280 and $28,080 as
management fees from Major Fleet for management services performed in 1998 and
1997, respectively.
(3) 1998 amounts represent a full year of salary and automobile allowance of
$500 per month for Mr. Hall who commenced employment in December 1997.
(4) Mr. Feinstein was a part time consultant in 1997 and commenced full time
employment in January 1998. Other Annual amount represents an automobile
allowance of $527 per month since July 1998.
(5) Includes $5,000 for life and disability insurance premiums and $18,000
annual automobile allowance.
Option Grants Table
No individual grants of stock options were made during the fiscal year ended
December 31, 1998 to any of the executive officers of the Company named in the
Summary Compensation Table.
Aggregated Option Exercises and Fiscal Year-End Option Value Table
No stock options were exercised during the fiscal year ended December 31,
1997 by any of the executive officers named in the Summary Compensation Table.
The value of unexercised options held by any such persons as of December 31,
1998 was as follows for Bruce Bendell (the only such option holder):
Total number of shares underlying unexercise 50,000
Exercisable options 50,000
Unexercisable options - 0 -
Value of in-the-money options $162,500(1)
(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.
Compensation of Directors
Directors of the Company were not compensated for their services in 1998.
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 earnings per share exceeding
$1.00 per share. Mr. Bendell is also entitled to a bonus in such amounts and at
such times as determined by the Company's Board of Directors. In addition, the
agreement provides that Mr. Bendell is entitled to various fringe benefits and
is entitled to participate in any incentive, stock option, deferred compensation
or pension plans established by the Company's Board of Directors. Mr. Bendell
has agreed not to disclose confidential information relating to the Company and
has agreed not to compete with, or solicit employees or customers of, the
Company during specified periods following the breach or termination of his
agreement to serve as a consultant to the Company. Mr. Bendell has been serving
at will since the expiration of the agreement pursuant to the same terms. Mr
Bendell's consulting fee in 1998 includes $150,000 subsequently paid through the
issuance of 39,024 shares of the Company's Common Stock. See "Executive
Compensation."
<PAGE>
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 earnings per share in excess of $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. Mr. Cohen
has been serving at will since the expiration of the agreement pursuant to the
same terms. Mr. Cohen's salary in 1998 includes $150,000 subsequently paid
through the issuance of 39,024 shares of the Company's Common Stock. See
"Executive Compensation."
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 earnings per share in excess of $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
established 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 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
<PAGE>
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.
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 maintains a $5 million liability insurance policy for the
benefit of its officers and directors.
Item 11. 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 April 8, 1999,
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:
<TABLE>
<CAPTION>
1996 Major Series of 1997 Major Series of
Convertible Preferred Convertible Preferred
Common Stock Stock(2) Stock(3)
Name and Address(9) Number Percent Number Percent Number Percent
<S> <C> <C> <C> <C> <C> <C>
Bruce Bendell 4,689,034(4) 44.14% 125,000(5) 50% 900,000(5) 100.0%
Doron Cohen 2,539,024(6) 29.8%
David Edelstein 400 *
Richard L. Feinstein 20,000 *
James Wallick 0 *
Jeffrey Weiner 2,200(8) *
All directors and execu-
tive officers as a group 7,250,658(7) 68.3%
</TABLE>
*Represents less than 1% of the outstanding shares of Common Stock.
(1) Based on 8,522,121 shares of Common Stock outstanding on April 8, 1999.
(2) Based on 250,000 shares of the 1996-Major Series of Convertible Preferred
Stock outstanding on December 31, 1998.
(3) Based on 900,000 shares of the 1997-Major Series of Convertible Preferred
Stock outstanding on December 31, 1998.
<PAGE>
(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, (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 beneficially owned by Bruce Bendell are
convertible. 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 and 1997-Major Series of
Convertible Preferred Stock are held in a 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) 2,210 shares of Common Stock owned by immediate family
members of directors and executive officers as a group and (ii) 2,100,000
shares of Common Stock that the directors and executive officers as a
group have the right to acquire within 60 days.
(8) Includes 2,000 shares owned by Mr. Weiner's wife.
(9) The address for each beneficial owner is c/o Fidelity Holdings, Inc.,
80-02 Kew Gardens Rd., Suite 5000, Kew Gardens, NY 11415.
Item 12. 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,
Treasurer and one of its directors, and (ii) the Employment Agreement between
the Company and Zvi Barak, its Director of Research and Development. In
addition, in January 1999, Mr. Cohen was granted piggyback registration rights
with respect to 39,024 shares of Company common stock issued to him as
compensation for fiscal 1998. See "Executive Compensation."
See "Executive Compensation-Compensation of Directors" for a description
of the Consulting Agreement between the Company and Bruce Bendell, its Chairman
and Chief Executive Officer. In addition, in January 1999, Mr. Bendell was
granted piggyback registration rights with respect to 39,024 shares of Company
common stock issued to him as compensation for fiscal 1998. See "Executive
Compensation."
In January 1999, Richard Feinstein, the Company's Chief Financial Officer,
was granted standard piggyback registration rights with respect to 20,000 shares
of Company common stock issued to him as a bonus for fiscal 1999.
<PAGE>
Following the acquisition of Major Auto by the Company, Bruce and Harold
Bendell continue to be responsible for senior-level management of the
dealerships. The Bendell brothers and the Company believe that this continuity
of senior management was important in obtaining the manufacturers' consents to
the transfer of the dealerships to the Company. The Bendell brothers' management
control has been 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 which commenced 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- I 997A-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. Any 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 and Chief
Executive Officer of the Company.
As part of the Major Auto Acquisition, Major Auto acquired two related
real estate components from Bruce and Harold Bendell for a purchase price of $3
million. See "Automotive Division" for a description of the Major Auto
Acquisition.
The Company has entered into a MOU with the Agent, the Nissko Principals,
and with the remaining limited partner of Nissko, Robert L. Rimberg. Mr. Rimberg
performs legal services on behalf of the Company. 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, 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,
1999.
Bruce Bendell, and Major Chevrolet, Major Dodge and Major Chrysler
Plymouth Jeep Eagle, wholly-owned by Major Auto, have guaranteed the obligations
of Major Fleet under a $5,000,000 line of credit with Marine Midland Bank. In
addition, Bruce Bendell and Major Fleet have guaranteed the obligations of Major
Auto's subsidiaries under certain of their agreements with various financial
institutions pursuant to which such subsidiaries sell their vehicle finance
contracts and leases. Major Fleet has pledged its assets to such financial
institutions to secure its guarantee. In addition, such subsidiaries have
cross-guaranteed and cross-collateralized their respective agreements with such
financial institutions. See "Description of Business-Automotive Sales
Division-Dealership Operations-Vehicle Financing" and "-Leasing Division" for a
description of certain transactions between Major Auto and Major Fleet.
<PAGE>
Major Subaru subleases from an unrelated third party approximately 2,500
square feet of office and automobile showroom space in Woodside, New York. This
lease expired on January 31, 1998 and contains no renewal provisions. The
property is currently being leased on a month-to-month basis. The annual rent
under such lease was $69,457.56. Pursuant to an informal arrangement between
Major Subaru and Major Fleet, Major Fleet occupies the space and pays the rental
payments.
On October 1, 1998 the Company entered into a consulting agreement with
Clemont Investments Ltd., a consulting firm which provides business advisory
services regarding the establishment in Europe of branches or operations of U.S.
based companies. In consideration for its services, Clemont will receive, over a
three to five year period (i) 54,000 shares of Company common stock in
connection with the performance of certain consulting services, (ii) 79,500
shares of Company common stock in connection with providing the Company with
certain business contacts, (iii) 54,000 shares of Company common stock in
connection with compliance with certain restrictive covenants contained in the
Consulting Agreement (collectively, the "Clemont Shares"). The Company has the
right to repurchase the Clemont Shares under certain circumstances at a price of
up to $4.00 per share. In connection with the Consulting Agreement, Clemont
entered into a put agreement with Bruce Bendell, Chairman and CEO of the Company
on October 1, 1998 pursuant to which Mr. Bendell agreed, under certain
conditions, to purchase the Clemont Shares from Clemont during such period, less
any Clemont Shares repurchased by the Company.
The Company has retained the accounting firm of Marcum & Kliegman LLP to
provide certain accounting and tax services for the Company and its subsidiary
Major Fleet. In 1998, the Company paid Marcum & Kliegman LLP $48,000 for its
services. Mr. Weiner, a director of the Company, is Managing Partner of Marcum &
Kliegman LLP.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description Page
- - - ------- ----------- ----
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
<PAGE>
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. N/A
4.2* Warrant Agreement for Nissko Warrants, incorporated by
reference to Exhibit 4.2 of Company's Registration
Statement on Form 10-SB,
<PAGE>
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. N/A
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. N/A
4.5** Form of Certificate of Designation for the Company's
1997A-Major Automotive Group Series of Preferred Stock. N/A
4.6** Form of Certificate of Designation for the Company's
1997-Major Series of Convertible Preferred Stock. N/A
4.7** Form of Registration Rights Agreement between the Company
and Bruce Bendell. N/A
4.8** Stock Pledge and Security Agreement, dated March 26, 1996,
between Doron Cohen, Bruce Bendell, Avraham Nissanian,
Yossi Koren, Sam Livian and Robert Rimberg. N/A
4.9** Form of Registration Rights Agreement between the Company,
Castle Trust and Management Services Limited and Bruce
Bendell. N/A
4.10** Form of the Company's 10% Convertible Subordinated
Debenture due 1999. N/A
4.11**** Certificate of Designation for the Company's 1997-MAJOR
series of Convertible Preferred Stock. N/A
4.11****** Form of Warrant N/A
4.12****** Form of CBS Warrant N/A
4.13****** Form of Debenture N/A
<PAGE>
4.14******* Form of Closing Warrant N/A
4.15******* Form of Adjustable Warrant N/A
4.16********Form of Closing Warrant N/A
4.17********Form of Adjustable Warrant N/A
4.18********Form of Closing Warrant N/A
4.19********Form of Adjustable Warrant N/A
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. N/A
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. N/A
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
<PAGE>
of Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange Commission
on March 7, 1997. N/A
10.6* Asset Purchase Agreement, dated April 18, 1996, between
the Company and Zvi and Sarah Barak, incorporated by
reference to Exhibit 10.6 of Company's Registration
Statement on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7, 1997. N/A
10.6(i)** Amendment to Asset Purchase Agreement dated August 7, 1997. N/A
10.7* Employment Agreement dated April 18, 1996 between the
Company and Dr. Zvi Barak, incorporated by reference to
Exhibit 10.7 of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.8* Employment Agreement dated October 18, 1996 between
Computer Business Sciences, Inc. and Paul Vesel,
incorporated by reference to Exhibit 10.8 of Company's
Registration Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission on March 7,
1997. N/A
10.9* Indemnification Agreement dated November 7, 1995 between
the Company and Doron Cohen, incorporated by reference to
Exhibit 10.9 of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.10* Indemnification Agreement dated November 7, 1995 between
the Company and Bruce Bendell, incorporated by reference
to Exhibit 10.10 of Company's Registration Statement on
Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.11* Indemnification Agreement dated December 6, 1995 between
the Company and Richard C. Fox, incorporated by reference
to Exhibit 10.11 of Company's Registration Statement on
Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.12* Indemnification Agreement dated March 28, 1996 between the
Company and Dr. Barak, incorporated by reference to
Exhibit 10.12 of Company's
<PAGE>
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
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. N/A
<PAGE>
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. N/A
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. N/A
10.18(iv)*** Amendment to Plan and Agreement of Merger, dated March 20,
1998, between Fidelity Holdings, Inc., Major Automotive
Group, Inc., Major Acquisition Corp., and Bruce Bendell. N/A
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. N/A
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. N/A
10.24** Letter of Intent, dated June 6, 1997, between the Company
and SouthWall Capital Corp. (formerly known as Sun Coast
Capital Corp.) N/A
10.25** Letter of Intent, dated September 1997, between the
Company, Lichtenberg Robbins Buick, Inc. and Lichtenberg
Motors Inc. N/A
10.26** Consulting Agreement, dated February 18, 1997, with Ronald
Shapss Corporate Services, Inc. N/A
10.27** Value Added Reseller Agreement between Summa
<PAGE>
Four, Inc. and Computer Business Sciences, Inc., as Reseller. N/A
10.28** Lease Agreement, dated March 1996, between 80-02 Leasehold
Company, as Owners and the Company, as Tenant. N/A
10.29** Master Lease Agreement, dated December 26, 1996, between
Major Fleet & Leasing Corp., as Lessor, and Nissko
Telecom, Ltd., as Lessee. N/A
10.30** Sublease Agreement, dated March 1995, between Speedy
R.A.C., Inc., as Sublessor, and Major Subaru Inc., as
Sublessee. N/A
10.31** Lease Agreement, dated November 1, 1991, between Gloria
Hinsch, as Landlord, and Major Chrysler-Plymouth, Inc., as
Tenant. N/A
10.32** Store Lease Agreement, dated June 10, 1992, between Bill
K. Kartsonis, as Owner, and Major Automotive Group, as
Tenant. N/A
10.33** Lease Agreement, dated June 3, 1994, between General
Motors Corporation, as Lessor, and Major Chevrolet, Inc.,
as Lessee. N/A
10.34** Lease Agreement, dated August 1990, between Bruce Bendell
and Harold Bendell, as Landlord and Major
Chrysler-Plymouth, Inc., as Tenant. N/A
10.34(i)** Extension of Lease Agreement, dated August 14, 1997,
between Bruce Bendell and Harold Bendell, as Landlord and
Major Dodge, Inc. (formerly known as Major
Chrysler-Plymouth, Inc.), as Tenant. N/A
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. N/A
10.35** Lease Agreement, dated February 1995, between Bendell
Realty, L.L.C., as Landlord, and Major Chrysler-Plymouth
Jeep Eagle, Inc., as Tenant. N/A
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. N/A
10.35(ii)** Extension of Lease Agreement, dated December 16, 1997,
between Bendell Realty, L.L.C., as Landlord and Major
Chrysler-Plymouth Jeep
<PAGE>
Eagle, Inc., as Tenant. N/A
10.36** Lease Agreement, dated February 1996, between Prajs
Drimmer Associates, as Landlord, and Barak Technology
Inc., as Tenant. N/A
10.37** Sublease Agreement, dated January 8, 1997, between
Newsday, Inc., as Sublessor, and Major Fleet & Leasing
Corp., as Sublessee. N/A
10.37(i)** Consent to Sublease Agreement, dated January 16, 1997,
between 80-02 Leasehold Company, Newsday Inc. and Major
Fleet and Leasing Corp. N/A
10.38** General Security Agreement between Major Fleet & Leasing
Corp., as Debtor, and Marine Midland Bank, as Secured
Party. N/A
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. N/A
10.40** Wholesale Lease Financing Line of Credit
between General Electric Capital Corporation,
as Lender, and Major Fleet & Leasing Corp., as Borrower. N/A
10.41** Chrysler Leasing System License Agreement between Chrysler
Motors Corporation, as Licensor, and Major Fleet & Leasing
Corp., as Licensee. N/A
10.42** GMAC Retail Plan Agreement between General Motors
Acceptance Corp. and Major Fleet & Leasing Corp., as
Dealer. N/A
10.43** Fidelity Holdings, Inc. 1996 Employees' Performance
Recognition Plan. N/A
10.44** Secured Promissory Note, dated December 31, 1996, between
Doron Cohen, as Maker, and Fidelity Holdings, Inc., as
Holder. N/A
10.45** Dealer Master Agent Agreement and License, dated February
1996, between Computer Business Sciences, Inc. and
Progressive Polymerics International, Inc., as Master
Agent. N/A
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. N/A
10.47** Dealer Master Agent Agreement and License, dated February
1996, between Computer Business
<PAGE>
Sciences, Inc. and America's New Beginning, Inc.,
as Master Agent. N/A
10.48** Dealer Master Agent Agreement and License,
dated February 1996, between Computer Business
Sciences, Inc. and Korean Telecom, as Master
Agent. N/A
10.49** Dealer Master Agent Agreement and License,
dated February 1996, between Computer Business
Sciences, Inc. and Philcom Telecommunications,
as Master Agent. N/A
10.50** Management Agreement, dated August 23, 1996,
between Major Fleet, Bruce Bendell anf Harold Bendell N/A
10.51** Wholesale Security Agreement, dated April 26,
1990, between General Motors Acceptance
Corporation ("GMAC") and Major Fleet. N/A
10.51(i)** Amendment, dated February 14, 1991, to
Wholesale Security Agreement between GMAC and
Major Fleet. N/A
10.52** Direct Leasing Plan Dealer Agreement, dated
July 24, 1986, between GMAC and Major Fleet. N/A
10.53** Retail Lease Service Plan Agreement, dated
April 3, 1987, between GMAC and Major Fleet. N/A
10.54** Contribution Agreement dated as of October 6, 1997
between the Company, Bruce Bendell and Doron Cohen. N/A
10.55** Letter of Commitment dated March 16, 1998 from
Falcon Financial, LLC to Major Auto Acquisition, Inc. N/A
10.56**** Security Agreement, dated May 14, 1998, made by
Major Acquisition Corp., Major Automotive
Realty Corp., and Falcon Financial, LLC. N/A
10.57**** Guarantee, dated as of May 14, 1998, made by
Fidelity Holdings, Inc. in favor of Falcon
Financial, LLC. N/A
10.58**** Amended and restated secured promissory note,
dated may 14, 1998 and between Major
Acquisition Corp., and Falcon Financial, LLC. N/A
10.59*** Consulting Agreement among Fidelity Holdings,
Inc., Major Automotive Group, Inc. and Clemont
Investors Ltd., dated October 1, 1998. N/A
10.60****** Placement Agent Agreement, dated as of January
<PAGE>
25,1999, between Fidelity Holdings, Inc. and
The Zanett Securities Corporation, Claudio
Guazzoni, David McCarthy, and Tony Milbank N/A
10.61****** Securities Purchase Agreement dated as of
January 25,1999, by and among Fidelity
Holdings, Inc., Computer Business Sciences,
Inc., Zanett Lombardier, Ltd., Goldman Sachs
Performance Partners, L.P., Goldman Sachs
Performance Partners, (Offshore) L.P., David
McCarthy and Bruno Guazzoni. N/A
10.62****** Registration Rights Agreement dated as of
January 25,1999, by and among Fidelity
Holdings, Inc., Zanett Lombardier, Ltd.,
Goldman Sachs Performance Partners, L.P.,
Goldman Sachs Performance Partners, (Offshore)
L.P., David McCarthy and Bruno Guazzoni. N/A
10.63******* Letter Agreement, dated as of June 24,1999, by and among
Fidelity Holdings, Inc. and Strong River Investments, Inc.,
Bay Harbor Investments, Inc. and Augusta Street LLC. NA
10.64******* Securities Purchase Agreement dated as of June 24,1999, by
and among Fidelity Holdings, Inc. and Strong River Investments,
Inc., Bay Harbor Investments, Inc. and Augusta Street LLC. NA
10.65******* Registration Rights Agreement dated as of June 24,1999, by
and among Fidelity Holdings, Inc. and Strong River Investments,
Inc., Bay Harbor Investments, Inc. and Augusta Street LLC. NA
10.66******** Securities Purchase Agreement dated as of December 8,1999,
by and among Fidelity Holdings, Inc. and Strong River Investments,
Inc., Montrose Investments Ltd. and Augusta Street LLC. NA
10.67********* Registration Rights Agreement dated as of December 8,1999, by
and among Fidelity Holdings, Inc. and Strong River Investments,
Inc., Montrose Investments Ltd. and Augusta Street LLC. NA
10.68********* Securities Purchase Agreement dated as of February 8, 2000, by
and among Fidelity Holdings, Inc. and Strong River Investments,
Inc., Montrose Investments Ltd. and Augusta Street LLC. NA
10.69********* Registration Rights Agreement dated as of February 8, 2000, by
and among Fidelity Holdings, Inc. and Strong River Investments,
Inc., Montrose Investments Ltd. and Augusta Street LLC. NA
11.1 Statement re: computation of per share
earnings. --
16.1***** Letter from Peter C. Cosmas Co., CPAs, dated
February 9, 1999. N/A
21.1* List of Subsidiaries of the Company,
<PAGE>
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. N/A
27.1 Financial Data Schedule. --
* Previously filed with the Commission as Exhibits to, and incorporated herein
by reference from, the Company's registration statement on Form 10-SB (File
No. 0-29182).
** Previously filed with the Commission as Exhibits to, and incorporated herein
by reference from, the Company's annual report on Form 10-KSB for the year
ended December 31, 1997 (File No. 0-29182)
*** Previously filed with the Commission as Exhibits to, and incorporated herein
by reference from, the Company's quarterly report on Form 10-QSB for the
quarter ended September 30, 1998 (File No. 0-29182)
****Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's current report on Form 8-K, dated
May 14, 1998. (File No.0-29182).
***** Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's current report on form 8-K, dated
February 5, 1999. (File No.0-29182).
******Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's current report on form 8-K, dated
January 26, 1999. (File No.0-29182).
*******Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's current report on form 8-K, dated
July 3, 1999. (File No.0-29182).
********Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's current report on form 8-K, dated
December 10, 1999. (File No.0-29182).
*********Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Company's current report on form 8-K, dated
February 16, 2000 (File No.0-29182).
(b) Reports on Form 8-K
During the last quarter of Fiscal 1998, the Company did not file any Reports
on Form 8-K.
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
Fidelity Holdings, Inc.
We have audited the consolidated balance sheet of Fidelity Holdings, Inc. and
subsidiaries as of December 31, 1998, and the related consolidated statements of
operations, stockholders' equity, and cash flows 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 did not examine the financial statements of 786710 Ontario
Limited, a wholly-owned subsidiary, which statements, after intercompany
eliminations, reflect total assets of $183,132 as of December 31, 1998 and total
revenue of $1,088,852 in 1998. Those statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for 786710 Ontario Limited is based solely on the report of
the other auditors.
We conducted our audit 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 report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the report 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 at December 31, 1998, and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
New York, New York
March 20, 1999
Except for Notes 12 and 18,
which are as of February 10, 2000
F-1
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
Fidelity Holdings, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Fidelity Holdings, Inc. and subsidiaries
for the year ended December 31, 1997. 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 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 revenue of $953,033 in 1997. 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 the reports of the other
auditors.
We conducted our audit 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 results of operations and cash flows of Fidelity
Holdings, Inc. and subsidiaries for the year ended December 31, 1997 in
conformity with generally accepted accounting principles.
Peter C. Cosmas Co., CPA's
New York, New York
March 31, 1998
F-2
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheet
================================================================================
<TABLE>
<S> <C>
December 31, 1998
- - - -----------------------------------------------------------------------------------
Assets
Current:
Cash and cash equivalents $ 977,134
Net investment in direct financing leases, current 2,168,952
Accounts receivable 7,118,717
Inventories 19,061,666
Other current assets 1,510,545
- - - -----------------------------------------------------------------------------------
Total current assets 30,837,014
Net investment in direct financing leases, net of current portion 785,023
Property and equipment, net 5,352,406
Excess of costs over net assets acquired 10,614,963
Notes receivable - officer 799,819
Other assets 2,159,198
- - - -----------------------------------------------------------------------------------
$ 50,548,423
===================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable - floor plan $ 17,791,253
Notes payable - bank 450,000
Convertible debenture payable 600,000
Accounts payable 2,584,189
Accrued expenses 2,809,714
Current maturities of long-term debt 869,813
Customer deposits 732,014
- - - -----------------------------------------------------------------------------------
Total current liabilities 25,836,983
Long-term debt, less current maturities 7,953,278
Due to employees 249,851
Other 54,795
- - - -----------------------------------------------------------------------------------
Total liabilities 34,094,907
- - - -----------------------------------------------------------------------------------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value - 2,000,000 shares
authorized; 1,150,000 shares issued and outstanding 11,500
Common stock, $.01 par value - 50,000,000 shares authorized;
8,036,514 shares issued and outstanding 80,365
Additional paid-in capital 14,799,800
Cumulative currency translation adjustment (4,977)
Retained earnings 1,566,828
- - - -----------------------------------------------------------------------------------
Total stockholders' equity 16,453,516
- - - -----------------------------------------------------------------------------------
$ 50,548,423
===================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
- - - ----------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Sales $99,667,822 $ 3,862,284
Cost of sales 84,828,470 823,397
- - - ----------------------------------------------------------------------------------------
Gross profit 14,839,352 3,038,887
Operating expenses 12,953,857 2,389,743
Interest expense 843,355 121,005
- - - ----------------------------------------------------------------------------------------
Operating income before income tax expense 1,042,140 528,139
Income tax expense 514,000 159,000
- - - ----------------------------------------------------------------------------------------
Net income $ 528,140 $ 369,139
========================================================================================
Per common share:
Net income:
Basic $ .07 $ .06
Diluted .06 .05
- - - ----------------------------------------------------------------------------------------
Average number of shares used in computation:
Basic 7,336,794 6,454,350
Diluted 8,980,904 7,550,546
- - - ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
================================================================================
<TABLE>
<CAPTION>
Years ended December 31, 1998 and 1997
- - - --------------------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock Additional
-------------------- -------------------- paid-in Retained
Shares Amount Shares Amount capital earnings
- - - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1997 250,000 $ 2,500 6,279,200 $ 62,792 $ 4,509,108 $ 669,549
Issuance of common stock pursuant to
exercise of warrants -- -- 523,000 5,230 648,520 --
Effect of stock compensation charge -- -- 93,500 935 256,665 --
Net income -- -- -- -- -- 369,139
Translation adjustment -- -- -- -- -- --
- - - --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 250,000 2,500 6,895,700 68,957 5,414,293 1,038,688
Issuance of preferred stock for
acquisition of Major Automotive Group 900,000 9,000 -- -- 5,991,000 --
Issuance of common stock for services
and equipment -- -- 1,140,814 11,408 3,394,507 --
Net income -- -- -- -- -- 528,140
Translation adjustment -- -- -- -- -- --
- - - --------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,150,000 $ 11,500 8,036,514 $ 80,365 $ 14,799,800 $ 1,566,828
================================================================================================================================
<CAPTION>
Years ended December 31, 1998 and 1997
- - - -----------------------------------------------------------------------------
Currency Total
translation stockholders'
adjustment equity
- - - -----------------------------------------------------------------------------
<S> <C> <C>
Balance, January 1, 1997 $ 264 $ 5,244,213
Issuance of common stock pursuant to
exercise of warrants -- 653,750
Effect of stock compensation charge -- 257,600
Net income -- 369,139
Translation adjustment 33 33
- - - -----------------------------------------------------------------------------
Balance, December 31, 1997 297 6,524,735
Issuance of preferred stock for
acquisition of Major Automotive Group -- 6,000,000
Issuance of common stock for services
and equipment -- 3,405,915
Net income -- 528,140
Translation adjustment (5,274) (5,274)
- - - -----------------------------------------------------------------------------
Balance, December 31, 1998 $ (4,977) $ 16,453,516
=============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
- - - ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 528,140 $ 369,139
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of intangible assets 477,504 343,744
Depreciation 514,780 495,118
Deferred income taxes -- 159,000
Noncash item - stock-based compensation 739,434 257,600
(Increase) decrease in assets:
Net investment in direct financing leases (622,294) 118,204
Notes receivable -- (5,741)
Accounts receivable (767,119) (1,471,082)
Inventories 1,698,176 (110,655)
Customer deposits 11,730 --
Other assets 414,668 (261,310)
Increase (decrease) in liabilities:
Accounts payable (94,339) 32,689
Accrued expenses 292,987 (121,349)
Floor plan notes payable (2,892,917) --
Accrued income taxes -- (4,378)
Deferred revenue (38,937) 5,161
Due to affiliate 802,859 (102,097)
- - - ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,064,672 (295,957)
- - - ---------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (61,694) (708,108)
Acquisition of Major Automotive Group, net of cash acquired (1,018,432) --
- - - ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,080,126) (708,108)
- - - ---------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Line of credit 300,000 150,000
Proceeds from long-time debt 429,599 416,431
Payments of long-term debt -- (573,444)
Proceeds from issuance of common stock and exercise of warrants,
net of expenses -- 653,750
Decrease in notes payable (109,080) --
Proceeds from convertible debentures 600,000 --
Proceeds from employee 249,851 --
Increase in due from shareholders (689,699) --
- - - ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 780,671 646,737
- - - ---------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (5,274) 33
- - - ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 759,943 (357,295)
Cash and cash equivalents, beginning of year 217,191 574,486
- - - ---------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 977,134 $ 217,191
===================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 624,222 $ 121,092
Income taxes 2,846 16,809
===================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Summary of (a) Nature of Business
Significant
Accounting Fidelity Holdings, Inc. (the "Company") was
Policies 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, an automotive division and a
technology division, which includes computer
telephony and telecommunication operations
and plastics and utility operations.
(b) Principles of Consolidation
The accompanying consolidated financial
statements include the account of Fidelity
Holdings, Inc. and its wholly-owned
subsidiaries. All significant intercompany
accounts, transactions and profits have been
eliminated.
(c) Earnings per Share
In February 1997, the Financial Accounting
Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share", applicable for
financial statements issued for periods
ending after December 15, 1997. As required,
the Company adopted SFAS No. 128 for the
year ended December 31, 1997 and restated
all prior period earnings per share figures.
The Company has presented basic and diluted
earnings per share. Basic earnings per share
excludes potential dilution and is
calculated by dividing income available to
common stockholders by the weighted average
number of outstanding common shares. Diluted
earnings per share incorporates the
potential dilutions from all potential
dilutive securities that would have reduced
earnings per share.
F-7
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(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
approximates market value.
(e) 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 and vehicles held for lease
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.
(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 forty 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.
F-8
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(g) Revenue Recognition
Revenues and costs 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. 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. Revenue
from sales of computer software and
programming and hardware equipment is
recognized upon delivery of products.
Revenue from service contracts is amortized
over the life of the contracts.
(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 currency 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 amounts 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.
F-9
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(j) Excess of Costs Over Net Assets Acquired
The excess of costs over fair value of net
assets of businesses acquired is amortized
on a straight-line basis from five to forty
years. Amortization expense was $477,504 and
$303,233 for the years ended 1998 and 1997,
respectively.
(k) Impairment of Long-Lived Assets
Effective January 1, 1996, the Company
adopted 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 amounts 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 amounts 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 asset's 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, inventories, assets held for
sale, 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.
F-10
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(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 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) Impact of Recently Issued Accounting
Standards
SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities",
establishes accounting and reporting
standards for derivative instruments. The
Company has not in the past nor does it
anticipate that it will engage in
transactions involving derivative
instruments which will impact the financial
statements.
Statement of Position 98-1, "Accounting for
the Costs of Computer Software Developed or
Obtained for Internal Use", requires an
entity to expense all software development
costs incurred in the preliminary project
stage, training costs and data conversion
costs for fiscal years beginning after
December 15, 1998. The Company believes that
this statement will not have a material
effect on the Company's accounting for
computer software costs.
Statement of Position 98-5, "Accounting for
Start-up Costs", requires an entity to
expense all start-up related costs as
incurred for the fiscal years beginning
after December 15, 1998. The Company
believes that this statement will not have a
material effect on the Company's accounting
for start-up costs.
F-11
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to 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 was necessary at December 31, 1998.
3. Notes Receivable - The Company holds notes in the amount of
Officers/ $799,819, including accrued interest, at
Stockholders December 31, 1998. The notes bear interest at
a rate of 5-7/8% per annum.
4. Net Investment in Components of the net investment in direct financing
Direct Financing leases are as follows:
Leases
<TABLE>
<S> <C>
December 31, 1998
------------------------------------------------------------------------
Total minimum lease payments to be received $3,019,036
Estimated residual value of leased property 312,805
Unearned income (225,425)
------------------------------------------------------------------------
3,106,416
Less: Lease income receivable included in accounts
receivable 152,441
------------------------------------------------------------------------
Net investment $2,953,975
========================================================================
Future minimum lease payments receivable at December 31, 1998
are as follows:
<CAPTION>
Year ending December 31, Amount
------------------------------------------------------------------------
<S> <C>
1999 $2,168,952
2000 412,995
2001 258,976
2002 76,758
2003 36,294
------------------------------------------------------------------------
Total $2,953,975
========================================================================
</TABLE>
F-12
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
5. Inventories Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------------------
<S> <C>
New automobiles $ 4,147,351
New trucks and vans 7,800,692
Used automobiles and trucks 6,562,388
Parts and accessories 510,492
Other 92,339
----------------------------------------------------------------------
19,113,262
Less: LIFO reserve (51,596)
----------------------------------------------------------------------
$19,061,666
======================================================================
</TABLE>
6. Property Property and equipment consist of the following:
and equipment
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------------------
<S> <C>
Land $2,400,000
Building 1,000,000
Leasehold improvements 1,174,600
Furniture and fixtures 681,515
Equipment 1,481,771
----------------------------------------------------------------------
6,737,886
Less: Accumulated depreciation and amortization 1,385,480
----------------------------------------------------------------------
$5,352,406
======================================================================
</TABLE>
7. Income Taxes The Company accounts for income taxes using the
asset and liability method whereby deferred assets
and liabilities are recorded for differences
between the book and tax carrying amounts of
balance sheet items. Deferred liabilities or assets
at the end of each period are determined using the
tax rate expected to be in effect when the taxes
are actually paid or recovered. The measurement of
deferred tax assets is reduced, if necessary, by a
valuation allowance for any tax benefits that are
not expected to be realized. The effects of changes
in tax rates and laws on deferred tax assets and
liabilities are reflected in net income in the
period in which such changes are enacted.
F-13
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The provision for taxes on income is as follows:
Year ended December 31, 1998 1997
------------------------------------------------------
Federal:
Current $302,000 $ --
Deferred -- 127,000
State:
Current 212,000 --
Deferred -- 32,000
------------------------------------------------------
Total $514,000 $ 159,000
======================================================
The reconciliation between the amount computed by
applying the Federal statutory rate to income
before income taxes and the actual income tax
expense was as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1998 1997
----------------------------------------------------------------
<S> <C> <C>
Amount using the statutory
Federal tax rate $ 348,000 $180,000
State income tax, net of Federal tax
benefit 140,000 21,000
Utilization of tax loss carryforwards (102,000) --
Goodwill amortization 155,000 --
Other, net (27,000) (42,000)
----------------------------------------------------------------
Provision for taxes on income $ 514,000 $159,000
================================================================
</TABLE>
F-14
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The tax effect of temporary differences resulted in
deferred tax liabilities as follows:
<TABLE>
<CAPTION>
December 31, 1998 1997
-----------------------------------------------------------------
<S> <C> <C>
Revenue and expenses of consolidated
subsidiary recognized on the cash
basis for tax purposes, resulting in
a timing difference $ -- $112,974
Depreciation -- 42,015
Other -- 4,011
-----------------------------------------------------------------
$ -- $159,000
=================================================================
</TABLE>
8. Secured Line The Company has two lines of credit ("Line") with
of Credit Marine Midland Bank (the "Bank") for $1,500,000.
The interest rate is a variable rate based on the
Bank's prime rate of interest. Interest is payable
monthly. At December 31, 1998, the rate was 9%.
The Line is collateralized by a first security
interest in and UCC filing on all assets of
Fidelity Holdings, Inc. and the personal guarantees
of the majority stockholders, Bruce Bendell and
Doran Cohen, each of whom will be limited to 50% of
the total obligation to the Bank.
As of December 31, 1998, the Company owes $450,000
against the Line.
9. 10% Convertible During April 1998, the Company issued $600,000 of
Subordinated 10% convertible subordinated debentures. The
Debentures debentures are due in June 1999 and interest is
paid semi-annually. If conversion takes place
during January and April 1999, then the debenture
converts into common stock at the price of $2.94 a
share. After April 1999, the debenture converts
into common stock at half closing price, but not
less than $2.50 a share. The due date may be
extended to April 2000 upon certain conditions.
During January 1999, $100,000 of debentures was
converted into 34,000 shares of common stock.
F-15
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
10. 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, 1998 ranged between 8.75% 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.
On May 14, 1998, the Company borrowed $7.5 million
from Falcon Financial, LLC (an unrelated party) to
finance the Major Auto Acquisition. The term of the
loan is for fifteen years with interest at 10.18%.
Payments of principal and interest of $81,423 are
due monthly.
-----------------------------------------------
Leasing notes payable $1,432,171
Falcon loan payable 7,390,920
-----------------------------------------------
8,823,091
Less: Current portion 869,813
-----------------------------------------------
$7,953,278
===============================================
Maturities are as follows:
-----------------------------------------------
1999 $ 869,813
2000 746,721
2001 475,679
2002 433,825
2003 362,955
Thereafter 5,934,098
-----------------------------------------------
$8,823,091
===============================================
F-16
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
11. Business On April 21, 1997, the Company and its wholly-owned
Combinations subsidiary, Major Acquisition Corp., entered into a
merger agreement (the "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 48.2% of the Company's outstanding
common stock. Mr. Bendell owned 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,
operated five franchised automobile dealerships
(collectively, the "Major Auto Group").
On May 14, 1998, pursuant to the Merger Agreement,
Bruce Bendell contributed 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. then acquired
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. Major Acquisition Corp. purchased
the remaining 50% of the issued and outstanding
shares of common stock of Major Dodge and Major
Chrysler, Plymouth, Jeep Eagle from Harold Bendell,
Bruce Bendell's brother, for $4 million in cash
pursuant to a stock purchase agreement. In
addition, Major Acquisition Corp. acquired two
related real estate components (the "Major Real
Estate", defined hereinafter) from Bruce Bendell
and Harold Bendell (collectively "the Bendells")
for $3 million.
The preferred stock issued to Bruce Bendell is
designated as the "1997-MAJOR Series of Convertible
Preferred Stock." It has voting rights and is
convertible into the Company's common stock (the
"Common Stock"). The number of shares of Common
Stock into which the new class is convertible is
1.8 million shares. The foregoing acquisitions from
Major Auto and Harold Bendell are collectively
referred to herein as the "Major Auto Acquisition".
F-17
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
To finance the cash portion of the Major Auto
Acquisition, aggregating $7 million ($4 million for
Harold Bendell and $3 million to purchase the Major
Real Estate), Major Acquisition Corp. borrowed $7.5
million from Falcon Financial, LLC pursuant to a
loan and security agreement dated May 14, 1998, for
a 15 year term with interest equal to 10.18%.
Prepayment is not permitted for the first five
years, after which prepayment may be made, in full
only, along with the payment of a premium.
The collateral securing the loan transaction
includes the Major Real Estate and, subject to the
interests of any current or prospective "floor plan
or cap loan lender," the assets of Major
Acquisition Corp. Major Acquisition Corp. is
required to comply with certain financial covenants
related to net worth and cash flow. In addition,
the Company provided an unconditional guarantee of
the loan pursuant to a guarantee agreement dated
May 14, 1998. This acquisition was treated as a
purchase by Major Acquisition Corp.
The pro forma unaudited results of operations for
the year ended December 31, 1998, combining the
acquisition of Major Automotive Group, Inc. as
though it was acquired by the Company as of January
1, 1998, are as follows:
---------------------------------------------------
Revenues $148,000,000
Net income 841,000
===================================================
12. Discontinued On December 16, 1998, the Company's Board of
Operations Directors decided to explore the possible
divestiture or disposition by merger or
consolidation or otherwise, of the Company's
nonautomotive assets. On February 7, 2000, the
Board of Directors has decided not to sell the
nonautomotive assets. As required by Emerging
Issues Task Force 90-16, "Accounting for
Discontinued Operations" subsequently retained, the
financial statements have been reclassified to
reflect the results of the nonautomotive assets in
continuing operations.
F-18
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
13. Governmental Substantially all of the Company's facilities are
Regulations 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. 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. Doran 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.
In 1997, compensation paid and accrued to Mr. Cohen
amounted to $150,000. Mr. Bendell waived his
compensation in 1997. 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. The amount that
must be paid by the Company in the event of default
is $1,432,171.
F-19
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Legal Proceedings
On November 22, 1996, the Company and its
wholly-owned subsidiaries, Computer Business
Sciences, Inc. 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.
On February 4, 1997, the defendants filed a
counterclaim against the Company and its
subsidiaries seeking damages of $50,000,000 of
compensatory and punitive damages for breach of
contract and violation of the Lanham Act. The
defendants allege in their counterclaim that the
Company, Computer Business Sciences and Info
Systems 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 Company, Computer Business Sciences, Inc. and
Info Systems have filed a Motion to Dismiss Marom
and MMT's counterclaims for failure to state a
cause of action. While there was minimum
opposition, Marom and MMT did cross move to amend
their answer and counterclaims to include thirteen
causes of action. The Company has submitted
opposition to this amendment attempting to show
that the proposed amended counterclaims have no
merit. All papers in the action have been recently
submitted and the Company is awaiting a decision
from the Court. The Company and its litigation
counsel believe that the Company and its
wholly-owned subsidiaries have a good basis to
oppose Marom's and MMT's counterclaims.
F-20
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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 tortuous 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 Noncompetition
Agreement entered into by the parties to the
litigation. The litigation has been settled without
any financial contribution by the Company.
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 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.
F-21
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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.
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.
F-22
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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, 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.
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.
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.
F-23
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
15. Related Party Amounts due affiliates are amounts owed by the
Transactions 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 noninterest-bearing obligations with
no specified maturity dates. At December 31, 1998,
the amount due from affiliates of $268,845 was
included in accounts receivable.
Marcum & Kliegman LLP, an accounting firm of which
a director is a member, charged the Company
approximately $48,000 in fees for accounting
services for the year ended December 31, 1998.
All sales of used cars to affiliates were made at
wholesale cost plus related fees incurred by Major
Auto and, therefore, resulted in no profit to Major
Auto. Total sales revenue and unit counts were
estimated to be less than 5% of total sales.
16. Warrants (a) Warrants
and Options
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 which expired in October 1997.
F-24
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(i) 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 1997, warrants to
purchase 523,000 shares were exercised,
leaving a balance of 977,000
outstanding. Of this amount, Class B
warrants for 750,000 shares, which were
exercisable through March 19, 1998, were
unexercised by that date and, therefore,
lapsed and warrants to purchase 144,714
shares of the Company's common stock
were exercised in December 1998.
(ii) 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
at December 31, 1998 was 182,286,
exercisable at $1.25 per share.
(b) Options
As required by SFAS 123, the Company has
determined the pro forma information as if the
Company had accounted for stock options
granted since January 1, 1996, under the fair
value method of SFAS 123. An option pricing
model similar to the Black-Scholes was used
with the following weighted average
assumptions used for grants in the years 1997
and 1996, respectively; expected volatility of
80 percent; risk-free interest rate of 6% and
5.5%, respectively and expected lives of 5
years. The pro forma effect of these options
on net earnings was not material.
In consideration for certain consulting
services related to the acquisition of the
Major Auto Group, the Company has issued
options to purchase 50,000 shares of the
Company's common stock for $4.50 per share,
exercisable until May 2002. At December 31,
1998, no options were exercised.
F-25
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
17. Preferred The Company has 2,000,000 shares of undesignated
Stock preferred stock authorized; during 1996, the
Company designated 250,000 shares as the 1996 -
Major Series. The shares of the 1996 - Major Series
have voting rights and vote with the common stock
and not as a separate class. Each share entitles
the holder to 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 $10 per share or a
total of $2,500,000. Pursuant to an agreement
between the Company and the preferred stockholders,
the right of rescission (under certain
circumstances), which was a part of the original
agreement, has been rescinded.
On May 14, 1998, the Company designated 900,000
shares as the 1997 - Major Series of Convertible
Preferred Stock (the "1997 Preferred Stock"). The
shares of the 1997 Preferred Stock have voting
rights and vote with the common stock and not as a
separate class. Each share entitles the holder to
two votes per share reflecting the underlying
conversion rate. The shares of 1997 Preferred Stock
are convertible, with each share converting into
two shares of common stock if the market value is
equal to or greater than $6,000,000 for the
1,800,000 shares of common stock. If the 1,800,000
shares of common stock has a market value of less
than $6,000,000, then additional shares of common
stock will be issued to equal a market value of
$6,000,000. In the event that a dividend is
declared on the common stock, a dividend of twice
the per share dividend of common stock will be paid
on the 1997 Preferred Stock. The 1997 Preferred
Stock has a liquidation value of $6,000,000. On the
fifth anniversary, the 1997 Preferred Stock
automatically converts into shares of common stock.
F-26
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Common Stock
In 1996, the Company issued to various employees,
in recognition of their services, 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 the oral agreements entered into in
January 1996, in connection with investment banking
marketing services rendered to the Company, the
Company in October 1996, upon the completion of
these services, issued 200,000 shares of its common
stock. 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 14 are
convertible into restricted shares at $1.25 per
share, were separate and distinct from the Major
Fleet acquisition and were 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-27
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In 1997, the Company issued 67,000 shares valued at
$2.80 per share which was considered to be the fair
value in connection with legal and financial
services rendered in connection with the
acquisition of the Major Auto Group. The $187,600
value of the shares issued has been deferred and
included in other assets, which amount was charged
as part of the cost of acquisition at closing.
During 1998, the Company issued 1,140,814 shares of
common stock at estimated market prices for
telephony territories and equipment and services.
An aggregate of 458,000 shares valued at $1,494,140
was issued for telephony territories and equipment,
while an aggregate of 682,814 shares valued at
$1,911,775 was issued for services.
18. Segment In the fourth quarter of 1998, the Company adopted
Information the SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which
establishes standards for reporting information
about a company's operating segments. The Company
has divided its operations into two reportable
segments; automotive and technology.
The reporting segments follow the same accounting
policies used for the Company's consolidated
financial statements and described in the summary
of significant accounting policies. Management
evaluates a segment's performance based upon profit
or loss from operations before income taxes.
F-28
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Following is a tabulation of business segment
information for 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------------------------
<S> <C> <C>
Segment sales:
Automotive $ 98,578,970 $ --
Technology 1,088,852 3,862,284
-------------------------------------------------------------------
Total consolidated net sales $ 99,667,822 $ 3,862,284
===================================================================
Operating income:
Automotive $ 2,021,301 $ --
Technology (979,161) 528,139
-------------------------------------------------------------------
Consolidated earnings before
taxes on income $ 1,042,140 $ 528,139
===================================================================
Assets:
Automotive $ 42,352,571 $ --
Technology 8,195,852 9,401,343
-------------------------------------------------------------------
Total $ 50,548,423 $ 9,401,343
===================================================================
</TABLE>
Substantially all of the Company's assets are
located within the continental United States.
However, the Company sells and ships products to
foreign countries. Geographic information regarding
the Company's net sales is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------
<S> <C> <C>
United States $93,735,032 $2,925,789
Ukraine 4,843,938 --
Canada 1,088,852 936,495
----------------------------------------------------------------
Total consolidated net sales $99,667,822 $3,862,284
----------------------------------------------------------------
</TABLE>
F-29
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
19 Subsequent Events In January 1999, Fidelity Holdings and Major Auto
entered into an agreement with Universal Ford, Inc. to
acquire Universal Kia, a Kia automobile dealership
located in Long Island City, New York. The purchase
price of Universal Kia is based on Universal Kia's
historical operating results and is expected to
aggregate less than $200,000.
Also in January 1999, the Company signed a Letter of
Intent to acquire, for $1,250,000, 80% of the Long
Island, New York based Major of the Five Towns (formerly
Nissanland and Kialand), currently doing business as
Major Nissan and Major Kia, that is owned by the
Company's Chairman and CEO, Bruce Bendell. This
dealership has three separate showroom locations.
Nicholas Guadagno, who is President and a 20%
shareholder of Major of the Five Towns, will continue to
manage day-to-day operations after the completion of
this acquisition.
In February 1999, the Company signed a contract to
acquire, for $800,000, subject to certain adjustments,
in cash and stock, Compass Lincoln-Mercury and Compass
Dodge, both of which are based in Essex County, New
Jersey.
F-30
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In January 1999, the Company and its subsidiary,
Computer Business Sciences, Inc. ("CBS") entered into a
Securities Purchase Agreement with certain purchasers
named therein (the "Purchasers"), pursuant to which the
Company and CBS agreed to sell up to 2,750 Units (the
"Units"), each Unit consisting of (a) in the first
tranche, (i) a 12% Convertible Debenture of the Company
in the principal amount of $1,000, convertible on
certain terms and conditions into shares of the
Company's common stock, par value $0.01 per share (the
"Common Stock"), (ii) 36.3636 shares of Common Stock,
(iii) warrants (the "Warrants") to acquire 83.3333
shares of Common Stock and (iv) warrants (the "CBS
Warrants") to acquire 25.4545 shares of common stock,
par value $0.01 per share, of CBS (the "CBS Shares"),
(b) in the second tranche, (i) $1,563.64 and (ii)
Warrants to acquire 130.3030 shares of Common Stock, and
(c) in the third tranche, (i) Debentures in an aggregate
principal amount of $1,563.64 and (ii) Warrants to
purchase 130.3030 shares of Common Stock. The shares of
Common Stock issuable upon conversion of or otherwise
pursuant to the Debentures are referred to herein as the
"Conversion Shares" and the shares of Common Stock
issuable upon exercise of or otherwise pursuant to the
Warrants are referred to herein as the "Warrant Shares."
The Company closed on the first tranche of $2.75 million
and issued to Purchasers, in the aggregate, Debentures
in the face amount of $2.75 million, 100,000 shares of
Common Stock, Warrants to acquire 229,167 shares of
Common Stock and CBS Warrants to acquire 70,000 CBS
Shares. Consummation of the second and third tranches is
conditioned upon, among other things, achievement by the
Company and CBS of certain mutually agreeable milestones
and, under certain conditions, approval by the
shareholders of Fidelity. The Debentures are convertible
into Common Stock of the Company at any time after the
date of issue (subject to certain volume limitations).
Upon conversion, holders will be entitled to receive a
number of shares of Common Stock determined by dividing
the outstanding principal amount of the Debentures by a
conversion price equal to the lesser of 90% the average
closing bid prices
F-31
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
for the Common Stock during a defined period prior to
conversion, and $4.20 (but in no event less than $3.00,
and subject to adjustment upon the occurrence of certain
dilutive events). The Warrants are exercisable for
shares of Common Stock of the Company. Upon exercise,
holders will be entitled to receive shares of Common
Stock for an exercise price of $4.20 per share. The
Warrants will expire on January 25, 2004. The CBS
Warrants are exercisable for shares of Common Stock of
CBS. Upon exercise, holders will be entitled to receive
shares of Common Stock for an exercise price of $0.001
per share. The CBS Warrants will expire on January 25,
2004. In connection with this transaction, the Company
also entered into a Registration Rights Agreement with
the Purchasers under which the Company is required to
file a registration statement on Form S-3 by March 11,
1999, subject to certain specified exceptions, which
have been met, covering resales of the Conversion Shares
and the Warrant Shares (the "Resale Registration
Statement"). Under the Registration Rights Agreement,
the Company may be required to make certain payments to
holders of the Debentures as partial damages if, among
other things, the Resale Registration Statement has not
been declared effective by the Securities and Exchange
Commission on or before July 9, 1999, subject to certain
specified exceptions. In connection with the placement
of the Debentures, the Company paid to Zanett Securities
Corporation, the placement agent for the transaction
(the "Placement Agent"), a fee and nonaccountable
expense allowance of 6.9%, and the Company also issued
to the Placement Agent and its assignees, 50,000 shares
of the Company's Common Stock, 30,000 shares of CBS
Common Stock and Warrants to purchase an aggregate of
114,583 shares of Common Stock at an exercise price
equal to $4.20 per share.
F-32
<PAGE>
Report of Independent Certified Public Accountants
Major Chevrolet, Inc. and Affiliates
Long Island City, New York
We have audited the accompanying combined statements of income and cash flows of
Major Chevrolet, Inc. and Affiliates for the four and one-half months ended May
14, 1998 and the year ended December 31, 1997. 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 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 combined financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Major Chevrolet, Inc. and Affiliates for the four and one-half months ended May
14, 1998 and the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
New York, New York
March 20, 1999
F-33
<PAGE>
Major Chevrolet, Inc. and Affiliates
Combined Statements of Income
================================================================================
Four and
one-half Year ended
months ended December 31,
May 14, 1998 1997
- - - --------------------------------------------------------------------------------
Revenues:
Sales $50,276,561 $144,499,231
Cost of sales 43,743,891 126,855,734
- - - --------------------------------------------------------------------------------
Gross profit 6,532,670 17,643,497
Operating expenses 5,980,605 15,510,591
Interest expense 48,808 1,283,420
- - - --------------------------------------------------------------------------------
Operating income 503,257 849,486
Other income 18,172 255,918
- - - --------------------------------------------------------------------------------
Income before income taxes 521,429 1,105,404
Income taxes 42,320 169,813
- - - --------------------------------------------------------------------------------
Net income $ 479,109 $ 935,591
================================================================================
See accompanying summary of accounting policies
and notes to combined financial statements.
F-34
<PAGE>
Major Chevrolet, Inc. and Affiliates
Combined Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
================================================================================
Four and
one-half
months Year ended
ended December
May 14, 1998 31, 1997
- - - --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 479,109 $ 935,591
- - - --------------------------------------------------------------------------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 20,430 64,470
Changes in assets - (increase) decrease in:
Trade receivables 995,618 (468,521)
Inventories (3,385,036) 10,462,590
Prepaid expenses and other current assets (50,465) (84,944)
Security deposits (1,485) 5,007
Changes in liabilities - increase (decrease) in:
Customer deposits 342,819 (885,914)
Accounts payable (488,844) 613,255
Accrued expenses (609,874) 1,511,257
- - - --------------------------------------------------------------------------------
Total adjustments (3,176,837) 11,217,200
- - - --------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities (2,697,728) 12,152,791
- - - --------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property, plant and equipment (12,115) (53,616)
Note receivable 675,396 (38,230)
(Purchase) proceeds from sale of lease and rental
vehicles (566,487) 3,505,516
Certificate of deposit 699,935 84,677
- - - --------------------------------------------------------------------------------
Net cash provided by investing activities 796,729 3,498,347
- - - --------------------------------------------------------------------------------
Cash flows from financing activities:
Increase in (payment of) stockholder loans (790,457) 164,677
Increase (decrease) in long-term debt (2,093) 17,978
Increase (decrease) in floor plan notes payable 3,734,301 (14,348,333)
Increase in due from affiliates (946,785) -
S corporation distributions - (410,782)
- - - --------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities 1,994,966 (14,576,460)
- - - --------------------------------------------------------------------------------
Net increase in cash and cash equivalents 93,967 1,074,678
Cash and cash equivalents, beginning of period 1,424,915 350,237
- - - --------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 1,518,882 $ 1,424,915
================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 314,362 $ 1,323,866
Income taxes 129,681 89,732
================================================================================
See accompanying summary of accounting policies and
notes to combined financial statements.
F-35
<PAGE>
Major Chevrolet, Inc. and Affiliates
Notes to Combined Financial Statements
================================================================================
1. Summary of (a) Business and Principles of Combination and
Accounting Reporting
Policies
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., all of
which are under common control. All significant
intercompany balances and transactions have been
eliminated.
(b) 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.
(c) 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.
(d) 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.
F-36
<PAGE>
Major Chevrolet, Inc. and Affiliates
Notes to Combined Financial Statements
================================================================================
(e) Revenue and Cost Recognition
Revenues and cost are recognized upon delivery of
the vehicle to the customer. At time of delivery,
all financing arrangements between and among the
parties have been concluded.
(f) 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 1998, total inventory quantities were
reduced, resulting in a LIFO liquidation. The net
income realized as a result of the inventory
liquidation amounted to approximately $560,000.
(g) 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.
F-37
<PAGE>
Major Chevrolet, Inc. and Affiliates
Notes to Combined Financial Statements
================================================================================
(h) 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.
(i) Cash Equivalents
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.
(j) Certificates of Deposit
The Company has two certificates of deposit with a
financial institution which have initial
maturities of one year and six months,
respectively, that automatically renew on such
maturity dates. The fair value of the certificates
of deposit approximate their carrying value due to
their short-term maturities.
F-38
<PAGE>
Major Chevrolet, Inc. and Affiliates
Notes to Combined Financial Statements
================================================================================
(k) 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.
2. Acquisition by On May 14, 1998, the Company was merged into Major
Fidelity Acquisition Corp., a wholly-owned subsidiary of Fidelity
Holdings, Inc. Holdings, Inc. ("Fidelity"). Pursuant to the merger
agreement, Major Acquisition Corp. acquired all of the
Company's shares of stock for $4 million in cash, the
incurrence of $500,000 in merger-related expenses and
the issuance of 900,000 shares of Fidelity's convertible
preferred stock. Such shares are convertible, by their
terms, into 1,800,000 shares of Fidelity's common stock.
3. Related Party The Company rents its Dodge showroom premises from its
Transactions stockholders. The agreement is on a month-to-month
basis. Rent expense relating to this agreement amounted
to $36,000 and $96,000 for the four and one-half months
ended May 14, 1998 and the year ended December 31, 1997,
respectively.
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 $90,000 and $240,000 for the four
and one-half months ended May 14, 1998 and the year
ended December 31, 1997, respectively.
F-39
<PAGE>
Major Chevrolet, Inc. and Affiliates
Notes to Combined Financial Statements
================================================================================
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 $45,000 and $120,000
for the four and one-half months ended May 14, 1998 and
the year ended December 31, 1997, respectively.
4. Governmental Substantially all of the Company's facilities are
Regulations 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.
5. 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.
F-40
<PAGE>
Signatures
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Fidelity Holdings, Inc.
Dated: February 25, 2000 By: /s/ Doron Cohen
Doron Cohen, President and
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated:
Signature Title Date
- - - --------- ----- ----
/s/ Doron Cohen President and Chief February 25, 2000
- - - --------------- Executive Officer
Doron Cohen
/s/ Bruce Bendell Chairman of the Board February 25, 2000
- - - -----------------
Bruce Bendell
/s/ David Edelstein Director February 25, 2000
- - - -------------------
David Edelstein
/s/ Richard L. Feinstein Chief Financial Officer February 25, 2000
- - - ------------------------
Richard L. Feinstein
/s/ James Wallick Director February 25, 2000
- - - -----------------
James Wallick
/s/ Jeffrey Weiner Director February 25, 2000
- - - ------------------
Jeffrey Weiner
<TABLE>
<CAPTION>
Exhibit 11.1
Statement re: Computation of Earnings Per Share
FIDELITY HOLDINGS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE
Number of shares outstanding at January 1, 1998 6,895,700
Common stock issued during the year:
Weighted
Date Days Number of Average
Issued Outstanding Shares No. of Shares
------ ----------- ------ -------------
<S> <C> <C> <C>
4/14/98 261 350,000 250,274
6/2/98 212 10,500 6,099
7/1/98 184 17,000 8,570
7/9/98 176 3,000 1,447
8/11/98 143 16,000 6,268
8/27/98 159 150,000 65,342
10/5/98 86 187,500 44,178
10/19/98 74 40,000 8,110
10/19/98 74 50,000 10,137
10/21/98 72 50,000 9,863
10/26/98 67 100,000 18,356
10/28/98 65 2,300 410
12/2/98 29 144,714 11,498
12/21/98 10 19,800 542
---------
Weighted average number of shares issued during 1998 441,094
---------
Number of shares used in computing basic earnings per share 7,336,794(A)
Dilution:
250,000 shares of Preferred Stock, each share
convertible into 2 shares of common stock 365 500,000 500,000
900,000 shares of Preferred Stock, each share
convertible into 2 shares of common stock 232 1,800,000 1,144,110
---------
1,644,110
---------
Number of shares used in computing diluted earnings per share 8,980,904(B)
=========
Earnings
Net income 528,140(C)
=========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Earnings Earnings
Per share Per share
Basic Diluted
----------- -----------
<S> <C> <C>
Earnings Per Share:
Net income (C)/(A) 0.07 (C)/(B) 0.06
==== ====
</TABLE>
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
years ended December 31, 1998 and 1997 and is qualified in its entirety by
reference to such financial statements and footnotes.
<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
YEARS ENDED DECEMBER 31, 1998 AND 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND FOOTNOTES.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 977,134 217,191
<SECURITIES> 0 0
<RECEIVABLES> 7,118,717 1,650,919
<ALLOWANCES> 0 0
<INVENTORY> 19,061,666 164,661
<CURRENT-ASSETS> 30,837,014 4,200,918
<PP&E> 5,457,036 1,854,961
<DEPRECIATION> (104,630) (618,448)
<TOTAL-ASSETS> 50,548,423 9,401,343
<CURRENT-LIABILITIES> 25,836,983 1,780,988
<BONDS> 9,423,091 0
0 0
11,500 2,500
<COMMON> 80,365 68,957
<OTHER-SE> 16,361,651 6,453,278
<TOTAL-LIABILITY-AND-EQUITY> 50,548,423 9,401,343
<SALES> 99,667,822 2,909,251
<TOTAL-REVENUES> 99,667,822 3,862,284
<CGS> 84,828,470 823,397
<TOTAL-COSTS> 12,953,857 2,260,668
<OTHER-EXPENSES> 0 137,475
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 843,355 112,605
<INCOME-PRETAX> 1,042,140 528,139
<INCOME-TAX> 514,000 159,000
<INCOME-CONTINUING> 528,140 369,139
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 528,140 369,139
<EPS-BASIC> .07 .06
<EPS-DILUTED> .06 .05
</TABLE>