UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(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, 1999
|_| 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 |_|
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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: $210,814,104
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 5, 2000 was
approximately $135,725,277. The number of shares outstanding of the Company's
common stock on April 5, 2000, was 25,620,203 shares.
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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 our expansion 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. Unless otherwise indicated, all
references to the number of our shares of common stock gives effect to our 3 for
2 stock splits effectuated in June 1999 and January 2000.
General
Fidelity Holdings, Inc. ("we" or the "Company") was incorporated in Nevada
on November 7, 1995. We historically have operated as a holding company and,
accordingly, we derive our revenues solely from our operating subsidiaries. Our
first full year of operations was 1996. Our operating subsidiaries have been
grouped into two divisions: Automotive and Technology. Unless otherwise
indicated, all references to the "Company" or "we" include reference to the
subsidiaries of the Company.
o Automotive Division
The Automotive Division operates through the Major Dealer Group ("Major
Dealer Group"), a leading consolidator of automobile dealerships in the New York
metropolitan Area which operates through nine retail automobile franchises. The
leasing operations are included in the Automotive Division and consist of
providing leases and other financing. Such activities are directed primarily
toward the automotive vehicle market.
o Technology Division
The Technology Division, headed by Computer Business Services, Inc.
("CBS"), has operated through voice processing and computer telephony technology
divisions. Through CBS, we provide a broad range of telecommunications services.
Included in CBS's telecommunications product lines are (i) its 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. Additionally, the Technology Division, through
our IG2, Inc. subsidiary, is developing a sophisticated, technological, leading
edge network, the IG2(R) Network, that is seeking to take advantage of the
convergence of data, voice and multi-media. We have qualified IG2 as a CLEC in
the majority of our planned jurisdictions and have incurred substantial
expenditures in connection with the IG2(R) Network's development. Also included
in the Technology Division is our plastics and utility products operations,
which currently consist of a development-stage company. Our 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 these products are
still under development, no commercial sales have as yet been made.
o 1999 Summary
The year 1999 has been one of significant change for us. In the prior
year, our Board of Directors determined to explore the possible divestiture of
our non-automotive operations. At the same time, we continued to invest in
development activities relating to these operations in order to enhance both
their potential marketability and internal prospects. In particular, IG2, Inc.
required substantial investment in development and licensing. Part of this
investment was the application and review process relating to obtaining CLEC
licenses in each of the markets in which IG2, Inc. envisions operating in order
to gain nationwide coverage. By year-end 1999, we had obtained CLEC status in 25
states covering 54 of its planned 62 markets and is currently licensed in 60
such markets. Additional investments were made in
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staffing, engineering, research and equipment in order to maximize the potential
of this operation. Although the Automotive Division maintained a historical high
gross profit level of approximately $33 million for 1999, such
technology-related expenditures were primarily responsible for our 1999 net loss
of more than $3.5 million.
Automotive Division
Major Auto Acquisition
On April 21, 1997, we and our 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 our Chairman and the beneficial owner of approximately 36.3% of our
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 our 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 our 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 were originally convertible was 4.05 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 50% of the value of the
consideration paid to Harold Bendell to each of Major Dodge and Major Chrysler,
Plymouth, Jeep Eagle, respectively.
To finance the cash portion of the Major Auto Acquisition, which
aggregated $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 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, we provided an unconditional guarantee
of the Falcon loan pursuant to a guarantee agreement dated May 14, 1998.
General
The Major Dealer Group 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. In addition, the
Major Dealer Group owns two other franchised dealerships in the New York
Metropolitan area: (i) Kia and (ii) Lincoln-Mercury. Major Auto also distributes
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General Motors vehicles in the former Soviet Union. 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 28 years
experience in the automobile industry. He began selling and leasing used
vehicles in 1972 and has owned and managed franchised automobile dealerships
since he acquired Major Auto's Chevrolet dealership in 1985. Under Mr. Bendell's
leadership, Major Dealer Group has expanded from a single-franchise dealership
having approximately $10 million in revenues and 25 employees in 1985 to a nine-
franchise dealership group having more than $200 million in revenues and more
than 250 employees in 1999.
Industry Background
According to industry data from the National Automobile Dealers
Association ("NADA data"), on average in 1999, new vehicle sales constitute 60%
of a franchised dealership's total sales. Unit sales of new vehicles rose 4.3%
in 1999 to a total of 16.9 million units sold. At an average retail selling
price of $24,445 per vehicle, new vehicle sales totaled approximately $413
billion in 1999. From 1994 to 1999 sales revenue from the sale of new vehicles
increased approximately 42%. The annual net profit before taxes of the typical
United States franchised dealer is estimated to be $500,000.
According to NADA data, on average in 1999, used vehicle sales constitute
29.2% of a franchised dealership's total sales. In 1999, franchised new vehicle
dealers sold 11.1 million retail used vehicles. At an average selling price of
$13,236 per vehicle, used vehicle sales totaled approximately $147 billion in
1999. From 1994 to 1999 sales revenue from the retail sale of used vehicles
increased approximately 32% and the combined sales revenue from the retail and
wholesale sale of used vehicles increased approximately 36%. The annual net
profit of the typical United States franchised dealer's used vehicle department,
including wholesale and retail, is estimated to be $154,311. 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 results.
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>
1994 1995 1996 1997 1998 1999
------ ------ ------ ------ ------ ------
(Units in millions; dollars in billions)
<S> <C> <C> <C> <C> <C> <C>
New vehicle unit sales 15.1 14.8 15.1 15.1 16.2 16.9
New vehicle sales revenue(1) $290.0 $303.0 $328.0 $338.2 $383.0 $413.1
Used vehicle unit sales-retail 10.9 11.4 11.9 12.0 12.2 11.1
Used vehicle retail sales revenue $111.0 $126.0 $137.0 $145.2 $153.0 $146.9
Used vehicle unit sales-wholesale 6.8 7.0 7.2 7.1 7.1 7.6
Used vehicle wholesale sales revenue $ 27.7 $ 30.3 $ 33.4 $ 34.6 $ 35.7 $ 38.2
</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, 2000 (1999 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 1999 for franchised dealerships, a portion
of which is accounted for by the increase in the amount of used vehicle
reconditioning. Revenue from parts and services constitutes, on average,
approximately 11.2% of a franchised dealership's total sales.
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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, $3.5 million, with an average net profit before taxes
of $500,000.
To reduce the costs of owning a new vehicle, in recent years, automobile
manufacturers 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.
The Major Dealer Group 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 Company
has also been seeking to reduce the number of its franchises as part of a
campaign to upgrade its retail networks and make the dealers that remain more
profitable. The Major Dealer Group 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
The Major Dealer Group'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. The Major Dealer Group has established its Major
World brand and www.majorworld.com Internet brand for its current used car
operations and those of the Major Dealer Group's participating regional
dealerships. With centralized buying and advertising as its focus, Major World
is a natural extension of its efforts in its regional acquisition strategy and
its accomplishments in used car sales through its dealerships in the New York
metropolitan area.
Internet Sales and Other Technology. The Major Dealer Group believes that
it has achieved a competitive advantage through the use of technology. The Major
Dealer Group 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, the Major Dealer Group 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. The Major
Dealer Group presently enables its customers to obtain credit approvals over the
telephone via its proprietary Talkie(R)-AutoCom, a customized application of our
"Talkie(R)" telephone interactive voice response system (see "Technology
Division -- Talkie(R)"), that operates 24 hours per day, seven days per week and
in nine different languages. The Major Dealer Group is presently expanding its
use of Talkie(R)-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. The Major Dealer Group is also intending
to expand its use of Talkie(R)-AutoCom to call its customers automatically to
notify them of required maintenance, sales and promotions and to solicit
customer satisfaction information. In addition, Major Dealer Group intends to
explore new ways to use technology to provide
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better customer service and is working to install Major Browse N Talk (TM) for
use on the Major website to enable immediate customer service response.
Focus on Used Vehicle Sales. A key element of the Major Dealer Group's
operating strategy is to focus on the sale of used vehicles. In 1999,
approximately 11.1 million used cars were sold retail by dealers, over 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 the Major Dealer Group sells more used cars in the
New York metropolitan area than any other automobile dealership or dealership
group. The Major Dealer Group 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. The Major Dealer Group
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,
the Major Dealer Group acquires used vehicles from trade-ins and a variety of
sources nationwide, including direct purchases from individuals and fleets, and
manufacturers' and independent auctions. The Major Dealer Group believes that
the price at which it acquires used vehicles is the most significant factor
contributing to the profitability of its used vehicle operations. The Major
Dealer Group believes that, because of the large volume of used vehicles that it
sells each month and the more than 28 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. The Major Dealer
Group 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. The Major
Dealer Group provides its employees with special training and compensates them,
in part, with commissions based on their sales of such products and services.
The Major Dealer Group 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. The Major Dealer Group
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 various locations, the Major Dealer Group offers, collectively,
nine makes of new vehicles, including Chevrolet, Chrysler, Plymouth, Dodge, Jeep
and Subaru, Kia, Lincoln and Mercury. In addition, the Major Dealer Group sells
a variety of used vehicles at a wide range of prices. The Major Dealer Group
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. The Major Dealer Group's
goal is to become the leading automotive dealer in its target market by
operating multiple dealerships in that market. To accomplish this, the Major
Dealer Group seeks to acquire new franchises in its existing market and to
expand its existing franchises to new markets. This strategy enables the Major
Dealer Group 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, the
Major Dealer Group's primary market, is ethnically diverse, the Major Dealer
Group targets its selling efforts to a broad range of ethnic groups. In addition
to offering pre-paid international telephone calling time, the Major Dealer
Group employs a multi-lingual sales force and intends to expand its electronic
media to accommodate multiple languages.
Leverage the Sale of International Calling Time. The Major Dealer Group
offers customers pre-paid international telephone calling time in connection
with the purchase or lease of its automobiles. To accomplish this, the Major
Dealer Group utilizes our proprietary Talkie(R) technology, which is able to
provide users with international calling time at sharply discounted rates.
Because the Major Dealer Group purchases telephone time from us at below-market
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rates, the cost to the Major Dealer Group of implementing this program is
minimal compared with the savings realized by its customers. The Major Dealer
Group's primary market, the New York metropolitan area, is home to many diverse
ethnic groups who have family and friends whom they frequently call in their
native countries. By offering pre-paid international telephone calling time with
the purchase or lease of a vehicle, the Major Dealer Group believes that it adds
value to its customers and thereby increases customer satisfaction and loyalty.
Employ Professional Management Techniques. The Major Dealer Group employs
professional management techniques in all aspects of its operations, including
information technology, employee training, profit-based compensation and cash
management. Each of the Major Dealer Group's dealership locations, its
centralized used vehicle operation and its 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. The Major Dealer Group compensates its general managers based, in
part, on the profitability of the operations they control rather than on sales
volume. The Major Dealer Group'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. The Major Dealer Group believes that the
application of its professional management techniques provides it with a
competitive advantage over other dealerships and dealership groups.
Growth Strategy
We intend to expand our automotive business by acquiring additional
dealerships and improving their performance and profitability by implementing
our operating strategy. As part of our growth strategy, we intend to focus our
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 we believe are
underperforming. In evaluating potential acquisition candidates, we 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 we will be
able to acquire additional franchises in that market to achieve larger market
share. Major Dealer Group believes that the most attractive acquisition
candidates can be found in the greater New York metropolitan area, but we may
consider acquisitions in other markets. The financing of such acquisitions may
involve expending cash, incurring debt or issuing equity securities, which could
have a dilutive effect on our then outstanding capital stock. We, 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, we intend to implement our 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. We also intend to install our
management information system in acquired dealerships as soon as possible after
the acquisition, which will allow our senior management to carefully monitor
each aspect of the dealership's operations and performance. Whenever possible,
we intend to implement our strategies and operation procedures prior to the
closing of an acquisition to enable us to accelerate the implementation of our
operating strategy after closing. See "Operating Strategy." No assurance can be
given that we will successfully locate suitable acquisition candidates, or even
if such candidates are located and acquired, that such acquisitions will
ultimately prove profitable to us.
We believe that Major Dealer Group's management team has considerable
experience in evaluating potential acquisition candidates, determining whether a
particular dealership can be successfully integrated into the Major Dealer
Group's existing operations and implementing our operating strategy to improve
our performance and profitability following the acquisition. We also believe
that an increasing number of acquisition opportunities will become available to
us. See "Industry Background" and "Proposed Acquisitions."
Dealership Operations
Major Dealer Group owns and operates seven automobile franchises at five
locations in Long Island City, New York and two franchises in one location in
Orange, New Jersey. Major Dealer Group conducts its parts and service
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business and its used vehicle business from three additional locations in Long
Island City. Major Dealer Group offers the following nine makes of new vehicles:
Chevrolet, Chrysler, Plymouth, Dodge, Jeep, Subaru, Kia, Lincoln and Mercury.
Each location is run by a separate manager who is responsible for overseeing all
aspects of the business conducted at that location. Each of the parts and
service locations has two managers, one for parts and one for service. Each
manager meets with Major Dealer Group'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 our 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 (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 us (subject to approval by the applicable
manufacturers).
New Vehicle Sales. Major Dealer Group sells the complete product line of
cars, sport utility vehicles, minivans and light trucks manufactured by
Chevrolet, Chrysler, Plymouth, Dodge, Jeep, Subaru, Kia and Lincoln Mercury. For
the year ended December 31, 1999, Major Dealer Group's dealerships sold new
vehicles generating total sales of approximately $88,920,000, which constituted
approximately 43% of Major Dealer Group's total revenues. Major Dealer Group's
gross profit margin on new vehicle sales for the year ended December 31, 1999
was approximately 9.4%, which is significantly higher than the industry average
of 6.4%. The relative percentages of Major Dealer Group's new vehicle sales
among makes of vehicles for the year ended December 31, 1999 was as follows:
Percentage of
Manufacturer New Vehicle Sales
------------ -----------------
Chevrolet 41%
Chrysler, Plymouth
and Jeep 22%
Dodge 24%
Subaru and Kia 10%
Lincoln-Mercury 3%
The following table sets forth information with respect to Major Dealer
Group's new vehicle sales for the year ended December 31, 1999:
NEW VEHICLE SALES
(dollars in thousands)
Unit sales 3,716
Sales revenue $88,920
Gross Profit $ 8,381
Gross Profit Margin 9.4%
Major Dealer Group 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 Dealer Group posts the
manufacturer's suggested retail price on all
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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 Dealer Group has a
distributorship agreement with General Motors pursuant to which Major Dealer
Group distributes new vehicles manufactured by General Motors in the former
Soviet Union. Major Dealer Group generally receives a deposit on the purchase
price of the vehicle from the local 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 Dealer Group intends to
expand its distributorship operation in the future to include the sale of used
vehicles. To facilitate this facet of its operations, we 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 Dealer Group offers a wide variety of makes and
models of used vehicles for sale. For the year ended December 31, 1999, Major
Dealer Group sold 7,696 used vehicles generating total sales of approximately
$108,000,000, which constituted approximately 52% of Major Dealer Group's total
revenues. Major Dealer Group gross profit margin on used vehicle sales for the
year ended December 31, 1999 was approximately 18.4%, as compared with the
industry average of 10.7%. Major Dealer Group is one of the largest sellers of
used vehicles in the New York metropolitan area.
Major Dealer Group has, in the New York City area, consolidated its used
vehicle operations for its various dealerships at a single site and has another
site in Orange, New Jersey. Major Dealer Group 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 Dealer Group 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 Dealer
Group's used vehicle sales for the year ended December 31, 1999:
USED VEHICLE SALES
(dollars in thousands)
Unit sales 7,696
Sales revenue $108,265
Gross Profit $ 19,946
Gross Profit Margin 18.4%
Parts and Service. Major Dealer Group provides parts and service primarily
for the makes of new vehicles that it sells, but also services other makes of
vehicles. For the period ended December 31, 1999, Major Dealer Group's parts and
service operations generated total revenues of approximately $10,033,000, which
constituted approximately 5% of Major Dealer Group's total revenues at a gross
profit margin of approximately 39%.
The increased use of electronics and computers in vehicles makes it more
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 are subject to longer warranty periods, Major Dealer Group believes
that repair work will increasingly be performed at dealerships that have the
sophisticated equipment and skilled personnel necessary to perform the repairs.
Major Dealer Group considers its parts and service departments to be
integral to its customer service efforts and a valuable opportunity to
strengthen customer relations and deepen customer loyalty. Major Dealer Group
attempts to
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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 Dealer Group's parts and service business provides a stable,
recurring revenue stream to its dealerships. In addition, Major Dealer Group
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 Dealer Group believes that this revenue
stream helps mitigate the effects of a downturn in the new-vehicle sales cycle.
Major Dealer Group 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 Dealer
Group's sales of parts and services for the year ended December 31, 1999:
SALES OF PARTS AND SERVICES
(dollars in thousands)
Sales Revenue $10,033
Gross Profit $ 3,896
Gross Profit Margin 39%
Vehicle Financing. Major Dealer Group provides a wide variety of financing
and leasing alternatives for its customers. Major Dealer Group believes that its
customers' ability to obtain financing at its dealerships significantly enhances
Major Dealer Group's ability to sell new and used vehicles. Major Dealer Group
believes that its ability to provide its customers with a variety of financing
options provides Major Dealer Group 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 Dealer
Group.
In most instances, Major Dealer Group 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 Dealer Group is
exposed. Major Dealer Group typically receives a finance fee or commission from
the third party, which provides the financing. In certain limited instances in
which Major Dealer Group determines that its credit risk is manageable,
estimated by Major Dealer Group to be less than 1% of its vehicles sales and
leases, Major Dealer Group directly finances the purchase or lease of a vehicle.
In such instances, Major Dealer Group bears the credit risk that the customer
will default, but will have the right to repossess the vehicle upon default.
Major Dealer Group maintains relationships with a wide variety of financing
sources, including commercial banks, automobile finance companies, other
financial institutions and our subsidiary, Major Fleet. Major Fleet purchases
less than 1% of Major Dealer Group's leases, and none of Major Dealer Group's
finance contracts.
Sales and Marketing
Major Dealer Group believes marketing and advertising are significant to
its operations. As is typical in its industry, Major Dealer Group receives a
subsidy for a portion of its expenses from the automobile manufacturers with
which Major Dealer Group has franchise agreements. The automobile manufacturers
also assist Major Dealer Group by providing it with market research to develop
its own advertising.
Major Dealer Group's marketing effort is conducted over numerous forms of
media including television, newspaper, direct mail, billboards and the Internet.
Major Dealer Group'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 Dealer Group's dealerships periodically offers
price discounts or other promotions to attract additional customers. The
individual dealerships' promotions are coordinated by Major Dealer Group and,
because Major Dealer Group owns and operates several dealerships in the
metropolitan New York market, it realizes cost savings through volume discounts
and other media concessions.
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Major Dealer Group's operations have been fostered 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 1999 was approximately $418. Although advertising costs in the New York
metropolitan area are generally higher than the national average, Major Dealer
Group's cost of marketing and advertising per vehicle sold is approximately
equal to the national average. Combined with a substantial increase in media
exposure, which resulted in increased volume, it shows the economies that Major
Dealer Group has achieved. These lower costs result from the fact that Major
Dealer Group: (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.
Relationships with Manufacturers
Each of Major Dealer Group'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 Dealer Group's dealership agreement with General Motors, with
respect to its Chevrolet dealership, provides General Motors with a right of
first refusal to purchase such dealership.
The dealership agreement with General Motors imposes on us several
additional restrictions. As a consequence of the Major Dealer Group Acquisition,
our Chevrolet franchise, and any other General Motors' franchises that we may
subsequently acquire, could be at risk if: (i) any person or entity acquires
more than 20% of our voting stock with the intention of acquiring additional
shares or effecting a material change in our business or corporate structure; or
(ii) if we take any corporate action that would result: (a) in any person or
entity owning more than 20% of our 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 our Board of Directors within a rolling one-year period; or (d) the
acquisition of more than 20% of our voting stock by another automobile dealer or
such dealer's affiliates. If General Motors determines that any of such actions
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, we 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 our voting stock or that the actions in question will not occur.
In addition, the General Motors dealer agreement requires that we 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 we 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
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buyback of the related dealership assets at book value by General Motors. We
believe that Major Dealer Group's Chevrolet dealership currently complies with
the Project 2000 guidelines.
We have also agreed that our dealerships offering new vehicles
manufactured by General Motors will not 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 Dealer Group 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 Dealer Group'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 Dealer Group 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 Dealer
Group competes with used car "superstores" that have inventories that are larger
and more varied than Major Dealer Group's.
Major Dealer Group 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 Dealer Group
believes that its dealerships are competitive in all of these areas.
In addition, Major Dealer Group, 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 Dealer Group's size has historically
permitted it to attract experienced and professional sales and service personnel
and has provided it with the resources to compete effectively. However, as we
enter other markets, we may face competitors that are larger and that have
access to greater resources.
Major Dealer Group 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 Dealer Group's financing activities are
subject to certain statutes governing credit reporting and debt collection.
As with automobile dealerships generally, and parts and service operations
in particular, Major Dealer Group's
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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
Dealer Group 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 Dealer Group believes that it is in
material compliance with all environmental laws and that such compliance will
not have a material adverse effect on our business, financial condition or
results of operations.
Leasing Operations
In October 1996, we 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 Dealer Group's dealerships, in almost all
cases, Major Fleet will acquire the vehicle from Major Dealer Group 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 Dealer Group.
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 Dealer Group 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
We signed a letter of intent to acquire the Long Island, New York based
Major of the Five Towns (formerly Nissanland and Kialand), currently doing
business as Major Nissan and Major Kia. This dealership is 80% owned by our
Chairman, Bruce Bendell. The purchase price is $1,250,000, subject to our
receipt of a fairness opinion from an independent appraiser. This dealership has
three separate showroom locations. Nicholas Guadagno, President and the 20%
shareholder of Major of the Five Towns, is expected to continue to manage
day-to-day operations after the completion of the acquisition.
During the fiscal year 1999, we and Mr. Bendell were negotiating a letter
of intent concerning our acquisition of Oyster Bay Nissan, a dealership
controlled by Mr. Bendell, but such negotiations have terminated and Mr. Bendell
disposed of his interest to an unaffiliated third party.
We have signed an agreement to acquire Hempstead Mazda, a Long Island, New
York based Mazda dealer, from Messrs. Martin Ain and Gary Ain. The purchase is
$1.2 million, payable 10% in cash and 90% in the form of our common stock. The
acquisition is scheduled to be completed in the second quarter of 2000 and will
help secure Major Dealer Group's presence in Long Island, New York. We believe
that Hempstead is a market that will allow for continued growth in new and used
car sales utilizing the "Major World" brand of marketing.
We are under contract to acquire Compass Dodge, an Essex County, New
Jersey dealer, from Arthur Picon, for which we are awaiting factory approval.
With the already acquired Compass Lincoln-Mercury, Major Dealer Group will
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expand its presence in northern New Jersey. The aggregate purchase prices for
these dealerships is $800,000, of which $300,000 is being paid in cash and
$500,000 is being paid in the form of our common stock.
We are also under contract to acquire Brunner Cadillac/Buick/Pontiac, an
Essex County, New Jersey dealer, from William Brunner. The purchase price is the
assumption of up to $600,000 of the seller's liabilities and $150,000 payable in
the form of shares of our common stock. This is an additional step in building a
northern New Jersey automotive group that will utilize the "Major World"
strategies.
An agreement has been reached to acquire Major Motors of Pennsylvania, a
Hyundai dealer in Stroudsburg, Pennsylvania, from our chairman Bruce Bendell and
John McDermott, a 33% owner. A fairness opinion is to be obtained from an
independent appraiser before a sale price can be determined.
We have signed an agreement to purchase 80% of B&L Auto Group Inc., a
Bronx, New York-based dealer, from Martin Ligorner, who will remain a 20% owner
following the acquisition. This dealership group includes Toyota, Subaru and Kia
franchises, and is currently pending final factory approval. The purchase price
is $4.0 million, payable $1.4 million in cash, $1.4 million in the form of our
common stock and our assumption of $1.2 million of liabilities. The cash portion
is subject to adjustment based on the actual net worth of B&L Auto Group at the
time of closing and the actual amount of liabilities assumed.
No assurance can be given that we will successfully consummate any or all
of the aforementioned potential acquisitions, or, if consummated, that such
acquisitions will ultimately prove profitable to us.
Technology Division
We, 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)"), and IG2, Inc., a Florida corporation ("IG2"), the four
wholly owned or majority owned subsidiaries comprising our Technology
operations, currently develop, manufacture, market, sell and service two product
lines. The first product line utilizes "Talkie(R)" 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.
We, through IG2, Inc., plan to exploit our technological capabilities in
telephony by emphasizing high speed, broadband, multimedia transmission over
existing telephone wires, including voice, data, video conferencing and other
areas.
We originally acquired the technology for our telecommunications products
(see "Talkie(R)" below) in April 1996 through our acquisition of all of the
issued and outstanding capital stock of Info Systems from Dr. Zvi Barak and
Sarah Barak (the "Baraks"). A portion of the purchase price for such capital
stock consisted of twenty monthly installment payments of $15,000 to the Baraks.
In order to secure such installment payments, we granted a security interest to
the Baraks in the capital stock of Info Systems and the other assets purchased
by us from the Baraks. On December 31, 1998 we entered into a definitive
agreement with the Baraks regarding payment of all amounts due them. The
agreement called 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. We have made all payments as of the date of this Annual Report as
scheduled. Accordingly, the security interest has been released.
IG2(R)
In February 1999, CBS launched IG2, a multimedia network platform seeking
to provide a converged package of
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television programming, television quality video conferencing, high-speed
Internet access, e-Commerce capabilities and local and long distance telephone
services through existing telephone wires already installed in residential homes
and small businesses. We believe IG2 may provide the next generation platform in
Internet and communications delivery. We expect to price IG2 services at a
substantial discount from current rates charged for telephone, cable and
Internet access combined. Additionally, we expect IG2 to offer a higher quality
and a greater spectrum of services than are currently available. IG2, Inc., a
subsidiary of CBS, was designated to deploy IG2 services. Additional financing
will be necessary to roll out the entire IG2(R) Network.
Orienting itself to retail distribution to the residential community, IG2
is seeking to offer a set of entertainment and communication services that we
intend to have broad appeal to a segment of the population underserved in
current DSL distribution. Through the packaging of a substantial number of
widely-utilized services in a unified package, IG2 is positioning itself to
simplify customer service and generate increased revenues from the telephone
wire. Using an asynchronous transfer mode ("ATM") technology and proprietary
integration strategies, IG2 is expected to offer guaranteed quality of service
for the optimization of voice over Internet ("VoIP") traffic, video distribution
and high-speed Internet access. IG2 has filed a provisional patent for the
Network Active Intelligence Control System (NAICS(TM)), a system designed to
provide a suite of security, service and policy management capabilities, in
order to enable IG2 to securely deliver the highest quality and broadest range
of value-added services.
As of March 23, 2000, IG2 has received approval to operate as a
Competitive Local Exchange Carrier (CLEC) in 30 states, covering 60 of the 62
markets in which IG2 plans to operate. This will enable CBS, through IG2, to
provide XDSL services in these states. The initial rollout, Phase I, presently
projected for the third quarter of 2000, initially targets seven metropolitan
areas, subject to financing, and is planned to expand to sixty-two cities
through 2001. Our goal is to maintain a national presence, which we would expect
would enable IG2 to provide more cost-effective and high quality of service
transmissions for telephony and Internet access. Additionally, the national
presence, if completed, is planned to enable IG2 to carry television programming
from any region of the country to all of the cities in IG2's planned operations
area.
No assurance can be given that we will be successful in developing the
foregoing products or services, or that if successfully developed, such products
or services will result in revenues or profits to us.
Talkie(R)
"Talkie(R)" is the trademarked name we use to describe the technology
relating to our telephonic and interactive voice response software applications.
We have three products that use Talkie(R) technology. The first product, the
"Talkie(R) 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(R)," is
an international call-back, debit card and long-distance reselling system.
The Talkie(R) 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 country.
Peak minutes are generally able to be sold at higher rates than off-peak
minutes.
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The Talkie(R) Power Web Line Machine includes an integrated programmable
telephone call switching system known as the Talkie(R) 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 we purchase in bulk, international call-back services (described
below), telemarketing, Internet access and facsimile transmission.
Historically, through our subsidiary, CBS, we sold the Talkie(R) Power Web
Line Machines to various service providers (known as "master agents"). We have
determined, however, that in order for us to carry out our revised business plan
concerning both our IG2 operations and the Talkie(R) Power Web Line Machines, we
are acquiring from the majority of our master agents their rights to their
respective territories and the Talkie(R) Power Line Web Machines previously sold
to them. In general, we repurchased these rights in consideration for shares of
CBS common stock and/or shares of our common stock. We believe that we can
maximize our profitability by selling for ourself the telephone minutes to the
existing and additional territories. Negotiations are continuing with each of
our remaining 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, CBS formed a joint venture with Nissko Telecom, L.P.
("Nissko"). The joint venture is a general partnership named Nissko Telecom
Associates ("Associates"). CBS owns 45% of the joint venture and Nissko owns
55%. Nissko is a limited partnership, the general partner of which is one of our
master agents, Nissko Telecom, Ltd. (the "Agent"), and the limited partners of
which are four individuals, three of whom, including Yossi Koren, our former
director, are shareholders of the Agent (such three individuals being
collectively referred to herein as the "Nissko Principals").
In November 1999, CBS entered an agreement (the "Nissko Agreement") with
the shareholders of the Agent (the "Nissko Group") to purchase Nissko Telecom,
L.P.'s share in Associates, including all assets, licenses and proprietary
technology, and liabilities only relating to taxes to which any Nissko Principal
may become liable and telephone bills related to services provided. For five
years the Nissko Group may not compete in the communications business relating
to telephony to and from the United States. All members of the Nissko Group
provided a general release in favor of us and CBS.
As payment, CBS issued 670,000 shares of its common stock (the "CBS
Shares") to the Nissko Group. We have also placed 588,000 restricted shares
(which will include any issuances, dividends, stock splits and conversions
occurring after January 10, 2000) of our common stock in escrow ("Fidelity
Shares"). If by May 30, 2001 we have not caused the common stock of CBS to
become publicly traded, the Nissko Group will receive the Fidelity Shares to the
extent that they receive a value of $2,500,000, valued at the average closing
price for the 30 trading days prior to May 30, 2001, and discounted at 35% if
restricted.
The remaining Fidelity Shares are to remain in escrow until November 30,
2001. In the event we have caused the common stock of CBS to become publicly
traded prior to May 30, 2001 and the net proceeds of the sale of the CBS Shares
by the Nissko Group do not equal a total of $2,500,000, or, if the CBS Shares
have not been sold, and the value of such CBS Shares does not equal at least
$2,500,000, then additional Fidelity Shares will be released to the Nissko Group
to cover any shortfall in value. In the event that at any time prior to November
30, 2001 CBS secures a bona fide third party purchaser of the CBS Shares for a
cash purchase price of $2,500,000, or a proportional amount of the CBS Shares,
and any member of the Nissko Group rejects such offer, then no additional
Fidelity Shares are to be issued to such member on November 30, 2001. The escrow
agreement includes a provision that awards a further 200,000 restricted shares
of our common stock (which will include any issuances, dividends, stock splits
and conversions) to the Nissko Group as penalty in the event that we have not
caused the common stock of CBS to become publicly traded by May 30, 2001.
An additional 200,000 restricted shares of our common stock (which will
include any issuances, dividends, stock splits and conversions occurring after
January 10, 2000) have been placed in escrow under the agreement to cover
personal guarantees of the Nissko Group and Nissko Jewelry of MCI, Sprint or any
other creditor with respect to
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liabilities of CBS or related to the purchased liabilities, as described above.
In the event any member of the Nissko Group or Nissko Jewelry is required to
make payment to MCI or Sprint or any other creditor with respect to liabilities
of CBS or related to the purchased liabilities, as described above, such member
will notify CBS, in writing, of such obligation. CBS will have the right to
defend against the payment demand to its full extent; provided that CBS posts
any required bond or makes any payment required to proceed with any appeal. In
the event that CBS has exhausted all options and payment remains due, then the
escrowed shares are to be sold to satisfy the payment of any such obligations.
Interactive Voice Response Software Programs
The second product group, the Talkie(R) Interactive Voice Response
software programs, consists of the following applications:
o Talkie(R)-Ad: permits callers to browse through pre-recorded messages
based on their search criteria, similar to a talking classified ad.
o Talkie(R)-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.
o Talkie(R)-Audio: delivers pre-recorded information in response to
telephone inquiries and can serve as a talking bulletin board.
o Talkie(R)-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.
o Talkie(R)-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.
o Talkie(R)-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.
o Talkie(R)-Form: permits the user to set up a questionnaire and collect
answers to pre-recorded questions.
o Talkie(R)-Mail: permits the user to record, send, receive and retrieve
voice messages from personal mailboxes.
o Talkie(R)-Query: responds to callers' inquiries using information stored
in the system database.
o Talkie(R)-Trans: accepts orders, issues orders (including delivery
instructions) and faxes order confirmations.
Users of the Talkie(R) interactive voice response system can also
customize the foregoing applications to create new applications using
Talkie(R)-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:
o Talkie(R)-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.
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o Talkie(R)-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).
o Talkie(R)-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.
o Talkie(R) Browse N Talk(TM): Permits website viewers to gain instant and
automatic voice access to customer service or other designated website
representatives.
All of the Talkie(R) 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(R) AutoCom for use by automobile
dealers. See "Automotive Division-Operating Strategy."
The Talkie(R) interactive voice response software package is sold through
our Info Systems subsidiaries.
The Talkie-Globe(R) is the name we use to describe our third
telecommunications product. It is a software-based integrated call-back,
debit-card and long-distance reselling system and includes all of the Talkie(R)
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(R). Using Talkie-Globe(R), the foreign caller first places a
telephone call from the foreign country to the United States or Canadian
telephone number where the Talkie-Globe(R) system is located and disconnects
without the call being connected so that no charge is assessed for the call.
Talkie-Globe(R) 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(R) 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(R) 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(R) system located in the
United States or Canada generally will be lower than the cost of a single call
placed directly from the applicable foreign market to the desired destination.
The Talkie-Globe(R) system also has a debit card feature, which permits a caller
to purchase a stated value of calling time, and debits that value as the caller
uses the prepaid calling time. Talkie-Globe(R) is sold by us through Info
Systems.
Marketing and Sales
Historically, our strategy with respect to the Talkie(R) Power Web Line
Machine has been threefold. First, we sold additional machines through our
existing master agents as they expanded their businesses by providing telephone
service to additional foreign markets. Second, as demand for the machines
increased, we 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 us to share in the revenue generated by the master
agents' sale of telephone time. Third, we intended to continually to adapt
advancing computer and telecommunications technology to improve and customize
the performance of the machines. Currently, we are in the process of acquiring
the territorial rights and equipment from our master agents and we intend to
operate our Talkie(R) Power Web Line Machines on our own behalf. We consummated
such arrangements with Nissko in November 1999 and anticipate consummating all
other such arrangements with our other master agents by the third quarter of
2000.
We install, maintain and service all Talkie(R) Power Web Line Machines at
our offices in Kew Gardens, New York, where the machines are housed.
Historically, for these services, we 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
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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. We also customized the
performance of the machines for the respective master agents and for use in
particular countries, for which we have received a fee that is negotiated by us
and the applicable master agent based upon the complexity of the customization.
As noted above, all master agents have been required by contract with us to
locate their purchased Talkie(R) Power Web Line Machines at our principal office
and to have all required installation, service and maintenance performed by us.
In addition to the services we provide with respect to the Talkie(R) Power Web
Line Machines, we also have provided services for the various other Talkie(R)
products and for the business control software, if requested by the users.
We typically sell our interactive voice response software programs to
third parties 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. Our
plans include a focus of our efforts with respect to our Talkie(R) interactive
voice response software programs on the market for industry-specific and
customized applications in which we generally realize higher profit margins in
order to maximize our value to potential acquirers. As we target a given
industry, we expect to hire sales personnel familiar with that industry and to
attend trade shows to market our product. In addition, we intend to expand sales
of our interactive voice response system into Europe and South America.
We typically sell four to five of our Talkie-Globe(R) systems per month to
third parties who wish to provide a telephone business with low overhead and
fixed costs and to small foreign telephone companies. Users of Talkie-Globe(R)
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(R) system consists of three personal computers, proprietary
software and a voice card and sells for approximately $25,000.
We realized gross revenues of $1,282,000 during 1999 and $1,089,000 during
1998 from the sale of our Talkie(R) interactive voice response software programs
and of Talkie-Globe(R) (excluding intercompany sales). Our gross profit margin
on sales of our Talkie(R) products, including interactive voice response
software programs, was approximately 16% for 1999 and approximately 35% for
1998.
We advertise our Talkie(R) interactive voice response software programs
and Talkie-Globe(R) in telephone and telecommunications industry trade
publications. In addition, Info Systems attends telephone and telecommunications
industry trade shows, which has resulted in reviews of these products in trade
publications.
We are not currently allocating resources to market our business control
software, but perform software service contracts and provides annual program
updates to the program's users.
Plastics and Utility Products Operations
Through our subsidiary Premo-Plast, Inc. ("Premo-Plast"), we are
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 our 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, our focus has been our research on fixtures such as the jets used to
introduce water mixed with air bubbles into a whirlpool bath, spa or tub and we
have designed and developed prototypes of such fixtures and have begun tooling
for our production.
We acquired the technology for the proprietary fixture installation method
through our acquisition from Mr. John Pinciaro of all of his rights to such
technology and two United States patent applications (which have been
subsequently granted) related thereto. It is expected that we and Mr. Pinciaro
will participate jointly in exploitation of the fixture
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installation method. In October 1997, we formed a new subsidiary, Maxflo, Inc.,
("Maxflo") whose shares are owned 80% by our existing subsidiary Premo-Plast and
20% by Mr. Pinciaro.
Status of Development of Spa Fixtures
Development of the Spa and Bath Fixture product was limited in 1999 due to
an attempted renegotiation of contract terms between us and Mr. Pinciaro. While
the patent applications have not yet been assigned to us, we expect a
satisfactory outcome in the second quarter of 2000.
Our Strategy with respect to Spa and Bath Fixture Technology
We believe, based on our own research, 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.
Our strategy with respect to the fixture technology is to establish our
proprietary installation method and our fixtures as the industry standard for
whirlpool baths, spas and tubs. We have has a threefold plan to implement this
strategy upon our commencement of commercial production of the fixtures.
First, we intend to expand our workforce by hiring employees experienced
in the areas of design, production and marketing. Second, we initially intend to
sell our fixtures and license the right to use our installation method to
several designated regional manufacturers and producers of whirlpool baths, spas
and tubs. All of these manufacturers and producers were consulted by Mr.
Pinciaro, 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 our 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, we intend to publicize our installation method and fixtures
generally to the whirlpool bath, spa and tub industry and to attend major trade
shows.
No assurance can be given that we will successfully market these products
or that any sales will prove profitable.
Armored Conduit
In November 1995, we acquired from Progressive Polymerics, Inc. two United
States patents and a Canadian patent application covering an armored conduit
product. We are presently involved in litigation relating to the purchase price
for these 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 manufactured 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 type 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. Unless
installed at the proper depth, if there is a problem with a portion of a conduit
system's fiberglass tubing (as well as PVC duct, cement or concrete ) once
installed, the entire system must be removed and replaced.
The product covered by our 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 end of the pre-formed shell has an extension that can be
coupled to the next section in end-to-end fashion.
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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. 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.
We have been engaged in limited research and development activities
relating to the armored conduit, and expect, subject to the availability of
funding, to continue these activities. No assurance can be given that we will
successfully market these products or that any sales will prove profitable.
The Hardge Companies
In June 1999 we entered into an agreement with Mr. Lawrence Hardge, a Los
Angeles, California based inventor of approximately 80 proprietary inventions.
Mr. Hardge assigned the rights to these inventions in consideration for 45,000
restricted shares of our common stock, vesting 25% per year, beginning in June
2000. We have formed four subsidiary corporations (the "Hardge Companies"): (i)
Cryogenix, Inc., formed to develop, exploit and promote a fire extinguishing
agent, patent pending; (ii) Energy Plus, Inc., formed to develop, exploit and
promote a long-life battery invention, patent pending; (iii) Ever Safe, Inc.,
formed to develop, exploit and promote a safety helmet apparatus with
eye-spraying capacity, patent granted; and (iv) Slack 2000, Inc., formed to
develop, exploit and promote proprietary sludge treatment uses, two patents
pending. Mr. Hardge serves as President of the Hardge Companies. We maintain
100% ownership of the Hardge Companies. Mr. Hardge will receive 20% of net
profits, and retains an option to purchase up to 20% of the Hardge Companies,
and has the right to direct us to issue an aggregate of less than 1% of the
Hardge Companies as gifts to Hardge donees. All Hardge inventions are presently
in various degrees of development. No assurance can be given that we will
successfully market these products or that any sales will prove profitable.
Research and Development
In 1999, IG2, Inc. engaged in substantial research and development in
connection with its planned IG2(R) Network. We spent approximately $3.1 million
on research and development for the IG2(R) Network in 1999. Computer Business
Sciences (Israel) engages in research and development to (i) improve its
existing telecommunications software, and to adapt the software to changing
personal computer environments, (ii) expand the software to new uses and (iii)
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(R) technology and related Talkie(R) products and of the business
control software. We spent approximately $300,000 on research and development in
each of 1999 and 1998, with respect to this division. Research and development
with respect to the armored conduit technology and the spa and bath fixture
technology is conducted through our wholly-owned subsidiary Premo-Plast, with
only nominal expenditures in 1999. Such division currently has no customers.
Intellectual Property
We have obtained various rights in various patents and patent
applications. We own two U.S. patents issued in June 1993 and May 1994 relating
to armored conduit technology and also own a Canadian patent application
relating to such technology. We own one U.S. patent issued November 1999
relating to a head cover with an eye spraying capability. We own at least a
partial interest in one U.S. patent issued March 1999 to a long-life storage
battery with a magnetic field source and an acid based heat source, and have
filed a further U.S. patent application related to the same technology. We have
also recently filed three U.S. patent applications relating to a fire
extinguishing agent, a sludge treatment and fertilizer, and a cleaning and
treatment agent. Further, we have filed a provisional U.S. patent application
relating to the control of internet protocol traffic in a wide- or
local-area-network (LAN or WAN). Finally, we are negotiating with third parties
with respect to our ownership of two issued U.S. Patents issued December 1998
and July 1999 relating to spa and bath fixtures and related installation
methods, and foreign applications related thereto, the first of
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which has been filed in Australia, Canada, and six European countries under the
European Patent Office (EPO), and the second of which is pending in Australia,
Canada, China, Japan, and the EPO (up to 18 countries) under the Patent
Cooperation Treaty (PCT). Under the PCT, applicants have the option to
individually file separate applications in designated countries at an
appropriate future date.
We have three U.S. Trademark registrations to the names "IG2(R),"
"Talkie(R)" and "Talkie Globe(R)," and six pending U.S. Trademark applications
to the names "IG2 Networks," "IG2 Communications," "BCS," Knock-Out 112,"
"NAICS" and "Browse N Talk". We have also registered the name "Talkie" as a
trademark in Canada.
As an additional method of protecting our proprietary technology, we
require that all of the Talkie(R) Power Web Line Machines that we sell remain at
our offices in Kew Gardens, New York and that we solely perform all
installation, service and maintenance of the machines. We also rely on trade
secret protection, confidentiality agreements and other laws to protect our
technology, but believe that these rights may not necessarily prevent third
parties from developing or using similar or related technology to compete
against us. In addition, we believe that it may be possible for third parties to
develop technology that provides the same or similar features to our products
without infringing our rights or making use of our proprietary technology.
Competition
Although we have many competitors, many of which possess greater resources
than we do, we believe our Talkie(R) Power Web Line Machine has certain
technological features that provide us with advantages over our competitors'
products and services. While other companies manufacture and sell traditional
telephone switching equipment, such equipment is expensive to purchase and
maintain as compared to the Talkie(R) Power Web Line Machine. Moreover, we
believe that the proprietary nature of the Talkie(R) Power Web Line Machine's
software program provides us with a significant head start over a potential
competitor who wishes to develop a competing product. There can be no assurance
that we will be able to maintain such technological advantages, if any, in the
future.
We will compete, after the acquisition of the territorial rights and
equipment of our 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. We believe that a primary
competitive factor in the industry is pricing. We believe that the use of the
Talkie(R) Power Web Line Machine, which is less costly to purchase and maintain
than traditional switching equipment, will enable us 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, we may face increasing competition which could adversely
affect our gross margins on phone services sold for our own account and,
thereby, reduce our income.
Our Talkie(R) 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, we know of
only one direct competitor. Our Talkie-Globe(R) system competes with telephone
callback products sold by several other entities.
As a result of our reliance on our proprietary software rather than on
hardware components to operate, the purchase price and maintenance costs of our
Talkie(R) interactive voice response software programs and Talkie-Globe(R) are
believed to be generally lower than those of competing products. In addition,
because software is easier to alter than hardware components, we are able to
customize our products or modify our products to incorporate changing technology
more quickly and at a lower cost than our competitors.
Even with our competitive advantages, many of the producers of products
competitive with us, and companies wishing to enter the market in which our
products compete, have well established reputations, customer relationships and
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marketing and distribution networks. Many also have greater financial,
technical, manufacturing, management and research and development resources than
us, may be more successful than us 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 us.
If our 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. Our spa and bath fixtures
will compete with existing types of such fixture. Because our fixtures and
installation method permit single-person assembly rather than the two-person
assembly required by existing products and installation methods, we believe that
use of our fixtures may result in significantly reduced assembly time and costs.
Many of the producers and distributors of products competitive with our
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 us. While we believe that our spa and bath fixtures
and installation method and our armored conduit will have significant advantages
over existing products, our competitors may be more successful than us in
manufacturing and marketing their products and may be able to leverage existing
relationships to obtain a competitive advantage over us.
The market for IG2, Inc.'s data networking solutions and Web hosting
services is rapidly evolving and intensely competitive. Many of our competitors
are offering, or may soon offer, technologies and services that will directly
compete with some or all of IG2, Inc.'s planned service offerings. IG2, Inc.'s
competitors use technologies for local access connections that include DSL,
wireless data systems, cable modems and ISDN technologies. Some of these
technologies may provide performance advantages in some respects over DSL and
other technologies using existing copper telephone wires. IG2, Inc. expects to
face competition for its DSL and leased line services from incumbent local
exchange carriers ("ILECs"), alternative DSL providers, competitive local
exchange carriers, Internet Service Providers, wireless and cable companies. In
the Boston, New York, Philadelphia and Washington, D.C. metropolitan areas, IG2,
Inc. expects to compete directly against other DSL providers such as Covad
Communications Group, Inc., Network Access Solutions Corporation, NorthPoint
Communications Group Inc. and Rhythms NetConnections, Inc. Many of IG2, Inc.'s
potential competitors, as well as a number of its potential new competitors,
have longer operating histories, greater name recognition and substantially
greater financial, technical and marketing resources. Some of its potential
competitors may have the financial resources to withstand substantial price
competition. Moreover, IG2, Inc.'s competitors may be able to negotiate
contracts with potential and current technical employees as well as suppliers of
telecommunications products and services which are more favorable than contracts
negotiated by IG2, Inc.
If any of the Hardge inventions is developed into a commercially viable
product, it will compete with companies that may be more successful than us in
manufacturing and marketing their products and may be able to leverage existing
relationships to obtain a competitive advantage over us.
Recent Developments
Financing Transactions
On June 24, 1999, we entered into an agreement with three investors,
pursuant to which we have the right or obligation to sell, under certain
circumstances, in a series of private placement transactions, up to $20 million
of our common stock and warrants in three tranches. Pursuant to a series of
Securities Purchase Agreements, the first tranche closed on June 24, 1999 and we
sold an aggregate of 285,714 shares of our 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 we sold an aggregate of 176,472
shares of our 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 we sold an aggregate of 266,667 shares of our common stock for an
aggregate of $4,000,000 or $15 per share. On March 14, 2000, a portion
representing approximately 10% of the third tranche closed and we sold an
aggregate of 50,000 shares of our common stock for an aggregate of $695,000 or
$13.90 per share. Shares issued upon closing of subsequent tranches, if any,
will be priced at 105% of the average closing bid price of our common stock for
the five trading days preceding the applicable closing
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date. Under the terms of our agreement and the adjustable warrant issued in
connection with the purchase of our common stock, the purchasers will be
entitled to acquire additional shares of common stock exercisable at $.01 per
share, pursuant to a "reset" formula which takes into account the market price
of our common stock at future dates, commencing 40 trading days after the date
on which the purchasers may resell the shares pursuant to an effective re-sale
registration statement. In addition, we issued warrants to the purchasers
enabling them to purchase up to an aggregate 285,714 shares of our common stock
at a purchase price of $23 per share, 176,472 shares of our common stock at a
purchase price of $17.25 per share, 266,667 shares of our common stock at a
purchase price of $16.00 per share, and 50,000 shares of our common stock at a
purchase price of $16.00 per share exercisable for a five-year period. If
specified closing conditions are satisfied, we 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. We have entered into a registration rights agreement with the
purchasers requiring us to register shares purchased by the purchasers 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
us in the event of failure to comply with certain of its terms. We have 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. We granted a right of first refusal in favor of the purchasers with
respect to below-market, non-public issuances of our securities during the 180
period which will commence on effective date of a registration statement
covering the re-sale of these shares. Securities not subject to the right of
first refusal include securities issued under our stock option plans, shares
issued upon exercise of currently outstanding warrants and securities issued in
connection with strategic transactions involving us or in connection with
certain commercial financings. The right of first refusal will 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. We used the net proceeds from the offering to redeem
85% of our outstanding $2,750,000 principal amount of 12% convertible
subordinated term debentures issued in January 1999 and have used the balance
for developmental activities in our Technology division, and also for working
capital purposes, including the acquisition of additional automotive
dealerships.
CarsTV.com, Inc. Acquisition
On February 23, 2000, we acquired CarsTV.com, Inc. ("Cars"), a regional
full service Internet Service Provider (ISP) and DSL provider, as well as a
content supplier for the cable industry focused on the automotive sector, in
exchange for 575,862 restricted shares of our common stock. Based in Richmond,
Virginia, Cars' two subsidiaries, Internet Creations, Inc., doing business as
Internet Connections and C.A.R.S., represent its Internet division and cable
divisions, respectively. Internet Connections operates regionally throughout the
Mid Atlantic and provides Internet services, web design and development to
individuals and small-to-medium sized businesses.
RISK FACTORS
The following risk factors should be reviewed carefully, in conjunction
with the other information in this Form 10-KSB and our consolidated financial
statements. These factors, among others, could cause actual results to differ
materially from those currently anticipated and contained in forward-looking
statements made in this Form 10-KSB and presented elsewhere by our management
from time to time.
Automobile manufacturers exercise significant control over our operations and we
are dependent on them to operate our business.
Like other franchised new vehicle dealers, we are significantly dependent
upon our relationships with, and the success of, the manufacturers with which we
have franchised dealerships. We are also dependent on the manufacturers to
provide us with an inventory of new vehicles. The most popular vehicles tend to
provide the Major Dealer Group with the highest profit margin and are the most
difficult to obtain from the manufacturers. In order to obtain sufficient
quantities of these vehicles, we may be required to purchase a larger number of
less desirable makes and models than we would
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otherwise purchase. Sales of less desirable makes and models may result in lower
profit margins than sales of more popular vehicles. If we are unable to obtain
sufficient quantities of the most popular makes and models, our profitability
may be adversely affected.
As is typical of franchised new vehicle dealers, the success of our
franchises depends to a great extent on the success of the respective
manufacturers. Our success will therefore be linked to many factors affecting
the manufacturers such as:
o financial condition;
o marketing strategy;
o vehicle demand;
o production capabilities;
o management;
o events such as labor strikes; and
o negative publicity.
Our franchise agreements contain geographic and other restrictions which could
limit our future growth.
Our franchise agreements with the manufacturers, like those of other
franchised new vehicle dealers, do not grant us the exclusive right to sell that
manufacturer's vehicles within a given geographical area. Accordingly, a
manufacturer could grant another dealer a franchise to start a new dealership or
permit an existing dealer to relocate to a geographic location that would be
directly competitive with us. Such an event could have a material adverse effect
on our business, financial condition and results of operations.
Historically, manufacturers have exercised significant control over
dealerships through the terms and conditions of the franchise agreements
pursuant to which the Major Dealer Group dealerships operate. These franchise
agreements restrict dealerships to specific locations and retain for the
manufacturers approval rights over changes in the dealerships' ownership and
management. Our ability to expand through the acquisition of new dealerships
requires the consent of the manufacturers. To date, the Major Dealer Group's
acquisitions have been approved and the Major Dealer Group has not been
materially adversely affected by other limitations imposed by the manufacturers.
However, there can be no assurance that in the future we will be able to obtain
necessary approvals on acceptable terms or that the Major Dealer Group will not
be materially adversely affected by other limitations.
The franchise agreements between the Major Dealer Group and the
manufacturers are for fixed terms with no renewal obligation on the part of the
manufacturers and permit the manufacturers to terminate the agreements for a
variety of causes. The franchise agreements between us and the manufacturers
have similar provisions. We believe that we have been and continue to be in
material compliance with the terms of our franchise agreements. While none of
the manufacturers has terminated or failed to renew our franchise agreements,
any such termination or failure to renew could have a material adverse effect on
us and our business, financial condition and results of operations.
The automobile industry is a mature industry with limited growth potential in
new vehicle sales and automobile sales are cyclical and subject to downturns.
The United States automobile industry is generally considered to be a
mature industry in which minimal growth is expected in unit sales of new
vehicles. In addition, the market for automobiles, particularly new vehicles, is
subject to substantial cyclical variation and has experienced significant
downturns characterized by oversupply and weak demand. Many factors affect the
automobile industry, including:
o general and local economic conditions;
o taxes;
o consumer confidence;
o interest rates;
o credit availability; and
o the level of personal discretionary income.
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A material decrease in vehicle sales from the historical level of vehicle
sales achieved by the Major Dealer Group would materially adversely affect our
business, financial condition and results of operations.
Our automobile operations are geographically concentrated and subject to local
economic conditions.
All of the Major Dealer Group dealerships we have acquired are located in
the greater New York metropolitan area. While we may pursue acquisitions outside
of the New York metropolitan area, we expect that our automotive operations will
be concentrated in the New York metropolitan area for the foreseeable future. As
a result, our results of operations will depend substantially on general
economic conditions and consumer spending habits and preferences in the New York
metropolitan area, as well as various other factors, such as tax rates and
applicable state and local regulation. There can be no assurance that we will be
able to expand geographically or that any such expansion will adequately
insulate us from the adverse effects of local or regional economic conditions.
Our future operating results will be directly related to the availability and
cost of capital to us.
The principal sources of financing for new and used automobile inventories
have historically been lines of credit from commercial lenders and other
financial institutions and from cash generated from operations. There can be no
assurance that we will be able to continue to obtain capital for our current or
expanded operations on terms and conditions that are acceptable to us.
Our strategy of growth through the acquisition of additional dealerships
will require substantial capital. Our expansion and new acquisitions may involve
cash, the need to incur debt or the need to issue equity securities, which could
have a dilutive effect on our then outstanding capital stock. We may seek to
obtain funds through borrowings from institutions or by the public or private
sale of our securities. There can be no assurance that we will be able to obtain
capital to finance our growth on terms and conditions acceptable to us.
Risks associated with expansion may hinder our ability to increase revenues and
earnings.
Our future growth will depend, in part, on our ability to acquire
additional automobile dealerships. In pursuing a strategy of acquiring
additional dealerships, we will face risks commonly encountered with growth
through acquisitions. These risks include:
o incurring significantly higher capital expenditures and
operating expenses;
o failing to assimilate the operations and personnel of the
acquired dealerships;
o disrupting our ongoing business;
o dissipating our limited management resources;
o failing to maintain uniform standards, controls and policies;
and
o impairing relationships with employees and customers as a
result of changes in management.
There can be no assurance that we will be successful in overcoming these
risks or any other problems encountered with such acquisitions. In addition,
acquiring additional dealerships, as we intend, will have a significant impact
on our financial condition and could cause substantial fluctuations in our
quarterly and annual operating results. Acquisitions could result in significant
goodwill and intangible assets, which are likely to result in substantial
amortization charges to us that would reduce stated earnings, if any.
There is an uncertainty of market acceptance risk in our plastics and utility
products operations.
There can be no assurance that the products being developed by our
plastics and utility products operations, including the Hardge inventions, even
if developed, will attain a sufficient level of market acceptance for those
operations to become profitable. In addition, with respect to our spa and bath
fixtures and related installation method, although we have received indications
from several manufacturers and producers of whirlpool baths, spas and tubs that
they will purchase our fixtures, they are not obligated to do so. No assurance
can be given that such manufacturers and
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producers will make these purchases initially, or if they do, that they will be
sufficiently satisfied with our fixtures to continue making these purchases.
Our computer telephony technology operations are difficult to evaluate because
our subsidiary, IG2, Inc., has a limited operating history.
Because IG2, Inc. has a limited operating history to date, there is
minimal operating and financial data about its business upon which to base an
evaluation of its current or future performance. You should consider the risks,
expenses and difficulties we may encounter, including those frequently
encountered by developmental stage companies in new and rapidly evolving
markets. The success of IG2, Inc. will depend, in large degree, on our ability
to:
o deploy an effective network infrastructure;
o establish collocation and interconnection arrangements with
regional Bell operating companies, or RBOCs, and other
incumbent local exchange carriers, or ILECs;
o develop our billing and operational support systems;
o raise additional capital;
o rapidly expand digital subscriber line, or DSL, service within
the United States;
o attract and retain customers; and
o attract and retain qualified personnel.
If we fail to manage these activities successfully, it would materially
adversely affect IG2, Inc.'s business, financial condition and results of
operations.
Because the DSL market is new and evolving, we cannot predict the size of the
market.
The market for high-speed data networking services using copper telephone
lines is in the early stages of development. We cannot accurately predict the
rate at which this market will grow, if at all, or whether new or increased
competition will result in market saturation. The security, reliability, ease,
cost of access and quality of service relating to the use of DSL technology for
Internet and local area network access are unresolved and may impact the growth
of these services. To be successful, IG2, Inc. must develop and market services
that are widely accepted by businesses at profitable prices. If the market for
our DSL services fails to develop, grows more slowly than anticipated or becomes
saturated with competitors, these events could adversely affect the business,
financial condition and results of operations.
IG2, Inc.'s operations and prospects will be subject to a number of risks
common to the developing high-speed data networking services industry including:
o DSL technology may not operate as expected on incumbent local
carrier networks and may interfere with or be affected by
other transport technologies;
o The data networking industry is undergoing rapid technological
changes, and new technologies may be superior to the
technology IG2, Inc. uses;
o IG2, Inc.'s failure to achieve or sustain market acceptance at
desired pricing levels could impair its ability to achieve
profitability or positive cash flow;
o IG2, Inc. will be dependent on ILECs, and others for copper
telephone lines, collocation space and transmission
facilities, and the ILECs reluctance to cooperate with IG2,
Inc. or inability to provide the services or facilities it
needs could adversely affect its business;
o IG2, Inc. will be unable to control the terms and conditions
under which it gains access to the ILECs collocation and
transmission facilities;
o IG2, Inc. will be unable to control the terms or timing of
extending its interconnection agreements;
o IG2, Inc.'s arrangements with the ILECs will be subject to
review and revision by various regulatory entities;
o IG2, Inc. may not be successful in completing the upgrade of
its network or achieving competitive transmission speeds;
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o IG2, Inc. will depend on peering relationships that may be
adversely modified in the future;
o A system failure or breach of security could cause delays or
interruptions of service to IG2, Inc.'s customers; and
o IG2, Inc. will depend on third parties to provide equipment
which is critical to providing its DSL and web hosting
services.
The loss of key personnel and our limited management and personnel resources
could adversely affect our operations and growth.
Our future success will depend to a significant extent on key personnel
and on the continued services of our senior management and other key personnel,
particularly Bruce Bendell, our Chairman, and Doron Cohen, our President and
Chief Executive Officer. The loss of the services of these, or certain other key
employees, would likely have a material adverse effect on our business. The
consulting agreement with Mr. Bendell and employment agreement with Mr. Cohen
both expired on December 31, 1998 and are in the process of being renegotiated.
Messrs. Bendell and Cohen are currently employed at will. We do not maintain
"key person" life insurance for any of our personnel. Our future success will
depend on our continuing ability to attract, retain and motivate other highly
skilled employees. Competition for such personnel in our industry is intense. We
may be unable to retain our key employees or attract, assimilate or retain other
highly qualified employees in the future. If we do not succeed in attracting new
personnel or retaining and motivating our current personnel, our business,
financial condition and operations will be adversely affected.
Potential conflicts of interest between us and our management personnel could
adversely affect our future performance.
We have entered into, or contemplate that we may enter into, several
transactions with our Chairman and controlling stockholder, Bruce Bendell,
and/or his brother Harold Bendell, a senior executive of the Major Dealer Group.
Such transactions include the following:
- In 1996, we acquired Major Fleet from the Bendell brothers. In exchange,
the Bendell brothers received (a) shares of our 1996-MAJOR Series of Convertible
Preferred Stock, (b) warrants that carry registration rights and (c) the right
to manage the operations of the Major Dealer Group's vehicle leasing activities
pursuant to a management agreement.
- We acquired Major Auto from Bruce Bendell and Harold Bendell in May
1998. Bruce and Harold Bendell received shares of our 1997A-MAJOR AUTOMOTIVE
GROUP Series of Preferred Stock in that transaction and Bruce Bendell has a
proxy to vote the 50 shares of the 1997A-MAJOR AUTOMOTIVE GROUP Series of
Preferred Stock owned by Harold Bendell for a seven-year period which commenced
on January 7, 1998. These shares allow the Bendell brothers to elect a majority
of the directors of Major Auto. The Bendell brothers are also parties to a
management agreement with Major Auto that gives them control over its day-to-day
operations. Should we and the Board of Directors of Major Auto disagree as to a
particular course of action, the Board of Directors of Major Auto will be able
to take that action over our objection. Conflicts could arise between our Board
of Directors and the Board of Directors of Major Auto as to the appropriate
course of action to be taken in the future. The Management Agreement does
prohibit certain actions from being taken without the prior approval of our
Board of Directors, including:
o disposition of any of the Major Auto dealerships;
o acquisition of new dealerships; and
o our incurring liability for Major Auto indebtedness.
Should either of the Bendell brothers cease managing the dealerships, the
management agreement provides that ownership of his 1997A-MAJOR AUTOMOTIVE GROUP
Series of Preferred Stock shares and his management rights under the management
agreement will be automatically transferred to the other, and should both
brothers cease managing the dealerships for any reason, the shares and
management rights will be automatically transferred to a successor manager
designated in a successor addendum to each dealership agreement or, failing such
designation, to a successor manager designated by us (subject to approval by the
applicable manufacturers).
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- We and Mr. Bendell are currently nearing completion of a transaction
concerning our acquisition of Major of the 5 Towns, a dealership majority-owned
by Mr. Bendell.
These transactions may involve situations in which Bruce Bendell's
interests as a director and shareholder of the Company conflict with his or his
brother Harold Bendell's interests as Major Auto's counterpart. Major Auto
supplies used vehicles to other dealerships in which the Bendells have an
interest. Such vehicles are charged to the other dealerships at amounts
sufficient to cover all of Major Auto's costs and expenses in connection with
the transactions.
The markets in which we operate are highly competitive, and we may not be able
to compete effectively, especially against established industry competitors with
significantly greater financial resources.
Automotive Division
The automobile dealership business is highly competitive. Our competitors
include:
o automobile dealers;
o private sellers of used vehicles;
o used vehicle dealers;
o other franchised dealers;
o service center chains; and
o independent service and repair shops.
Gross profit margins on the sale of new vehicles have been decreasing over
the past two decades and the used car market faces increasing competition from
independent leasing companies and from used vehicle "superstores" that may have
inventories that are larger and more varied than Major Auto's. Some of Major
Auto's competitors may be larger, have access to greater financial resources and
be capable of operating on smaller gross margins than Major Auto. There can be
no assurance that we will continue to compete effectively or that manufacturers
will not modify the historical automobile franchise system in a manner that
increases competition among dealers or market and sell their vehicles through
other distribution channels.
Technology Division
The markets in which the Technology Division sells its products or intends
to sell its products are highly competitive. There are at present no significant
barriers to entry into such markets. Many of the producers of products that
presently compete with or may in the future compete with our products, as well
as companies wishing to enter the market in which our current proposed products
and services compete, have well established reputations, customer relationships
and marketing and distribution networks. Many of these companies also have
greater financial, technical, manufacturing, marketing, management and research
and development resources than do we. They may be more successful than we are in
manufacturing and marketing their products and they may be able to use their
greater resources to leverage existing relationships to obtain a competitive
advantage over us. There can be no assurance that we will continue to compete
effectively.
The market for IG2, Inc.'s data networking solutions and Web hosting
services is rapidly evolving and intensely competitive. Many of its competitors
are offering, or may soon offer, technologies and services that will directly
compete with some or all of IG2, Inc.'s planned service offerings. IG2, Inc.'s
competitors use technologies for local access connections that include DSL,
wireless data systems, cable modems and ISDN technologies. Some of these
technologies may provide performance advantages in some respects over DSL and
other technologies using existing copper telephone wires.
IG2, Inc. expects to face competition for its DSL and leased line services
from ILECs, alternative DSL providers, competitive local exchange carriers,
internet service providers, wireless and cable companies. In the Boston, New
York, Philadelphia and Washington, D.C. metropolitan areas, IG2, Inc. expects to
compete directly against other DSL providers such as Covad Communications Group,
Inc., Network Access Solutions Corporation, NorthPoint Communications Group Inc.
and Rhythms NetConnections, Inc. It also expect to compete with cable companies
in the New England area for
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telecommuting and work-at-home applications.
ILECs are both essential suppliers of facilities and services for DSL and
other Internet connectivity services and significant competitors that pose a
significant risk to the success of IG2, Inc.'s business. ILECs have existing
networks in local areas and across the major metropolitan areas in IG2, Inc.'s
target market, currently provide basic telephony service to substantially all of
the customers that they hope to serve and have their own Internet service
provider businesses. Absent oversight by federal and state regulators, ILECs
have the ability to benefit their own DSL operations by providing them with
essential service inputs, such as copper telephone lines, transmission
facilities and collocation on more favorable terms than those provided to IG2,
Inc. ILECs are deploying DSL services in selected markets and could deploy DSL
services on a widespread basis which could have a material adverse effect.
IG2, Inc. expects to compete in the Web hosting and collocation segment of
its business with a variety of companies, including AboveNet Communications
Inc., Concentric Network Corporation, Digex Incorporated, Exodus Communications,
Inc., GTE Internetworking, Level 3 Communications, Inc. and NaviSite, Inc.
Many of IG2, Inc.'s potential competitors, as well as a number of its
potential new competitors, have longer operating histories, greater name
recognition and substantially greater financial, technical and marketing
resources. Some of its potential competitors may have the financial resources to
withstand substantial price competition. Moreover, IG2, Inc.'s competitors may
be able to negotiate contracts with potential and current technical employees as
well as suppliers of telecommunications products and services which are more
favorable than contracts negotiated by IG2, Inc.
In addition, we may face increasing competition with respect our Talkie(R)
Power Web Line Machine as a result of deregulation in foreign countries which
could result in competition from other service providers with large, established
customer bases or close ties to governmental authorities in their home countries
and decreased prices for direct-dialed international calls. Customers could
become unwilling to use our services, which would adversely affect our ability
to derive revenues from our Talkie(R) Power Web Line Machines.
Government regulation and environmental regulation compliance costs may
adversely affect our profitability.
Automotive Division
Our operations are subject to various Federal, state and local laws and
regulations including those relating to local licensing and consumer protection.
While we believe that we maintain all requisite licenses and permits and that we
are in substantial compliance with all applicable laws and regulations, there
can be no assurance that we will be able to continue to maintain all requisite
licenses and permits or to comply with applicable laws and regulations, and our
failure to do so could have a material adverse effect on our business, financial
condition and results of operations. In addition, the adoption of any new laws
or regulations and the cost to us of complying with any new laws or regulations,
could have a material adverse effect on our business, financial condition and
results of operations.
In addition, as with automobile dealerships generally, and parts and
1service 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:
o motor oil;
o waste motor oil and filters;
o transmission fluid;
o antifreeze;
o freon;
o waste paint and lacquer thinner;
o batteries;
o solvents;
o lubricants;
o degreasing agents; and
o gasoline and diesel fuels.
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Accordingly, we are subject to Federal, state and local environmental laws
governing health, environmental quality, and remediation of contamination at
facilities Major Auto operates or to which it sends hazardous or toxic
substances or wastes for treatment, recycling or disposal. We believe that we
are in material compliance with all environmental laws and that such compliance
will not have a material adverse effect on our business, financial condition or
results of operations. However, environmental laws are complex and subject to
frequent change. There can be no assurance that compliance with amended, new or
more stringent laws, stricter interpretations of existing laws or the future
discovery of environmentally hazardous conditions will not require material
expenditures by us.
Technology Division
Because many of the facilities and services IG2, Inc. will need in order
to provide DSL are subject to regulation at the federal, state and local levels,
changes in applicable laws or regulations could have an adverse impact on its
business. For example, the FCC and state telecommunications regulators help
determine the terms under which collocation space will be provided. The FCC also
oversees the terms under which IG2, Inc. will gain access to an ILEC incumbent
local exchange carrier's copper telephone lines and transport facilities that it
will need in order to provide DSL services. Future federal or state regulations
and legislation may be less favorable to IG2, Inc. than current regulations and
legislation and could have a material adverse effect on its business, financial
condition or results of operations. In addition, IG2, Inc. may choose to expend
significant resources to participate in regulatory proceedings at the federal or
state level without achieving favorable results. IG2, Inc. expects ILECs and
other incumbent local carriers to pursue litigation in courts, institute
administrative proceedings with the FCC and state telecommunications regulators
and lobby the U.S. Congress in an effort to affect the applicable laws and
regulations in a manner that would be more favorable to them and may be against
IG2, Inc.'s interests. Any changes in IG2, Inc.'s regulatory environment could
create greater competitive advantages for all or some of its competitors or
could make it easier for additional parties to provide DSL services.
IG2, Inc. will be subject to FCC and state regulation for its
interconnection arrangements with the incumbent local carriers in its markets,
but the scope of this regulation is uncertain because it is the subject of
ongoing court and administrative proceedings. Several parties have brought court
challenges to the FCC's interconnection rules, including the rules that
establish the terms under which a competitive telecommunications company may use
portions of an incumbent local carrier's network and that define the particular
network elements to which IG2, Inc. will be entitled. Although the Supreme Court
recently held that the FCC has the authority to adopt interconnection rules and
specifically upheld several of these rules, the Supreme Court also reversed and
remanded the FCC's specification of the network elements it will be entitled to
obtain from ILECs and other incumbent local carriers. The FCC is conducting a
proceeding to re-specify those elements and may not require the continued
availability of elements IG2, Inc. will need. Other rules are still being
considered by the courts and the FCC. If a rule that is beneficial to IG2,
Inc.'s business is struck down by the courts, it could harm its ability to
compete. In particular, the courts have not yet resolved the lawfulness of the
methodology that the FCC established to determine the price that competitive
telecommunications companies would have to pay incumbent local carriers for use
of the incumbent local carriers' networks. The courts may determine that the
FCC's pricing rules are unlawful, which would require the FCC to establish a new
pricing methodology. If this occurs, the new pricing methodology that the FCC
adopts may result in IG2, Inc.'s having to pay a higher price to incumbent local
carriers to use a portion of their networks in providing its services, and this
could have a material adverse effect on its business, financial condition and
results of operations.
The FCC issued a decision that an incumbent local carrier's data services
are subject to unbundling and resale requirements. The FCC is still considering
alternative corporate structures for the incumbent local carriers that would
allow them to compete more directly with DSL providers like IG2, Inc. on an
unregulated basis. This issue is still pending before the FCC. An FCC decision
in favor of the incumbent local carriers could have a material adverse effect on
IG2, Inc.'s business, financial condition and results of operations. Although
the FCC recently adopted new rules designed to provide greater access to central
office space at less cost, these new rules potentially could benefit IG2, Inc.'s
competitors to a greater extent than they benefit it, which could harm its
competitiveness.
A January 1999 decision by the U.S. Supreme Court has raised questions
about whether IG2, Inc. will be able to
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obtain the network elements from the ILECs necessary to provide DSL in the
future. In that decision, the Supreme Court invalidated an FCC rule which
defines the particular elements of an incumbent local carrier's network that
must be provided to competitors like IG2, Inc., and it sent the matter back to
the FCC with instructions to consider further the question of which elements of
an incumbent local carrier's network must be provided to competitors. The FCC
recently initiated a proceeding to establish which network elements are required
to be provided by incumbent carriers to competitors. The FCC has stated that it
plans to issue a new decision on this matter later this year. IG2, Inc. would be
adversely affected if the FCC were to specify a set of elements that does not
include the elements that it will need to provide its services.
Recently, various ILECs have requested the FCC grant them regulatory
relief in the provision of data transmission services, including DSL services,
which would allow the ILECs to compete more directly with DSL providers such as
IG2, Inc. In response, the FCC issued a decision that data services generally
are telecommunications services that, when provided by ILECs, are subject to the
FCC's interconnection rules, including the rule requiring that an ILEC's data
services be subject to unbundling and resale requirements. This issue is still
pending before the FCC, and we cannot be certain that the FCC will not
reconsider its decision. Moreover, although the FCC recently adopted new rules
designed to provide greater access to central office space at less cost, these
new rules may benefit our competitors to a greater extent than they benefit us,
which could harm our competitiveness. Additionally, since the FCC issued its
decision, various ILECs have again asked the FCC for regulatory relief with
respect to their provision of data transmission services. The FCC has not yet
resolved these later requests. We would expect that an FCC decision in favor of
the ILECs could have a material adverse effect on IG2's business, prospects,
financial condition and results of operations.
We face risks in our international operations.
We intend to expand our new and used vehicle purchasing service to foreign
markets through licensing our technology, business processes and tradenames and
by establishing relationships with vehicle dealers and strategic partners
located in certain foreign markets.
By expanding our operations to various other countries, we may become
subject to laws or treaties that regulate the marketing, distribution and sale
of motor vehicles. In addition, the laws of other countries may impose
licensing, bonding or similar requirements on us as a condition to doing
business therein. In addition, there are certain risks inherent in doing
business in international markets, such as:
o changes in political conditions;
o regulatory requirements;
o potentially weaker intellectual property protections;
o tariffs and other trade barriers;
o fluctuations in currency exchange rates;
o potentially adverse tax consequences;
o difficulties in managing or overseeing foreign operations;
o seasonal reductions in business activities during summer
months in Europe and other areas; and
o educating consumers and dealers who may be unfamiliar with the
benefits of online marketing and commerce.
One or more of such factors may have a material adverse effect on our
current or future international operations and, consequently, on our business,
results of operations and financial condition.
Our Talkie(R) Power Web Line Machine and Talkie-Globe(R) system are used
to provide services to foreign countries. These products are subject to the
risks associated with international operations enumerated above, as well as:
o difficulty in accounts receivable collection;
o longer payment cycles;
o difficulty in maintaining and repairing equipment abroad; and
o possible confiscation of equipment and potentially adverse tax
consequences.
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The realization of these risks by purchasers of our Talkie(R) products
could adversely affect our ability to sell our Talkie(R) products and could
reduce our income therefrom.
Government-owned monopolies operate the telephone systems of many of the
countries to which our Talkie(R) Power Web Line Machine is used to provide
telephone services. While we are not aware that any such action is contemplated
by any of these entities, there can be no assurance that in the future one or
more of them will not adopt regulations limiting or prohibiting us from
providing such services. The effect of such regulation could be to reduce our
ability to operate the Talkie(R) Power Web Line Machine profitably.
We may be unable to protect our intellectual property. We have no protection to
the "Major" name.
The success of our Technology Division depends in part upon the strength
of our patents and our ability to operate without infringing the proprietary
rights of others. To protect our intellectual property we have:
o registered the name "Talkie(R)" as a trademark in Canada;
o registered the names "Talkie(R)," "Talkie-Globe(R)" and
"IG2(R)" as trademarks in the United States Patent and
Trademark Office;
o filed applications in the United States Patent and Trademark
Office for the names "BCS" "IG2 Networks," "IG2
Communications," "Knock-Out 112," "NAICS" and "Browse N Talk"
as trademarks;
o acquired two United States patents, issued in June 1993 and
May 1994, respectively, relating to the armored conduit
technology and a Canadian patent application relating to such
technology;
o obtained two United States patents and filed two additional
United States patent applications relating to the spa and bath
fixtures and related installation method;
o filed one application relating to the spa and bath fixtures
and related installation method in Canada and the European
Patent Office (listing six countries) and filed another
application relating to the spa and bath fixtures and related
installation method under the Patent Cooperation Treaty
designating Australia, Canada, China, Japan and the European
Patent Office (up to eighteen countries) as recipient
countries. Under such treaty, we will have the option to
individually file separate applications in the designated
countries at an appropriate future date;
o obtained one U.S. patent issued November 1999 relating to a
head cover with an eye spraying capability;
o obtained at least a partial interest in one U.S. patent issued
March 1999 to a long life storage battery with a magnetic
field source and an acid based heat source, and filed a
further U.S. patent application related to the same
technology;
o filed three U.S. patent applications in the last year relating
to a fire extinguishing agent, a sludge treatment and
fertilizer, and treatment agent; and
o filed a provisional U.S. patent application relating to the
control of Internet protocol traffic in a wide_ or
local_area_network (LAN or WAN).
There can be no assurance that we will choose to file such separate
applications, that any of our applications for patents or trademarks will be
granted or that we will maintain issued patents, patent applications or
trademarks. Nor can there be any assurance that any patents that issue from such
applications or our issued patents will not be challenged and, if challenged,
will be upheld. Nor can there be any assurance that issued patents will provide
us with a significant competitive advantage.
Moreover, we may be required to defend a claim of infringement or to
institute litigation to prevent infringement. The costs of such litigation, even
if we are successful, can be substantial and may be beyond our financial
capability. If we were unsuccessful in our defense of an infringement claim, we
could be liable for substantial damages and could be enjoined from manufacturing
or selling the infringing product or required to obtain a license which may not
be available on acceptable terms or at all.
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In addition, we have no federally or state registered trademark on the
Major name. Future use of the Major name by a third party could have a negative
impact on our business.
We face risks in connection with legal proceedings in which we are involved.
We and our wholly-owned subsidiaries, Computer Business Sciences and Info
Systems, are plaintiffs in a legal action against Michael Marom and M.M.
Telecom, Corp. The plaintiffs claim damages of $5,000,000 for breach of
contract, libel, slander, disparagement, violation of copyright laws, fraud and
misrepresentation. The defendants have counterclaimed for damages of $50,000,000
for breach of contract and violation of the Lanham Act. While we believe that
the our asserted claims have merit and that we have substantial defenses to the
asserted counterclaims, a judgment against us with respect to this action could
have a material adverse effect on our financial condition.
A legal action has been commenced against us in Federal District Court in
Nevada in connection with a dispute regarding ownership of 360,000 shares of our
common stock. While we believe that we have substantial defenses to the asserted
claims and intend to vigorously defend this suit, a judgment against us with
respect to this action could have a material adverse effect on financial
condition.
We are dependent on changing technology to keep our products competitive.
The computer and telecommunications industries are undergoing rapid
technological changes. The success of the Technology Division will depend upon
our ability to understand and utilize changing technology to keep our products
competitive. Failure to develop and introduce new products or enhancements to
our existing products in a timely fashion could result in product obsolescence,
diminished market acceptance of our products and a loss of business, which could
have a material adverse effect on our business, financial condition and results
of operations.
We face risks associated with the sale of automobiles over the Internet.
-Competition
Our Internet vehicle purchasing services compete against a variety of
Internet and traditional vehicle purchasing services and automotive brokers. The
market for Internet-based commercial services is new, and competition among
commercial Web sites is expected to increase significantly in the future. The
Internet is characterized by minimal barriers to entry, and new competitors can
launch new Web sites at relatively low cost. To compete successfully over the
Internet, we must significantly increase awareness of our services and brand
name.
We compete with other entities which maintain similar commercial Web
sites, including:
o Autoweb.com;
o Autobytel.com;
o Carsdirect.com;
o Cendant Membership Service, Inc.'s AutoVantage; and
o Microsoft Corporation's Carpoint and Stoneage Corporation.
AutoNation, Inc., a large consolidator of dealers, has announced its
intention to launch a Web site for marketing vehicles. We also compete
indirectly against vehicle brokerage firms and affinity programs offered by
several companies, including Costco Wholesale Corporation and Wal-Mart Stores,
Inc. In addition, all major vehicle manufacturers have their own Web sites and
many have recently launched or announced plans to launch online buying services.
We also compete with vehicle insurers, lenders and lessors as well as other
dealers that are not part of our network. Such companies may already maintain or
may introduce Web sites which compete with ours.
We cannot assure you that we can compete successfully against current or
future competitors, many of which have substantially more capital, existing
brand recognition, resources and access to additional financing. In addition,
competitive pressures may result in increased marketing costs, decreased Web
site traffic or loss of market share or otherwise may materially and adversely
affect our business, results of operations and financial condition.
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- The Internet industry is characterized by rapid technological change.
Rapid technological developments, evolving industry standards and consumer
demands, and frequent new product introductions and enhancements characterize
the market for Internet products and services. These market characteristics are
exacerbated by the emerging nature of the market and the fact that many
companies are expected to introduce new Internet products and services in the
near future. Our future success will significantly depend on our ability to
continually improve the vehicle purchasing experience, the addition of new and
useful services and content to our Web site, and the performance, features and
reliability of our Web site. In addition, the widespread adoption of developing
multimedia-enabling technologies could require fundamental and costly changes in
our technology and could fundamentally affect the nature, viability and
measurability of Internet-based advertising, which could adversely affect our
business, results of operations and financial condition.
- We could face liability for information retrieved from or transmitted
over the Internet and liability for products sold over the Internet.
We could be exposed to liability with respect to third-party information
that may be accessible through our Web site, or content and materials that may
be posted by consumers through our www.majorworld.com site. Such claims might
assert, among other things, that, by directly or indirectly providing links to
Web sites operated by third parties, we should be liable for copyright or
trademark infringement or other wrongful actions by such third parties through
such Web sites. It is also possible that, if any third-party content information
provided on our Web site contains errors, consumers could make claims against us
for losses incurred in reliance on such information.
We also may enter into agreements with other companies under which any
revenue that results from the purchase of services through direct links to or
from our Web site is shared. Such arrangements may expose us to additional legal
risks and uncertainties, including local, state, federal and foreign government
regulation and potential liabilities to consumers of these services, even if we
do not provide the services ourselves. We cannot assure you that any
indemnification provided to us in our agreements with these parties, if
available, will be adequate.
Even to the extent such claims do not result in liability to us, we could
incur significant costs in investigating and defending against such claims. The
imposition on us of potential liability for information carried on or
disseminated through our system could require us to implement measures to reduce
our exposure to such liability, which might require the expenditure of
substantial resources or limit the attractiveness of our services to consumers,
member dealers, automotive-related vendors and others.
Our general liability insurance and our communications liability insurance
may not cover all potential claims to which we are exposed and may not be
adequate to indemnify us for all liability that may be imposed. Any imposition
of liability that is not covered by insurance or is in excess of insurance
coverage could have a material adverse effect on our business, results of
operations and financial condition.
- We face risks associated with security breaches involving confidential
information transmitted via the Internet.
We rely on technology licensed from third parties that is designed to
facilitate the secure transmission of confidential information. Nevertheless,
our computer infrastructure is potentially vulnerable to physical or electronic
computer break-ins, viruses and similar disruptive problems. A party who is able
to circumvent our security measures could misappropriate proprietary
information, jeopardize the confidential nature of information transmitted over
the Internet or cause interruptions in our operations. Concerns over the
security of Internet transactions and the privacy of users could also inhibit
the growth of the Internet in general, particularly as a means of conducting
commercial transactions. To the extent that our activities or those of third
party contractors involve the storage and transmission of proprietary
information (such as personal financial information), security breaches could
expose us to a risk of financial loss, litigation and other liabilities. Our
insurance does not currently protect against such losses. Any such security
breach could have a material adverse effect on our business, results of
operations and financial condition.
- Major Auto and IG2, Inc. face risks associated with government
regulation and legal uncertainties associated
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with the Internet.
There are numerous state laws regarding the sale of vehicles. In addition,
government authorities may take the position that state or federal insurance
licensing laws, motor vehicle dealer laws or related consumer protection or
product liability laws apply to aspects of our business. As we introduce new
services and expand our operations to other countries, we will need to comply
with additional licensing and regulatory requirements.
A number of legislative and regulatory proposals under consideration by
federal, state, local and foreign governmental organizations may lead to laws or
regulations concerning various aspects of the Internet, including, but not
limited to:
o online content;
o user privacy;
o taxation;
o access charges;
o liability for third-party activities; and
o jurisdiction.
Additionally, it is uncertain as to how existing laws will be applied to
the Internet. The adoption of new laws or the application of existing laws may
decrease the growth in the use of the Internet, which could in turn decrease the
demand for our services, increase our cost of doing business or otherwise have a
material adverse effect on our business, results of operations and financial
condition.
The tax treatment of the Internet and e-commerce is currently unsettled. A
number of proposals have been made at the federal, state and local level and by
certain foreign governments that could impose taxes on the sale of goods and
services and certain other Internet activities. Recently, the Internet Tax
Information Act was signed into law placing a three-year moratorium on new state
and local taxes on Internet commerce. However, we cannot assure you that future
laws imposing taxes or other regulations on commerce over the Internet would not
substantially impair the growth of e-commerce and as a result have a material
adverse effect on our business, results of operations and financial condition.
Concentration of voting power and anti-takeover provisions in our charter
documents may reduce stockholder value in any potential change of control of the
Company.
Mr. Doron Cohen is the beneficial owner of approximately 20.5% and Mr.
Bruce Bendell is the beneficial owner of approximately 31.2% of our common stock
(in both instances giving effect to Mr. Bendell's right to vote his 1997 Major
Series Preferred Stock as our common stock on an "as converted" basis.) This
concentration of voting power will severely limit the ability of other of our
stockholders to elect directors or influence other corporate decisions and may,
among other things, have the effect of delaying or preventing a change in
control of the Company or preventing our stockholders from realizing a premium
on the sale of their shares upon an acquisition of the Company.
Our Board of Directors has the authority to issue shares of preferred
stock and to determine the price, rights, preferences and privileges, including
voting rights, of those shares without any further action by our stockholders.
The rights of holders of our common stock will be subject to and may be
adversely affected by the rights of the holders of any preferred stock. Any
future designation and issuance of preferred stock could have the effect of
making it more difficult for a third party to acquire control of us. We are also
subject to the provisions of the Nevada General Corporation Law regulating
business combinations, takeovers and control share acquisitions, which also
might hinder or delay a change in control of us. Anti-takeover provisions that
could be included in the preferred stock when designated and issued and the
Nevada statutes can have a depressive effect on the market price of our common
stock and can prevent the our stockholders from realizing a premium on the sale
of their shares by discouraging takeover and tender offer bids. In addition,
under our dealer agreement with General Motors, we may be at risk of losing the
Chevrolet franchise if any person or entity acquires 20% or more of our voting
stock without the approval of General Motors.
Future sales of our common stock may depress our stock price.
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Future sales of shares of common stock by existing shareholders under Rule
144 of the Securities Act or through the exercise of outstanding registration
rights or the issuance of shares of common stock upon the exercise of options or
warrants or the conversion of our outstanding Preferred Stock could materially
adversely affect the market price of the common stock and could materially
impair our future ability to raise capital through an offering of equity
securities. A substantial number of shares of common stock are available for
sale under Rule 144 in the public market or will become available for sale in
the near future and no predictions can be made as to the effect, if any, that
market sales of such shares or the availability of such shares for future sale
will have on the market price of the common stock prevailing from time to time.
Holders of our outstanding options and warrants are likely to exercise
them when, in all likelihood, we could obtain additional capital on terms more
favorable than those provided in the options and warrants. Our ability to obtain
additional financing may also be adversely affected by our obligation to
register shares of common stock under the Securities Act. We have filed, and
expect to file, registration statements covering the common stock described
under "Business - Recent Developments - Financing Transactions." Castle Trust
and Management Services Limited, as Trustee under the Millennium Trust created
under that certain Deed of Settlement dated October 2, 1996, the principal
beneficiary of which is Bruce Bendell, has the right (on an unlimited number of
occasions) to require us to register all or any portion of the common stock,
aggregating 738,918 shares, into which the 125,000 shares of our 1996-MAJOR
Series of convertible preferred stock has been converted (the "1996 Demand
Shares"). In addition, Bruce Bendell has the right to require us (on an
unlimited number of occasions) to register all or any portion of the 112,500
shares of common stock underlying a warrant held by him (the "Warrant Demand
Shares"). Further, if we register any shares of common stock, we will have to
offer to include the 1996 Demand Shares, the Warrant Demand Shares and the
shares of common stock (a minimum of 4,050,000 shares) into which the 1997-MAJOR
Series of Convertible Preferred Stock (the "1997 Major Preferred"), issued to
Bruce Bendell in the Major Auto Acquisition, is convertible. In October 1999 Mr.
Bendell converted 400,000 shares of 1997 Major Preferred into 1,800,000 shares
of common stock.
We may be required to issue additional shares to recent investors pursuant to
certain adjustable warrants without receiving additional payment, which could
result in dilution to our shareholders.
In connection with the recent sale of shares of our common stock to
certain investors, we may be required to issue adjustment shares to them for no
additional consideration pursuant to certain adjustable warrants. Declines in
the market price of our common stock could result in the issuance of a
significant number of adjustment shares. This could have a substantial dilutive
effect on our common stock. The number of adjustment shares to be issued depends
on the average of the lowest 10 days closing bid prices for our common stock
during certain periods.
We and the investors have agreed on "floor" prices and upper threshold
prices. If the average market price were to decline below the floor price, we
could pay cash in lieu of issuing additional shares. If the average price were
to be above specified levels for designated periods, the additional shares
issuances would be required.
We have never paid cash dividends on our common stock.
We have never paid cash dividends on our common stock. We intend to retain
any future earnings to finance our growth. In addition, dividends on common
stock are subject to the preferences for dividends on the preferred stock. Any
future dividends will depend upon our earnings, if any, our financial
requirements, and other factors.
We face year 2000 risks.
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 is processed. In addition, similar problems may arise in
some systems which 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 failure which could
affect an entity's ability to conduct normal business operations. Three months
into the Year 2000, we have experienced no problems internally and no problems
with any of our supplies relating to
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Year 2000 issues. However, it is possible that such problems may occur later in
the year. Accordingly, it is not possible to be certain that all aspects of the
year 2000 issue affecting us, including those relating to the efforts of
customers, suppliers or other third parties, will be fully resolved. Should any
adverse consequences occur, efforts to comply with Year 2000 requirements may
disrupt or delay our ability to continue developing and marketing our services.
We may also incur certain unexpected costs in connection with Year 2000
compliance.
Item 2. Description of Property.
Major Dealer Group owns an approximately 12,000 square foot facility
consisting of office and automobile showroom space 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 we nor any of our subsidiaries own any real
estate or plants. All of our other operations and our subsidiaries are conducted
from locations leased from unaffiliated third parties.
We lease approximately 6,900 square feet on two floors in Kew Gardens, New
York. The lease for the floor that we currently use for executive offices and to
house the Talkie(R) Power Web Line Machines consists of approximately 2,800
square feet and expires on March 31, 2001, but we have 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 we elect 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 4,100 square feet. The lease expires on May 1, 2006
and contains no renewal provisions. The current annual rent under such lease is
$111,051 and, will be increased by 3% per year.
We believe that our current facilities are suitable and adequate for our
current needs, but will require additional facilities to accommodate planned
future expansion for IG2.
Computer Business Sciences (Israel) leases from an unrelated third party
approximately 1,517 square feet of office space in Raanana, Israel. The lease
was renewed in September 1999 for an additional two-year period. The current
annual rent under such lease is $24,000.
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.
CarsTV and Internet Connections lease from an unrelated third party
approximately 3,500 square feet of office space in Richmond, Virginia. The lease
expires June 2000 and a new lease is currently being negotiated. The current
annual rent under this lease is $21,000.
Major Subaru subleases from an unrelated third party approximately 2,500
square feet of office and automobile showroom space in Woodside, New York. This
lease expires on December 31, 2004. The current annual rent under such lease is
$128,000.
We have an interest in the following leases, under which Major Dealer
Group presently pays aggregate annual rental payments of $706,000:
o 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 $92,000. 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.
o 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
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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.
o 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.
o Compass Lincoln Mercury ("Compass") leases from Ford Motor Car Company
approximately 30,000 square feet used for showroom, office, service department
and storage facilities in Orange New Jersey at an annual rental of $70,000. This
lease expires on April 30, 2000, but we expect to extend this lease through
December 31, 2000. Compass also leases 7,000 square feet of showroom, office and
storage space from an unaffiliated third party at an annual rental of $83,000.
This lease expires on March 31, 2001 with an option to extend for three years.
Item 3. Legal Proceedings.
On July 27, 1999, Mr. Daniel Tepper of Los Angeles, California, filed a
lawsuit against us and three of our officers (Bruce Bendell, Doron Cohen, and
Richard Feinstein) in the Eighth Judicial District Court in Clark County,
Nevada. That original Complaint was not served on us or the named officers. On
August 16, 1999, Mr. Tepper filed an Amended Complaint, which was subsequently
served on us. We and the individual defendants removed the litigation to the
United States District Court in Las Vegas, Nevada. We and individual defendants
filed a motion to dismiss the claims against the individuals on jurisdictional
grounds, and to transfer the remainder of the case to New York. Mr. Tepper
subsequently agreed to dismiss all claims against the individuals, and the Court
declined to transfer the case. Mr. Tepper contends in his lawsuit that he is the
rightful owner of 360,000 shares of our common stock. He contends that we have
wrongfully (i) refused to remove the "restricted" legend from 240,000 of those
shares, and (ii) withheld the remaining 120,000 shares from him. We have been
informed by Progressive Polymerics International, Inc. n/k/a InvestAmerica that
it is the rightful owner of the shares, and that Mr. Tepper acquired the shares
improperly. Because of these competing claims to ownership of the shares, we
have not released full ownership of the shares to Mr. Tepper. We have filed a
motion seeking to interplead the shares into court to avoid liability to either
claimant and to permit the court to determine the ownership. Mr. Tepper did not
name Progressive as a party to the lawsuit, but we are considering adding it as
a party to aid in resolving the ownership question.
By Summons and Complaint dated June 10, 1999, we were named as the
defendant in an action titled Ronald Shapss Corporate Services, Inc. v. Fidelity
Holdings, Inc., brought in New York State Supreme Court, Rockland County (Index
No. 3248/99). In this action, Ronald Shapss Corporate Services, Inc. ("RSCS")
has alleged that we breached a purported consulting agreement with it and
converted shares of our common stock that RSCS claims should have been provided
to it pursuant to that purported agreement. The complaint claims damages on the
breach of contract claim "believed to approximate $7,386,500," and on the
conversion claim "believed to approximate $1,387,500, plus punitive damages in
the amount of $5,000,000." By Notice of Motion dated July 6, 1999, we moved to
dismiss the conversion claim. Thereafter, RSCS cross-moved for partial summary
judgement on its breach of contact claim, which, if successful, under RSCS's
apparent theory of purported damages, presumably would have resulted in
liability to us of approximately $1,387,500. By order dated December 15, 1999,
the Court granted our motion and denied RSCS's cross-motion. RSCS has filed a
notice of appeal (which it has not perfected) and a motion for "reargument
and/or renewal" of the Court's denial of the cross-motion, which is now awaiting
a decision. On or about January 20, 2000, we served our answer and counterclaims
in which we denied the material remaining allegations of the Complaint and
asserted claims against RSCS and/or Ronald Shapss individually for breach of
contract, fraudulent inducement, and a declaration that we terminated any
agreement it might have had with RSCS. In addition to the declaration, the
counterclaims seek damages believed to exceed $1 million or, alternatively, the
return of 50,000 shares of our common stock we provided to RSCS and/or Mr.
Shapss in 1997, and/or punitive damages of no less than $5 million. The action
is now in discovery, and we intend to continue vigorously to defend against
RSCS's remaining claim and to prosecute our counterclaims.
Item 4. Submission of Matters to a Vote of Security-Holders.
None.
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PART II
Item 5. Market For Common Equity and Related Stockholder Matters.
Market Information
In August, 1999, our common stock was approved for trading on the NASDAQ
National Market. Prior thereto, we were listed on the NASDAQ Small Cap Market.
From the time of the National Market listing through April 6, 2000, the high bid
price was $25.25 and the low bid price was $8.00; 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 and which have been adjusted, as necessary, to
reflect two stock splits, each in an amount of 3 for 2, effected in June, 1999
and January, 2000:
Quarter Ended High Bid Low Bid
------------- -------- -------
March 31, 2000 $ 25.25 $ 10.125
December 31, 1999 $12.7083 $ 8.000
September 30, 1999 $ 17.125 $ 9.1667
June 30, 1999 $ 15.250 $ 8.4167
March 31, 1999 $ 8.222 $ 2.722
December 31, 1998 $ 2.917 $ 1.500
September 30, 1998 $ 2.583 $ 1.611
June 30, 1998 $ 2.167 $ 1.833
March 31, 1998 $ 2.056 $ 1.806
Shareholders
As of March 28, 2000 there were approximately 3,700 holders of record of
our common stock.
Dividends
We have never declared cash dividends on any class of our securities and
have no present intention to declare any dividends on any class of our
securities in the future.
Recent Sales of Unregistered Securities
The securities described below of were sold by us during 1999 without
being registered under the Securities Act. All such sales made in reliance on
Section 4(2) and/or Rule 506 promulgated thereunder of the Securities Act were,
to the best of our knowledge, made to investors that, either alone or together
with a representative that assisted such investor in connection with the
applicable investment, had such sufficient knowledge and experience in financial
and business matters to be capable of evaluating the merits and risks connected
with the applicable investment. All shares and prices have been adjusted to
reflect stock splits effected in June 1999 and January 2000.
1. In January 1999, we issued 33,750 shares of common stock to Kimberly Peacock
at a per share price of $1.56 as employment compensation.
2. In February 1999, we issued 22,500 shares of common stock, 11,250 each to
Arthur and Scott Picon, at a per share price of $2.44 in partial consideration
for the acquisition of Compass Lincoln-Mercury.
3. In January 1999, in connection with the private placement, of a convertible
debenture, we issued the following shares (each share at $1.56) and warrants:
Zanett Lombardier, Ltd. 40910 shares of common stock and 93,752 warrants;
Goldman Sachs Performance Partners, L.P., 91,637 shares of common stock and
210,000 warrants; Goldman Sachs Performance Partners (Offshore), L.P., 72,000
shares of common stock and 156,000 warrants; Bruno Guazzoni,18,819
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shares of common stock and 43,127 warrants; David McCarthy, 43,825 shares of
common stock and 100,430 warrants; Claudio Guazzoni, 42,188 shares of common
stock and 96,681 warrants; and Samuel Milbank, 26,125 shares of common stock and
54,454 warrants.
4. In January 1999, we issued 45,563 shares of common stock to Robert Rimberg,
Esq. at a per share price of $1.56 in consideration for legal services.
5. In January 1999, we issued 4,500 shares of common stock to Tom Mludzik at a
per share price of $1.56 pursuant to an employment agreement.
6. In January 1999, we issued 21,126 shares of common stock to Solomon Fromowitz
and 132,251 shares to Michael Fromm and 38,025 shares of common stock to
Elizabeth Deutch at a per share price of $1.56 in consideration for consulting
services.
7. In January 1999, we issued 2,383 shares common stock to Elias Fillas at a per
share of common stock price of $1.56 in consideration for settlement of
litigation.
8. In March 1999, we issued 26,910 shares of common stock to Dr. Zvi Barak at a
per share price of $1.56 pursuant to an employment agreement.
9. In January 1999, we issued 112,500 shares of common stock to Richard
Feinstein at a per share price of $1.56 as employment compensation.
10. In January 1999, we issued 87,804 shares of common stock to Bruce Bendell at
a per share price of $1.20 in consideration for past employment compensation.
11. In January 1999, we issued 87,804 shares of common stock to Doron Cohen at a
per share price of $1.20 in consideration for past employment compensation.
12. In January 1999 we issued 41,261 shares of common stock to Bruce Hall at a
per share price of $1.563.50 in consideration for consulting services rendered.
13. In April 1999, in connection with the conversion of $600,000 in debentures,
we issued the following shares (each at a conversion price of $1.96 per share):
Gross Foundation, Inc. 286,875 shares of common stock; Robert Kaszovitz 95,625
shares of common stock; and Harvey Glick 76,500 shares of common stock.
14. In June 1999, in connection with the conversion of all shares of 1996 Major
Preferred stock, we issued 1,477,833 shares of common stock to Millennium Trust
I.
15. In June 1999, in connection with a private placement offering, we issued
142,857 shares of common stock, at a per share price of $14.00, along with
warrants to purchase 142,857 shares of common stock and one adjustable warrant,
to each of three investors: Strong River Investments, Inc., Bay Harbor
Investments, Inc. and Augusta Street LLC.
16. In June 1999, in connection with the conversion and payoff of a convertible
debenture, we issued the following shares of common stock (each share at
$14.00): Zanett Lombardier, Ltd., 100,704 shares of common stock; Bruno
Guazzoni, 129,494 shares of common stock; and David McCarthy, 11,621 shares of
common stock.
17. In July1999, we issued 4,500 shares of common stock to Deborah Arnott at a
per share price of $18.50 as an employment bonus, subject to a vesting schedule.
18. In July 1999, we issued 1,500 shares of common stock to Mordechai Book, Esq.
at a per share price of $18.50 as legal services.
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19. In July 1999, we issued 900 shares of common stock to Zvi Lichter at a per
share price of $12.33 as an employment bonus.
20. In July 1999, we issued 9,000 shares of common stock to International
Securities Corporation at a per share price of $12.33 as a financing fee.
21. In July 1999, we issued 45,000 shares of common stock to Lawrence Hardge at
a per share price of $12.33, subject to a vesting schedule, in consideration for
inventions acquired.
22. In July 1999, we issued 4,500 shares of common stock to Joe Centner at a per
share price of $12.33 as an employment bonus.
23. In September 1999, we issued 43,676 shares of common stock to Arthur and
Scott Picon at a per share price of $12.30 as partial consideration for the
acquisition of Compass Lincoln Mercury.
24. In September 1999, we issued 2,439 shares of common stock to James Wallick
at a per share price of $12.30 as partial consideration for the acquisition of
Compass Lincoln Mercury.
25. In September 1999, we issued 7,500 shares of common stock to James Wallick
at a per share price of $12.30 in connection with the acquisition of Compass
Lincoln Mercury.
26. In October 1999, upon conversion of 400,000 shares of common stock of 1997
Major Preferred Stock, we issued 1,800,000 shares of common stock to Bruce
Bendell. Such shares were placed in Millennium Trust III, a trust in which Mr.
Bendell disavows any beneficial interest.
27. In November 1999, we issued 9,762 shares of common stock to Frank Graziadei,
Esq. at a per share price of $10.85 as a down payment for the acquisition of an
automotive dealership.
28. In November 1999, we issued 1,500 shares of common stock to William Brunner,
Esq. at a per share price of $10.85 as a down payment for the acquisition of an
automotive dealership.
29. In November 1999, in connection with the exercise of adjustable warrants, we
issued 32,430 shares of common stock, at a per share price of $.0067, to each of
three investors: Strong River Investments, Inc., Bay Harbor Investments, Inc.
and Augusta Street LLC.
30. In December 1999, in connection with a private placement offering, we issued
88,236 shares of common stock, at a per share price of $11.33, along with
warrants to purchase 88,236 shares of common stock and one adjustable warrant,
to each of three investors: Strong River Investments, Inc., Montrose
Investments, Ltd. and Augusta Street LLC.
31. In November 1999, we issued 37,500 shares of common stock to Roland Nassim
at a per share price of $20.00 in connection with the acquisition of Master
Agent's rights and equipment.
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 we and our subsidiaries should be read in conjunction
with our 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. Our actual
results could differ significantly from the results discussed in the
forward-looking statements.
o The Company
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<PAGE>
We are a holding company involved in the acquisition and development of
synergistic technological and telecommunications businesses and the regional
consolidation of the retail automotive industry. We operate in two divisions:
Automotive and Technology. The Automotive Division consists of retail automotive
dealerships, our subsidiary Major Fleet and Leasing, Inc. ("Major Fleet") and
any associated entities. The Technology Division is comprised of all
non-automotive operations, including our subsidiaries, Computer Business
Sciences, Inc. and IG2, Inc.
On May 14, 1998, we acquired, from a related party, the Major Automotive
Group of dealerships ("Major Auto") and associated real estate. In conformity
with generally accepted accounting principles, the 1998 consolidated results of
our operations include the results from Major Auto only since the date of
acquisition on May 14, 1998. The 1999 consolidated results of operations include
the results of Major Auto for the entire year, as well as the results of two
dealerships acquired in the 1999 Compass Lincoln-Mercury and Universal Kia
operations (which together represented approximately 3% of revenues and gross
profit), from their respective dates of acquisition, September 9, 1999 and April
27, 1999. Accordingly, the results of operations for the years 1999 and 1998 are
not directly comparable. Similarly, the results of operations for the years 1998
and 1997 are not directly comparable.
The year 1999 has been one of significant change for us. In the prior
year, the Board of Directors determined to explore the possible divestiture of
our non-automotive operations. At the same time, we continued to invest in
development activities relating to these operations in order to enhance both
their potential marketability and internal prospects. In particular, IG2, Inc.,
required substantial investment in development and licensing. Part of this
investment was the application and review process relating to obtaining CLEC
licenses in each of the markets in which IG2, Inc. envisions operating in order
to gain nationwide coverage. By year-end 1999, we had obtained CLEC status in 25
states covering 54 of its planned 62 markets and is currently licensed in 59
such markets. Additional investments were made in staffing, engineering,
research and equipment in order maximize the potential of this operation. We
also incurred substantial financing costs, including an extraordinary non-cash
charge of $733,000 in connection with the early repayment of a convertible
debenture. Although the Automotive Division grew to historical high gross profit
level of approximately $33 million for 1999, such technology-related
expenditures were significantly responsible for our 1999 net loss of more than
$3.5 million.
Based on the progress made during the year, both in development and
licensing, and, in consultation with our technology advisor, Hon. Jack Fields, a
former Congressman from Texas and a chief architect of the Telecommunications
Act of 1996, the Board of Directors determined, in February 2000, to continue
the development and operations of our Technology Division, with particular
emphasis on IG2, Inc.
Results of Operations - Year Ended December 31, 1999 and Year Ended December 31,
1998
Revenues. Revenue for the year 1999 had a net increase of $111.1 million
or 111.5% to $210.8. Revenue for the year 1998 was $99.7 million. The sources
for such increase (decrease) were:
Automotive Division (including Leasing) ........ $110,953,023
Technology Division ............................ $ 193,259
The increase in the Automotive Division's revenues was attributable to the
sales generated by Major Auto, which were $208.8 million in 1999, compared with
$97.6 million for the period from May 14, 1998 (date of acquisition) to December
31, 1998. This is an increase of $111.2 million or almost 114%. Revenues for
Major Fleet decreased $(225,000) or (22.7%) to $767,000 in 1999 from $992,000 in
1998.
A comparison of the average monthly revenue for our automotive dealerships
during the year 1999 with the average monthly revenue generated by our
automotive dealerships for the seven and one-half month period it was owned by
us in 1998 shows an approximate 30% increase in 1999, to more than $17 million
per month in 1999 from approximately $13 million per month in 1998. Management
believes that this increase in average monthly sales is primarily attributable
to Major Auto's successful efforts in selling used vehicles at its expansive
facility in Long Island City, New York. Average monthly used car sales revenues
increased almost 65% in the 1999 period as Major Auto
42
<PAGE>
continued to set used vehicle volume records for itself almost every month.
Major Auto's initiatives included extensive Internet promotions, local increased
advertising in all media, intensive focus on customer service and the branding
of its used car operation as "Major World."
Revenues in the Technology Division increased to $1.3 million in 1999 from
$1.1 million in 1998, an increase of $193,000 or almost 18%. This is primarily
the result of aggressive sales efforts and technical enhancements to the
Talkie(R) line of products.
Cost of Sales. Cost of sales increased to $177.6 million in 1999 from
$84.8 million in 1998. This increase of $92.8 million, or 109.4%, is primarily
attributable to the operations of the Automotive Division. The Automotive
Division's cost of sales in 1999 increased $92.4 million or, 110%, to
approximately $176.5 million from $84.1 million in 1998. The 1998 amount is
attributable to Major Dealer Group's operations since its acquisition on May 14,
1998. and is not directly comparable to the current year.
Cost of sales for 1999, which related to the Technology division, was
approximately $1.3 million, compared with $706,607 in the 1998 period. This is
an increase of $376,000 and is reflective of increased costs in creating new
Talkie(R) products and product enhancements, such as Talkie(R) Browse N Talk.
Gross profit. Gross profit showed a net increase of $18.4 million, or
124%, to $33.2 million for 1999, compared with $14.8 million for 1998. This
increase is substantially to the Automotive Division operations and particularly
to Major Dealer Group, the gross profit of which was $32.2 million in 1999,
compared with gross profit of $13.5 million in the period May 14, 1998 (date of
acquisition) to December 31, 1998. Gross profit as a percentage of sales for the
Automotive Division in 1999 was 15.9%, compared with 13.8% in 1998. Almost
$800,000 of the gross profit of the Automotive Division is attributable to
Leasing operations.
For the retail automotive dealership industry, as a whole in 1999 to date,
the average gross profit percentage is approximately 13%. Management believes
that the increase in gross profit percentage for Major Dealer Group and its
favorable comparison to the industry is primarily attributable to the increased
volume of used vehicle sales as a percentage of total sales during 1999 which
was 52.3%, as compared with the 1998 period of 44.3% and the industry as a whole
in 1999 approximating 29.2% of total average dealership sales. The gross profit
percentage on used vehicles sold by the Automotive Division in 1999 was
approximately 18.4% compared with the 1999 industry average of 10.7% and Major
auto's 1998 results of 14.37%.
Gross profit for the Technology division in 1999 was $199,672, which
represented a decrease of $(182,573), or (47.8%) from the prior year's gross
profit of $382,245. Additionally, gross profit as a percentage of the related
revenue decreased to 15.6% in 1999 from the 35.1% gross profit percentage in
1998. Both the dollar decrease and the gross profit percentage of revenues
decreases are consistent with the increased costs related to new and enhanced
Talkie(R) product development.
Operating expense. In 1999, operating expenses had a net increase of
approximately $21.2 million, or 164%, to approximately $34.2 million from
approximately $13.0 million in 1998. Of this increase, approximately $17.3
million related to the operations of the Automotive Division, which included
$28.6 million of operating expense for the full year of 1999, compared with
$11.3 million for that division in 1998, which included Major Auto only for the
period May 14, 1998 (date of acquisition) to December 31, 1998. Included in the
Automotive Division's operating expenses in 1999 is a one- time charge of $1.8
million relating to reimbursement of certain expenses and a bonus for our
Chairman, who is Major Auto's President. Additional operating expense increases
of $4.0 million related primarily to the development efforts of our Technology
Division.
Interest expense. Interest expense had a net increase of $1.2 million or
136% to $2.0 million in 1999 from interest expense of $843,000 incurred in 1998.
This increase is primarily related to the floor plan interest of approximately
$800,000 in 1999, an increase of $600,000 arising from both a full year of
operations for the Automotive Division and increased automotive sales and
related inventory carrying costs. To a lesser extent, there was a non-cash
interest charge incurred as amortization of original issue discount for stock
and warrants issued in connection with convertible
43
<PAGE>
debentures issued in January 1999, 85% of which was repaid in June 1999
utilizing part of the proceeds received in a private placement equity
transaction. The amount of this charge was almost $244,000. Additionally,
interest incurred in financing the acquisition of Major Auto amounted to
approximately $700,000, an increase of $200,000 over the prior year's amount of
almost $500,000 and is reflective of a full year's payments compared with the
period May 14, 1998 (date of acquisition) to December 31, 1998 in the prior
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
Technology .................................... $(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 Technology 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(R) Power Web Line machines for itself.
Consequently, at that time, we 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 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 Technology 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 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 us. We believe that because Major Dealer Group's Chevrolet
dealership had a substantial inventory of new cars at that time while there was
generally a shortage of such cars elsewhere, we were able to realize greater
gross margins than it otherwise would have in a more competitive situation.
Additionally, we believe that in instances where customers at our Chevrolet
dealership were resistant to the price level at that time, Major Auto was able
to direct such customers to our 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.
Gross profit for the Technology 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.
Operating expense. In 1998, operating 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.
Operating expenses attributable to Major Auto since that date aggregated $10.9
million and were partially offset by other
44
<PAGE>
operating 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.
Assets, Liquidity and Capital Resources - December 31, 1999
At December 31, 1999, our total assets increased to approximately $68.6
million, or approximately $18.0 million, from $50.5 million at the prior
year-end. The significant components of this increase are a $6.0 million
increase in cash; a $5.6 million increase in accounts receivable, attributable
primarily to the Major Dealer Group; an $8.6 million increase in excess of costs
over net assets acquired, resulting primarily from the acquisition of rights and
equipment from former Master Agents and, to a lesser extent, from automotive
dealership acquisitions, and a net increase in other current assets of $600,000,
resulting primarily from an increase of almost $1.0 million in prepaid taxes.
The aggregate of these increases, $20.8 million, was partially offset by a total
decrease in investment in financing leases of $2.0 million.
Stockholders' equity increased almost $12.1 million in 1999 to $28.5
million from $16.4 million at the end of 1998. This increase in significantly
attributable to a $15.8 million increase in additional paid-in capital resulting
from the issuance of common stock, in significant part related to private
placements of $8.9 million, conversion of outstanding debentures of $1.0
million, and services and business combinations of $4.3 million. These increases
were partially offset by our net loss of $(3.5 million).
The Company's primary source of liquidity for the year ended December 31,
1999 was $8,776,883 from its financing activities. The significant component of
this increase was $9,284,168 of net proceeds from the issuance of common stock
in private placements and the exercise of warrants.
This increase in cash was partially offset by $1,941,238 of cash used in
investing activities. The use of cash in investing activities was almost equally
divided between additions to property and equipment ($918,485) and cash used for
business combinations ($1,022,753).
Another partial offset to the cash generated through investing activities
was the net use of cash for operating activities aggregating $(825,674). This
resulted primarily from the net loss of $(3,540,366), which was more than offset
by non-cash charges which aggregated $4,243,955, principally, stock-based
compensation, aggregating $2,100,770 and, to a lesser extent, depreciation and
amortization totaling $1,165,685. This net increase in cash from income of
$703,589 was more than offset by the net change in operating assets, which
decreased cash by $(1,529,263) resulting from:
(a) a net increase in assets of $7,732,408, primarily from the increase in
inventory of $5,551,134, which was significantly attributable to the Major
Dealer Group; an increase in accounts receivable of $1,062,700, which was
also primarily attributable to the Major Dealer Group; and an increase in
other assets of $1,482,487, of which $972,002 related to prepaid taxes.
The accounts receivable and inventory increases reflect the higher level
and rate of sales of the Major Dealer Group in 1999 and the addition of
Compass Lincoln-Mercury, compared with the lower average monthly sales in
the 1998 period; and
(b) a net increase in liabilities of $6,203,145, primarily related to an
increase in floor plan notes payable of $3,870,401 and a net increase in
accounts payable and accrued expenses of $3,490,860, partially offset by a
$(1,066,797) decrease in due to affiliate. The floor plan notes increase
is consistent with the increase in inventories of the Major Dealer Group
and the accounts payable and accrued expenses increase reflects the higher
level of activities in the Technology division as well as in the Major
Dealer Group.
The Company's financing activities provided net cash of $(8,776,883). The
primary component of this addition was the proceeds from the issuance of common
stock and warrants aggregating $9,284,168. The most significant offset to this
increase was $628,192 used for the payment of long-term debt.
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<PAGE>
The foregoing activities, i.e., financing, investing and operating,
resulted in a net cash increase of $6,008,744 for the year ended December 31,
1999 with total cash at year end $6,985,878.
We believe that the cash generated from existing operations, together with
existing cash, available credit from our current lenders, including banks and
floor planning, will be sufficient to finance our current operations and
internal growth for at least the next twenty-four months. We are exploring
financing alternatives with respect to our planned expansion.
Year 2000 Issue
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields needed to accept four-digit entries to distinguish
the 21st century dates from 20th century dates. The effects of the Year 2000
issue may be experienced before, on, or after January 1, 2000, and if not
addressed, they may impact on operations and affect an entity's ability to
conduct normal business operations. Three months into the year 2000, we have not
identified any Year 2000 problems internally and we have not experienced
problems with our suppliers relating to year 2000 issues. However, it is
possible that such problems may occur or be discovered later. Accordingly, it is
not possible to be certain that all aspects of the Year 2000 issue affecting us,
including those relating to our suppliers or other third parties, are fully
resolved. Should any adverse consequence occur, it could affect our automotive
and technology operations and development efforts. We may also incur certain
unexpected costs in connection with the Year 2000 issue.
Item 7. Financial Statements
The Financial Statements are filed as a part of this Annual Report as
pages F-1 through F-42 following Part IV.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
(a) As previously reported on Form 8-K filed on February 9, 1999.
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 our Directors and Executive
Officers are as follows:
Name Age Position, Term In Office
- ---- --- ------------------------
Bruce Bendell 45 Chairman of the Board
Doron Cohen 43 President, Chief Executive Officer,
Treasurer and Director
David Edelstein 46 Director
Richard L. Feinstein 56 Chief Financial Officer
Dennis Roth 57 Director
James Wallick 49 Chief Operating Officer, Executive
Vice President and Director
Jeffrey Weiner 42 Director
The following is a brief description of the professional experience and
background of our directors and executive officers:
Bruce Bendell. Mr. Bendell has served as our Chairman of the Board since
our formation in November 1995, as our Chief Executive Officer from May 1998
until February 2000 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.
46
<PAGE>
Doron Cohen. Mr. Cohen has served as our Chief Executive Officer,
President, Treasurer and a Director. A founder of our company in November 1995,
Mr. Cohen has held those positions since inception. Mr. Cohen briefly
relinquished the presidency during the period from May 14, 1998 to December 18,
1998 and the position of Chief Executive Officer from May 14, 1998 to February
3, 2000. Mr. Cohen was also a founder and served as Chief Executive Officer and
Chairman of the Board of the Technology Division, CBS, since its inception in
1995. In March 2000, Mr. Cohen relinquished the positions of Chairman and Chief
Executive Officer of CBS, and remains a Director.
David Edelstein. Mr. Edelstein has served as a Director 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 our Senior Vice
President - Finance and 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.
Dennis Roth. Mr. Roth has served as our Director since March 2000 and
Chairman and Chief Executive Officer of CBS and IG2, Inc. since March 2000. Mr.
Roth has over 25 years experience at AT&T, most recently Vice-President and
Managing Partner, AT&T Solutions (1999); Chief Executive Officer, AT&T-Unisource
Communications Services (1998); President & Managing Director, AT&T
Communications (United Kingdom) Ltd. (1996-1998) and Regional Managing Director,
AT&T Business Communications Services. Under Mr. Roth's direction, AT&T
Communications (UK) Ltd., a telecommunications start-up, grew to approximately
$300 million a year in revenues.
James Wallick. Mr. Wallick has served as a director since May 1998 and
Executive Vice President and Chief Operating Officer since September 1999. Mr.
Wallick has been in the automotive dealership and financing business since 1971.
He is currently president of MIC Leasing and vice president and a director of
TecFin Corp.
Jeffrey Weiner. Mr. Weiner has served as a Director 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, are regarded by
management as key personnel:
Zvi Barak. Mr. Barak, age 47, has served as the Director of Research and
Development of our Technology division since April, 1996. From 1992 to August
1996, Mr. Barak served as President of Info Systems.
Moise Benedid. Mr. Benedid, age 50, has served as the President of our
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(R)" 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 52, has served as served as a senior
executive of Major Dealer Group since December 1985. He, together with his
brother, Bruce Bendell, is responsible for the day to day operations of Major
Dealer Group.
Kimberly R. Peacock. Ms. Peacock, age 34, serves as Vice-Chair person and
Chief Technical Officer of the Company. Ms. Peacock has been associated with us
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.
Jack Singer. Mr. Singer, age 41, serves as President of CarsTV.com, Inc.
and Internet Connections. Mr. Singer
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is a Director of Computer Business Sciences, Inc., our Technology division. Mr.
Singer has been with CarsTV.com since founding it in 1994. From 1984 until 1994
Mr. Singer has served as President of a number of successful software firms.
Advisory Board
Jack M. Fields, Jr. Mr. Fields, age 48, has served as Chairman of
Fidelity's Technology Advisory Board since September 7, 1999. The Technology
Advisory Board was established to counsel Fidelity Holdings on ways to improve
its technology operations. A former Member of the U.S. House of Representatives
from Texas, Congressman Fields was Chairman of the House Commerce Committee's
Telecommunications and Finance Subcommittee and chief architect of the
Telecommunications Act of 1996. Since his retirement in 1997, Mr. Fields opened
two companies: Twenty-First Century Group, Inc. and Texana Global.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our officers
and directors, and persons who own more than ten percent of a registered class
of our 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
us with copies of all Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by it, or
written representations from certain reporting persons, we believe that during
Fiscal 1999, our officers, directors, and greater than ten-percent beneficial
owners have complied with all applicable Section 16(a) filing requirements.
Item 10. Executive Compensation.
Summary Compensation Table
The following table sets forth information for each of our fiscal years
ended December 31, 1999 and 1998 concerning compensation of (i) all individuals
serving as our Chief Executive Officer during the fiscal year ended December 31,
1999 and (ii) each other of our executive officers whose total annual salary and
bonus equaled or exceeded $100,000 in the fiscal year ended December 31, 1999:
<TABLE>
<CAPTION>
Annual Compensation
------------------- All
Other Other
Name and Principal Position Year Salary($) Bonus($) Annual($) Compensation($)
--------------------------- ---- --------- -------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Doron Cohen(1) 1998 246,500 0 0 0
President, CEO and Treasurer 1999 244,580 0 0 0
Bruce Bendell(2) 1998 248,530 127,437 0 0
Chairman and Chief Executive 1999 278,000 0 0 1,800,000
Officer
Richard Feinstein(3) 1998 125,000 0 3,166 0
Chief Financial Officer 1999 170,715 0 6,324 70,000
</TABLE>
(1) Salary in 1998 includes $150,000 from us (subsequently paid through the
issuance of 87,804 shares of our common stock).
(2) Salary in 1998 includes $150,000 from us (subsequently paid through the
issuance of our 87,804 shares of common stock). Mr. Bendell received $81,250 in
salary and $127,437 in bonus from Major Dealer Group since its acquisition on
May 14, 1998. In December 1999, we authorized a one-time payment of $1.8 million
to Mr. Bendell for reimbursement of certain expenses and a bonus.
(3) Other Annual amount represents an automobile allowance of $527 per month
since July 1998. The amount reported under All Other Compensation reflects the
value of shares issued to Mr. Feinstein in January 1999.
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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock options
granted to the Named Executive Officers during 1999, as adjusted for 3 for 2
splits in June 1999 and January 2000. We have never granted any stock
appreciation rights.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Individual Grants (1)
---------------------
=======================================================================================================================
Number of Percent of Potential Realizable
Securities Total Value at Assumed
Options Annual Rates of Stock
Underlying Granted to Exercise Option Term (3)
Options Employees in Price per Expiration ----------------------
Name Granted 1999 (2) Share ($) Date 5% 10%
- ---- ---------- ------------ --------- ---------- ------ -------
=======================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Richard L. Feinstein ...... 112,500 (4) 43.1% 1.71 January 4, 2009 $120,983 $306,596
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
1. Each option represents the right to purchase one share of common stock.
The options shown in this table were all granted under our 1999 Stock
Option Plan.
2. In the year ended December 31, 1999, we granted options to employees to
purchase an aggregate of 261,000 shares of common stock.
3. Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 5% and
10% assumed annual rates of compounded stock price appreciation are
mandated by the rules of the SEC and do not represent our estimate or
projection of future common stock price growth. These amounts represent
certain assumed rates of appreciation in the value of our common stock
from the fair market value on the date of grant. Actual gains, if any, on
stock option exercises are dependent on the future performance of the
common stock and overall stock market conditions. The amounts reflected in
the table may not necessarily be achieved.
4. Vesting dates as follows: 45,000 shares on January 4, 1999, and 22,500
shares each on December 31, 1999, December 31, 2000, and December 31,
2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
No options were exercised by any of the Named Executive Officers during
the fiscal year ended December 31, 1999. The value of unexercised options held
by any such persons as of December 31, 1999 was as follows for Bruce Bendell
(the only such option holder):
Total number of shares underlying unexercised options 112,500
Exercisable options 112,500
Unexercisable options - 0 -
Value of in-the-money options $1,195,337(1)
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<PAGE>
(1) Represents warrants to acquire 112,500 shares of Common Stock issued to Mr.
Bendell on October 2, 1996 as a signing bonus under a management agreement with
us to manage the operations of Major Fleet.
Compensation of Directors
Non-employee Directors each received 4,500 shares of our Common Stock and
4,500 options to purchase shares of Common Stock in 1999 under our 1999
Directors Stock Plan. We reimburse directors for their expenses of attending
meetings of the Board of Directors.
Employment Contracts and Termination of Employment, and Change in Control
Arrangements
As of November 7, 1995, our date of incorporation, we entered into a
Consulting Agreement with Bruce Bendell, our Chairman, pursuant to which he
serves as a business, management and financial consultant to us for a period
ending on December 31, 1998, subject to successive one-year extensions at our
option. Mr. Bendell receives an annual consulting fee as determined by our 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 our 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 our 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 our Board of Directors. Mr. Bendell
has agreed not to disclose confidential information relating to us and has
agreed not to compete with, or solicit employees or customers of, us during
specified periods following the breach or termination of his agreement to serve
as a consultant to us. Mr. Bendell has been serving at will since the expiration
of the agreement pursuant to the same terms.
As of November 7, 1995, we entered into an Employment Agreement with Doron
Cohen, pursuant to which he serves as our President, Chief Executive Officer and
Treasurer for a period ending on December 31, 1998, subject to successive
one-year extensions at our option. Mr. Cohen receives an annual base salary as
determined by our 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 our 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 our 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 our Board of
Directors. Mr. Cohen has agreed not to disclose confidential information
relating to us and has agreed not to compete with, or solicit employees or
customers of, us 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.
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.
We are obligated under our Articles of Incorporation to indemnify any of
our present or former directors who served at our 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
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<PAGE>
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 us, unless otherwise ordered by the relevant
court. Our Articles of Incorporation also permit it to indemnify other persons
except against gross negligence or willful misconduct.
We are obligated under our bylaws to indemnify our directors, officers and
other persons who have acted as our representatives at our 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 we have received an opinion from
independent counsel that such person was not so derelict.
Our indemnification obligations are broad enough to permit indemnification
with respect to liabilities arising under the Securities Act. Insofar as we may
otherwise be permitted to indemnify our directors, officers and controlling
persons against liabilities arising under the Securities Act or otherwise, we
have 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. Our 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 our Articles of
Incorporation of this provision, our 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.
We maintain a $5 million liability insurance policy for the benefit of our
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 our securities as of April 5, 1999, respectively, by
(i) each of our directors, (ii) each of our executive officers, (iii) all of our
directors and executive officers as a group and (iv) each person known to us to
own more than 5% of any class of it securities:
<TABLE>
<CAPTION>
1997 Major Series of
Convertible Preferred
Number of Stock(2)
Name and Address Shares Percent(1) Number Percent
- ---------------- ------ ---------- ------ -------
<S> <C> <C> <C> <C>
Bruce Bendell 8,814,243(3) 31.5% 2,250,000 100.0%
Doron Cohen 5,712,804 22.3%
David Edelstein 9,900(4) *
Richard L. Feinstein 125,500 *
James Wallick 41,439(4) *
Jeffrey Weiner 13,950(4)(6) *
Dennis Roth -- --
All directors and execu-
tive officers as a group 14,717,836(4)(5)(6)(7)(8) 52.5%
</TABLE>
*Represents less than 1% of the outstanding shares of Common Stock.
(1) Based on 25,620,203 shares of common stock outstanding on April 5, 1999.
51
<PAGE>
(2) Based on 500,000 shares of the 1997-Major Series of Convertible Preferred
Stock outstanding on December 31, 1999 which converts into 2,250,000
shares of common stock.
(3) Includes (i) 23 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) 112,500 shares of common stock which Bruce
Bendell has the right to acquire upon the exercise of warrants; and (b)
2,250,000 shares of common stock, the minimum number of shares of common
stock into which the 500,000 shares of the 1997-Major Series of
Convertible Preferred Stock beneficially owned by Bruce Bendell are
convertible into common stock.
(4) Includes options for 4,500 shares of common stock which are immediately
exercisable.
(5) Includes (i) 58,000 of common stock which have vested and (ii) options for
67,500 shares which are immediately exercisable.
(6) Includes 4,500 shares of common stock owned by Mr. Weiner's wife.
(7) Includes (i) 8,323 shares of common stock owned by immediate family
members of directors and executive officers as a group and (ii) 2,488,500
shares of common stock that the directors and executive officers as a
group have the right to acquire within 60 days.
(8) 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.
In January 1999, Mr. Doron Cohen was granted piggyback registration rights
with respect to 87,804 shares of our common stock issued to him as compensation
for fiscal 1998.
In January 1999, Mr. Bendell was granted piggyback registration rights
with respect to 87,804 shares our common stock issued to him as compensation for
fiscal 1998. In December 1999, our Board of Directors approved a one-time
payment of $1,800,000 to our Chairman, Bruce Bendell, as a reimbursement of
certain expenses and a bonus.
In January 1999, Richard Feinstein, our Chief Financial Officer, was
granted piggyback registration rights with respect to 45,000 shares of our
common stock issued to him as employment compensation.
Following our acquisition of Major Auto, Messrs. Bruce Bendell and Harold
Bendell continue to be responsible for senior-level management of the
dealerships. The Bendell brothers and we believe that this continuity of senior
management was important in obtaining the manufacturers' consents to the
transfer of the dealerships to us. The Bendell brothers' management control has
been accomplished through (i) their ownership of 100 shares of our 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- 1997A-MAJOR AUTOMOTIVE GROUP Series of Preferred
Stock" below.
To further facilitate obtaining the required manufacturers' consents, we
and the Bendells 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 us in connection with the Major Auto Acquisition and any
additional automobile dealerships that we 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 us. If we continue 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
52
<PAGE>
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 us (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 we 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 our Board of
Directors. Those actions are (i) disposing of any of the Major Auto dealerships,
(ii) acquiring new dealerships, and (iii) our 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 from us.
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 "Description of Business - Automotive Division" for a description
of the Major Auto Acquisition.
We have made a loan to our President and Chief Executive Officer, Doron
Cohen, in the principal amount of $140,000, bearing interest at 5.77% per annum,
uncompounded. The loan is evidenced by a promissory note dated December 31, 1996
and payable upon demand. We have advanced an additional $377,783 to Mr. Cohen as
evidenced by a promissory note carrying 5.77% interest due June 30, 2001.
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 Division" for a
description of certain transactions between Major Auto and Major Fleet.
On October 1, 1998 we 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 common stock in connection with the
performance of certain consulting services, (ii) 79,500 shares of common stock
in connection with providing us with certain business contacts, (iii) 54,000
shares of common stock in connection with compliance with certain restrictive
covenants contained in the Consulting Agreement (collectively, the "Clemont
Shares"). We have 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,
our Chairman, 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 us.
We have retained the accounting firm of Marcum & Kliegman LLP to provide
certain accounting and tax
53
<PAGE>
services for us and our subsidiary Major Fleet. In 1999, we paid Marcum &
Kliegman LLP $103,500 for its services. Mr. Weiner, one of our directors, is
Managing Partner of Marcum & Kliegman LLP.
Our Chairman, Bruce Bendell, has interests in several non-affiliated auto
dealerships, including Five Towns Nissan, for which Major Auto purchases cars
and provides other services. Major Auto charges a fee to offset any expenses
incurred in providing such services. The volume of such transactions is
immaterial to Major Auto's operations; however, at December 31, 1999, these
affiliated dealerships were indebted to Major Auto in an amount of approximately
$1.3 million.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description Page
- ------ ----------- ----
3.1* Articles of Incorporation of Fidelity N/A
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.
3.2* Articles of Incorporation of Computer N/A
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.
3.3* Articles of Incorporation of 786710 N/A
(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.
3.4* Articles of Incorporation of N/A
Premo-Plast, Inc., incorporated by
reference to Exhibit 3.4 of Company's
Registration Statement on Form 10-SB,
54
<PAGE>
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
55
<PAGE>
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,
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
56
<PAGE>
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
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
57
<PAGE>
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
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
58
<PAGE>
10.8* Employment Agreement dated October 18, 1996
between Computer Business Sciences, Inc. and
Paul Vesel, incorporated by reference to
Exhibit 10.8 of Company's Registration
Statement on Form 10-SB, as amended, filed with
the Securities and Exchange Commission on March
7, 1997. N/A
10.9* Indemnification Agreement dated November 7,
1995 between the Company and Doron Cohen,
incorporated by reference to Exhibit 10.9 of
Company's Registration Statement on Form 10-SB,
as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.10* Indemnification Agreement dated November 7,
1995 between the Company and Bruce Bendell,
incorporated by reference to Exhibit 10.10 of
Company's Registration Statement on Form 10-SB,
as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.11* Indemnification Agreement dated December 6,
1995 between the Company and Richard C. Fox,
incorporated by reference to Exhibit 10.11 of
Company's Registration Statement on Form 10-SB,
as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.12* Indemnification Agreement dated March 28, 1996
between the Company and Dr. Barak, incorporated
by reference to Exhibit 10.12 of Company's
Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.13* Indemnification Agreement dated March 28, 1996
between the Company and Yossi Koren,
incorporated by reference to Exhibit 10.13 of
Company's Registration Statement on Form 10-SB,
as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
59
<PAGE>
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
10.18(ii)** Amendment to Plan and Agreement of Merger,
60
<PAGE>
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
61
<PAGE>
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
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
62
<PAGE>
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
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
63
<PAGE>
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
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 and
Harold Bendell. N/A
10.51** Wholesale Security Agreement, dated April 26,
1990, between General Motors Acceptance
Corporation ("GMAC") and Major Fleet. N/A
64
<PAGE>
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
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
65
<PAGE>
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
10.70 Merger Agreement dated January 18, 2000 by
and among Fidelity Holdings, Inc., Cars
Acquisition, Inc., CarsTV.com, Inc., and
Jack H. Singer. --
10.71 Transfer Restriction and Optional
Conversion Agreement dated January 18,
2000 by and among Fidelity Holdings, Inc.,
Jack H. Singer and certain other
individual investors. --
66
<PAGE>
10.72 Escrow Agreement dated January 18, 2000 by
and among Fidelity Holdings, Inc., Cars
Acquisition, Inc., CarsTV.com, Inc., and
Jack H. Singer, certain other individual
investors and Littman Krooks Roth & Ball
P.C., as escrow agent. --
10.73 Securities Purchase Agreement dated as of
March 14, 2000, by and between Fidelity
Holdings, Inc. and Strong River
Investments, Inc. --
10.74 Registration Rights Agreement dated as of
March 14, 2000, by and between Fidelity
Holdings, Inc. and Strong River
Investments, Inc. --
10.75 Lease Agreement dated as of January 28,
2000, by 80-02 Leasehold Company, L.P. and
Mid-Atlantic Telecommunications, Inc. --
10.76 Repurchase of Nissko Master Rights
Agreement among Computer Business Sciences
Inc, Nisko L.P.. and shareholders of
Nissko Telecom Ltd dated November 30, 1999
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
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).
67
<PAGE>
***** 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
The Company filed a Report on Form 8-K on December 13, 1999 reporting the
closing of a private placement of the Company's common stock.
68
<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: April 13, 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 Executive April 13, 2000
- ------------------------ Officer and Director
Doron Cohen
/s/ Bruce Bendell Chairman of the Board and April 13, 2000
- ------------------------ Director
Bruce Bendell
/s/ David Edelstein Director April 13, 2000
- ------------------------
David Edelstein
/s/ Richard L. Feinstein Chief Financial Officer April 13, 2000
- ------------------------
Richard L. Feinstein
/s/ Dennis Roth Director April 13, 2000
- ------------------------
Dennis Roth
/s/ James Wallick Chief Operating Officer and April 13, 2000
- ------------------------ Director
James Wallick
/s/ Jeffrey Weiner Director April 13, 2000
- ------------------------
Jeffrey Weiner
69
<PAGE>
Report of Independent Certified Public Accountants
To the Board of Directors
Fidelity Holdings, Inc.
We have audited the consolidated balance sheets of Fidelity Holdings, Inc. and
subsidiaries as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not examine the financial statements of
786710 Ontario Limited, a wholly-owned subsidiary, which statements, after
intercompany eliminations, reflect total assets of $644,783 and $183,132 as of
December 31, 1999 and 1998 and total revenue of $1,282,111 and $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 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 and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits 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, 1999 and 1998, and the results of their operations
and their cash flows for the years then ended in conformity with generally
accepted accounting principles.
BDO Seidman, LLP
/s/ BDO Seidman, LLP
New York, New York
March 22, 2000
F-1
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Consolidated Balance Sheet
================================================================================
<TABLE>
<CAPTION>
December 31, 1999
- -----------------------------------------------------------------------------------------------------------
<S> <C>
Assets
Current:
Cash and cash equivalents $ 6,985,878
Net investment in direct financing leases, current 411,444
Accounts receivable, net of allowance for doubtful accounts of $385,000 6,855,547
Inventories 24,612,800
Prepaid taxes 914,002
Other current assets 1,166,660
- -----------------------------------------------------------------------------------------------------------
Total current assets 40,946,331
Net investment in direct financing leases, net of current portion 508,084
Property and equipment, net 5,723,590
Excess of costs over net assets acquired 19,210,352
Notes receivable - officer 517,783
Other assets 1,668,510
- -----------------------------------------------------------------------------------------------------------
$ 68,574,650
===========================================================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable - floor plan $ 21,661,654
Accounts payable 7,018,566
Accrued expenses 1,866,197
Current maturities of long-term debt 758,150
Customer deposits 601,758
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 31,906,325
Long-term debt, less current maturities 7,436,749
Due to employees 397,302
Minority interest 190,810
Other 127,683
- -----------------------------------------------------------------------------------------------------------
Total liabilities 40,058,869
- -----------------------------------------------------------------------------------------------------------
Commitments
Stockholders' equity:
Preferred stock, $.01 par value - 2,000,000 shares authorized; 500,000 shares issued and
outstanding 5,000
Common stock, $.01 par value - 50,000,000 shares authorized; 16,091,796 shares issued and
outstanding 160,198
Additional paid-in capital 30,593,905
Cumulative currency translation adjustment (6,204)
Treasury stock (263,580)
Deficit (1,973,538)
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 28,515,781
- -----------------------------------------------------------------------------------------------------------
$ 68,574,650
===========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Consolidated Statements of Operations
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Sales $ 210,814,104 $ 99,667,822
Cost of sales 177,606,003 84,828,470
- ----------------------------------------------------------------------------------------------
Gross profit 33,208,101 14,839,352
Operating expenses 34,218,923 12,953,857
Loss to minority shareholder (2,876) --
Interest expense, net of interest income 1,991,295 843,355
- ----------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit) and
extraordinary item (2,999,241) 1,042,140
Income tax expense (benefit) (192,000) 514,000
- ----------------------------------------------------------------------------------------------
Net income (loss) before extraordinary item (2,807,241) 528,140
Loss on debt extinguishment (733,125) --
- ----------------------------------------------------------------------------------------------
Net income (loss) $ (3,540,366) $ 528,140
==============================================================================================
Per common share:
Net income (loss):
Basic income (loss) per common share:
Income (loss) before extraordinary item $ (0.13) $ 0.03
Extraordinary item (0.04) --
- ----------------------------------------------------------------------------------------------
Net income (loss) $ (0.17) $ 0.03
==============================================================================================
Income (loss) per common share - assuming dilution:
Income (loss) before extraordinary item $ (0.13) $ 0.03
Extraordinary item (0.04) --
- ----------------------------------------------------------------------------------------------
Net income (loss) $ (0.17) $ 0.03
==============================================================================================
Average number of shares used in computation:
Basic 21,054,183 16,507,786
Diluted 21,054,183 20,207,034
==============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Years ended December 31, 1999 and 1998
- ----------------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock Treasury stock
---------------------- ---------------------- ---------------------
Shares Amount Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 250,000 $ 2,500 6,895,700 $ 68,957 -- $ --
Comprehensive income (loss):
Net income -- -- -- -- -- --
Other comprehensive loss:
Translation adjustment -- -- -- -- -- --
Comprehensive income for the year
Issuance of preferred stock for acquisition of
Major Automotive Group 900,000 9,000 -- -- -- --
Issuance of common stock for services and
assets -- -- 1,140,814 11,408 -- --
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,150,000 11,500 8,036,514 80,365 -- --
Comprehensive income (loss):
Net loss -- -- -- -- -- --
Other comprehensive loss:
Translation adjustment -- -- -- -- -- --
Comprehensive loss for the year
Issuance of common stock for services and
business combinations -- -- 247,587 2,476 -- --
Effect of stock compensation charge -- -- 180,486 1,805 -- --
Purchase of treasury stock -- -- -- -- 20,980 (263,580)
Issuance of common stock in connection with
private placements -- -- 533,066 5,331 -- --
Conversion of preferred stock (650,000) (6,500) 2,185,222 21,852 -- --
Conversion of 10% and 12% debentures -- -- 514,972 5,150 -- --
Three-for-two stock split effected in the form
of a 100% stock dividend -- -- 4,321,949 43,219 -- --
Original issue discount on 12% dentures (stock
and warrants) -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 500,000 $ 5,000 16,019,796 $160,198 20,980 $(263,580)
============================================================================================================================
<CAPTION>
Years ended December 31, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------
Additional Retained Currency Total
paid-in earnings translation stockholders'
capital (deficit) adjustment equity
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 $ 5,414,293 $ 1,038,688 $ 297 $ 6,524,735
Comprehensive income (loss):
Net income -- 528,140 -- 528,140
Other comprehensive loss:
Translation adjustment -- -- (5,274) (5,274)
------------
Comprehensive income for the year 522,866
------------
Issuance of preferred stock for acquisition of
Major Automotive Group 5,991,000 -- -- 6,000,000
Issuance of common stock for services and
assets 3,394,507 -- -- 3,405,915
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 14,799,800 1,566,828 (4,977) 16,453,516
Comprehensive income (loss):
Net loss -- (3,540,366) -- (3,540,366)
Other comprehensive loss:
Translation adjustment -- -- (1,227) (1,227)
------------
Comprehensive loss for the year (3,541,593)
------------
Issuance of common stock for services and
business combinations 4,282,539 -- -- 4,285,015
Effect of stock compensation charge 673,228 -- -- 675,033
Purchase of treasury stock -- -- -- (263,580)
Issuance of common stock in connection with
private placements 8,873,837 -- -- 8,879,168
Conversion of preferred stock (15,352) -- -- --
Conversion of 10% and 12% debentures 1,045,572 -- -- 1,050,722
Three-for-two stock split effected in the form
of a 100% stock dividend (43,219) -- -- --
Original issue discount on 12% dentures (stock
and warrants) 977,500 -- -- 977,500
- -----------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ 30,593,905 $ (1,973,538) $ (6,204) $ 28,515,781
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Consolidated Statements of Cash Flows
================================================================================
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $(3,540,366) $ 528,140
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of intangible assets 518,417 477,504
Depreciation 647,268 514,780
Noncash financing costs 977,500 --
Stock-based compensation 2,100,770 739,434
(Increase) decrease in assets:
Net investment in direct financing leases 363,913 (622,294)
Accounts receivable (1,062,700) (767,119)
Inventories (5,551,134) 1,698,176
Customer deposits (130,256) 11,730
Other assets (1,482,487) 414,668
Increase (decrease) in liabilities:
Accounts payable 4,434,377 (94,339)
Accrued expenses (943,517) 292,987
Floor plan notes payable 3,870,401 (2,892,917)
Deferred revenue 38,937 (38,937)
Due to affiliate (1,066,797) 802,859
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (825,674) 1,064,672
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (918,485) (61,694)
Business combinations (1,022,753) (1,018,432)
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,941,238) (1,080,126)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Line of credit (450,000) 300,000
Proceeds from long-term debt -- 429,599
Payments of long-term debt (628,192) --
Proceeds from issuance of common stock and exercise of warrants,
net of expenses 9,284,168 --
Decrease in notes payable -- (109,080)
Proceeds from convertible debentures 405,000 600,000
Proceeds from employee 147,451 249,851
Purchase of treasury stock (263,580) --
Increase in due from shareholders 282,036 (689,699)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,776,883 780,671
- ---------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash (1,227) (5,274)
- ---------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 6,008,744 759,943
Cash and cash equivalents, beginning of year 977,134 217,191
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 6,985,878 $ 977,134
=========================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,966,053 $ 624,222
Income taxes 1,250,329 2,846
=========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
1. Stock Split (a) Nature of Business
Fidelity Holdings, Inc. (the "Company") was
incorporated under the laws of the State of Nevada
on November 7, 1995. The Company is structured as
a holding company that has two divisions, 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 accounts of Fidelity Holdings, Inc.
and its wholly-owned subsidiaries. All significant
intercompany accounts, transactions and profits
have been eliminated.
(c) Earnings per Share
The Company has presented basic and diluted
earnings per share, where applicable. 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. Diluted earnings per
share for 1999 is not shown since it would be
antidilutive.
(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.
F-6
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(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.
(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 lives of the contracts.
F-7
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(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 sheet.
(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.
(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 $518,417 and $477,504 for
the years ended 1999 and 1998 respectively.
(k) Impairment of Long-Lived Assets
Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to
be Disposed of." SFAS No. 121 requires the Company
to review the recoverability of the carrying
amounts of its long-lived assets whenever events
or changes in circumstances indicate that the
carrying amount of an asset might not be
recoverable.
F-8
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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 undiscounted
future cash flows over the remaining useful life
of the related asset.
(l) Fair Value Disclosures
The carrying amounts reported in the consolidated
balance sheet 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.
(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.
F-9
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
2. Stock Split The Company's Board of Directors declared a
three-for-two stock split effected in the form of a 50%
stock dividend during the second quarter of 1999. The
split resulted in the issuance of 4,321,949 shares of
common stock. The Company's Board of Directors declared
another three-for-two stock split effected in the form
of a 50% stock dividend during the first quarter of
2000. The split resulted in the issuance of 8,003,898
shares of common stock. All references to average number
of shares outstanding and prices per share have been
restated retroactively to reflect the 1999 split except
for earnings per share which also includes the first
quarter 2000 split.
3. Notes Receivable - The Company holds a note from one officer/stockholder in
Officers/ the amount of $517,783, including accrued interest, at
Stockholders December 31, 1999. 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 is as follows:
Leases
December 31, 1999
--------------------------------------------------------
Total minimum lease payments to be received $ 936,597
Estimated residual value of leased property 100,569
Unearned income (117,638)
--------------------------------------------------------
$ 919,528
========================================================
Future minimum lease payments receivable at December 31,
1999 are as follows:
Year ending December 31, Amount
--------------------------------------------------------
2000 $411,444
2001 377,963
2002 76,758
2003 53,363
--------------------------------------------------------
Total $919,528
========================================================
F-10
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
5. Inventories Inventories consist of the following:
December 31, 1999
--------------------------------------------------------
New automobiles $ 5,403,095
New trucks and vans 9,547,442
Used automobiles and trucks 9,253,161
Parts and accessories 754,380
Other 56,536
--------------------------------------------------------
25,014,614
Less: LIFO reserve (401,814)
--------------------------------------------------------
$24,612,800
========================================================
6. Property and Property and equipment consists of the following:
Equipment
December 31, 1999 Lives
--------------------------------------------------------
Land $2,400,000 --
Building 1,000,000 40 years
Leasehold improvements 1,037,196 15 years
Furniture and fixtures 922,156 3-7 years
Equipment 2,964,384 3-7 years
--------------------------------------------------------
8,323,736
Less: Accumulated depreciation
and amortization 2,600,146
--------------------------------------------------------
$5,723,590
========================================================
F-11
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
7. Income Taxes The Company accounts for income taxes using the asset
and liability method whereby deferred assets and
liabilities are recorded for differences between the
book and tax carrying amounts of balance sheet items.
Deferred liabilities or assets at the end of each period
are determined using the tax rate expected to be in
effect when the taxes are actually paid or recovered.
The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits
that are not expected to be realized. The effects of
changes in tax rates and laws on deferred tax assets and
liabilities are reflected in net income in the period in
which such changes are enacted.
The provision (benefit) for taxes on income is as
follows:
Year ended December 31, 1999 1998
--------------------------------------------------------
Federal:
Current $(134,000) $302,000
Deferred -- --
State:
Current 67,000 212,000
Deferred (125,000) --
--------------------------------------------------------
Total $(192,000) $514,000
========================================================
F-12
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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:
Year ended December 31, 1999 1998
--------------------------------------------------------
Amount using the statutory
Federal tax rate $(1,270,000) $ 348,000
Utilization of tax loss
carryforwards -- (102,000)
State and local income taxes,
net of Federal tax benefit (724,000) 140,000
Excess officers' compensation 534,000 --
Original issue discount 522,000 --
Goodwill amortization 277,000 155,000
Other, net 199,000 (27,000)
Bad debt accrual 200,000 --
Foreign losses 70,000 --
--------------------------------------------------------
Provision (benefit) for
taxes on income $ (192,000) $ 514,000
========================================================
8. Secured Line of The Company has two lines of credit ("Line") with a bank
Credit for a total of $1,500,000. The interest rate is a
variable rate based on the bank's prime rate of
interest. Interest is payable monthly.
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 two majority
stockholders, each of whom will be limited to 50% of the
total obligation to the Bank.
As of December 31, 1999, there is no outstanding balance
on the Line.
9. Convertible During April 1998, the Company issued $600,000 of 10%
Subordinated convertible subordinated debentures, due June 1999 with
Debentures interest payable semi-annually. During April 1999, the
debentures were converted into 306,000 shares of common
stock at a price of $2.94 per share.
F-13
<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 (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) 54.5454 shares of
Common Stock, (iii) warrants (the "Warrants") to acquire
124.9999 shares of Common Stock at $2.80 per share and
(iv) warrants (the "CBS Warrants") to acquire 25.4545
shares of common stock at $0.001 per share, par value
$0.01 per share, of CBS (the "CBS Shares"). The Company
closed on $2.75 million and issued to Purchasers, in the
aggregate, Debentures in the face amount of $2.75
million, 150,000 shares of Common Stock, Warrants to
acquire 343,751 shares of Common Stock and CBS Warrants
to acquire 70,000 CBS Shares. The Debentures resulted in
an original issue discount of $977,000. The Securities
Purchase Agreement allows for two more series of
issuances with similar terms. 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, 75,000 shares of the Company's Common Stock,
30,000 shares of CBS Common Stock and Warrants to
purchase an aggregate of 171,874 shares of Common Stock
at an exercise price equal to $2.80 per share.
Eighty-five percent of the convertible debentures were
redeemed for cash, while the remaining fifteen percent
were converted into 160,972 shares of common stock.
The Company recorded an extraordinary loss of $733,125
as a result of the early redemption of the $2.75 million
debentures. The loss consisted of unamortized original
issue discount.
F-14
<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, 1999 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.
Long-term debt consists of the following:
December 31, 1999
--------------------------------------------------------
Leasing notes payable $1,039,449
Falcon loan payable 7,155,450
--------------------------------------------------------
8,194,899
Less: Current portion 758,150
--------------------------------------------------------
$7,436,749
========================================================
Maturities are as follows:
December 31,
--------------------------------------------------------
2001 $ 547,928
2002 517,118
2003 407,457
2004 421,042
2005 432,596
Thereafter 5,110,608
--------------------------------------------------------
$7,436,749
--------------------------------------------------------
F-15
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
11. Business On May 14, 1998, pursuant to the Merger Agreement, Bruce
Combinations 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 2.7 million shares. The
foregoing acquisitions from Major Auto and Harold
Bendell are collectively referred to herein as the
"Major Auto Acquisition".
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.
F-16
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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.
On April 23, 1999, the Company acquired certain assets
of Universal Kia for approximately $140,000 in cash. The
Company accounted for this acquisition as a purchase,
and the excess cost over the fair market value of the
tangible net assets acquired was $140,000 and was
allocated to goodwill (Note 1). Results of operations
have been included in the Company's consolidated
financial statements for the period from April 23, 1999
to December 31, 1999.
On September 9, 1999, the Company acquired all of the
issued and outstanding shares of common stock of Compass
Lincoln Mercury, Inc. and Compass Dodge, Inc. for
approximately $434,000 in cash and 45,745 shares of the
Company's restricted common stock having a fair market
value of approximately $715,000. The Company accounted
for this acquisition as a purchase, and the excess cost
over the fair market value of the net tangible assets
acquired was approximately $882,000 and was allocated to
goodwill (Note 1). Results of operations have been
included in the Company's consolidated financial
statements for the period from September 9, 1999 to
December 31, 1999. The Company is waiting for approval
from the factory in connection with the Compass Dodge
purchase and has included $300,000 of the purchase price
in other assets.
F-17
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In December 1999, Computer Business Sciences, Inc.
("CBS") entered an agreement (the "Nissko Agreement")
with the shareholders of Nissko Telecom, L.P. (the
"Nissko Group") to purchase their share in Nissko
Telecom Associates ("Nissko"), including all assets,
licenses and proprietary technology, and liabilities
only relating to taxes to which any Nissko Principal may
become liable and telephone bills related to services
provided. For five years the Nissko Group may not
compete in the communications business relating to
telephony to and from the United States.
As payment, CBS issued 670,000 shares (3% of CBS) of the
common stock of CBS (the "CBS Shares") to the Nissko
Group and forgave approximately $4.0 million of
receivables. CBS has also placed 588,000 restricted
shares of Fidelity Holdings, Inc. common stock in escrow
("Fidelity Shares"). If, by May 30, 2001, the Company
has not caused the common stock of CBS to become
publicly traded, the Nissko Group will receive up to
588,000 shares of the Company (Fidelity Shares) based on
a maximum value of $2,500,000 of the shares or 588,000
shares at the average closing price for the 30 trading
days prior to May 30, 2001, and discounted at 35% if
restricted. The Company accounted for this acquisition
as a purchase, and the excess cost over the fair market
value of the tangible net assets acquired was
approximately $8.1 million and was allocated to goodwill
(Note 1).
The remaining Fidelity Shares are to remain in escrow
until November 30, 2001. In the event the Company has
caused the common stock of CBS to become publicly traded
prior to the 18 month anniversary of the Nissko
Agreement and the net proceeds of the sale of the CBS
Shares by the Nissko Group do not equal a total of
$2,500,000, or, if the CBS Shares have not been sold,
and the value of such CBS Shares does not equal at least
$2,500,000, then additional Fidelity Shares will be
released to the Nissko Group to cover any shortfall in
value, up to 588,000 shares.
F-18
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
In the event that at any time prior to November 30, 2001
CBS secures a bona fide third-party purchaser of the CBS
Shares for a cash purchase price of $2,500,000, or a
proportional amount of the CBS Shares, and any member of
the Nissko Group rejects such offer, then no additional
Fidelity Shares are to be issued to such member on
November 30, 2001.
The escrow agreement includes a provision that awards an
additional 200,000 restricted shares of Fidelity
Holdings, Inc. common stock to the Nissko Group as
penalty in the event that the Company has not caused the
common stock of CBS to become publicly traded by May 30,
2001.
An additional 200,000 restricted shares of Fidelity
Holdings, Inc. common stock have been placed in escrow
under the agreement to cover personal guarantees of the
Nissko Group.
The pro forma unaudited results of operations for the
years ended December 31, 1999 and 1998, combining the
acquisition of Major Automotive Group, Inc., Compass
Lincoln Mercury, Inc., Nissko and Universal Kia as
though they were acquired by the Company as of January
1, 1998, are as follows:
December 31, 1999 1998
--------------------------------------------------------
Revenues $217,000,000 $159,000,000
Net income (loss) before
extraordinary item (2,000,000) 1,000,000
========================================================
12. 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.
F-19
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
13. Commitments 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
$971,279.
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.
F-20
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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.
On July 27, 1999, Mr. Tepper (an individual) filed a
lawsuit against the Company and three of its officers
(Bruce Bendell, Doron Cohen and Richard Feinstein) in
the Eighth Judicial District Court in Clark County,
Nevada. That original Complaint was not served on the
Company or the named officers. On August 16, 1999, Mr.
Tepper filed an Amended Complaint, which was
subsequently served on the Company. The Company and the
individual defendants removed the litigation to the
United States District Court of Las Vegas, Nevada. The
Company and individual defendants filed a motion to
dismiss the claims against the individuals on
jurisdictional grounds, and to transfer the remainder of
the case to New York. Mr. Tepper subsequently agreed to
dismiss all claims against individuals, and the Court
declined to transfer the case.
F-21
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Mr. Tepper contends in his lawsuit that he is the
rightful owner of 240,000 shares of Fidelity stock. He
contends that the Company has wrongfully (1) refused to
remove the "restricted" legend from 160,000 of those
shares, and (2) withheld the remaining 80,000 shares
from him. Fidelity has been informed by Progressive
Polymerics International, Inc. n/k/a InvestAmerica that
it is the rightful owner of the shares, and that Mr.
Tepper acquired the shares improperly. Because of these
competing claims to ownership of the shares, the Company
has not released full ownership of the shares to Mr.
Tepper. The Company has filed a motion seeking to
interplead the shares into court to avoid liability to
either claimant and to permit the court to determine the
ownership. Mr. Tepper did not name Progressive as a
party to the lawsuit, but the Company is considering
adding it as a party to aid in resolving the ownership
question.
On June 10, 1999, the Company was named as the defendant
in an action titled Ronald Shapss Corporate Services,
Inc. v. Fidelity Holdings, Inc., brought in New York
State Supreme Court, Rockland County (the "Action"). In
the Action, Ronald Shapss Corporate Services, Inc.
("RSCS") has alleged that the Company breached a
purported consulting agreement with it and converted
shares of the Company's stock that RSCS claims should
have been provided to it pursuant to that purported
agreement. The Complaint claims damages on the breach of
contract claim "believed to approximate $7,386,500," and
on the conversion claim "believed to approximate
$1,387,500, plus punitive damages in the amount of
$5,000,000."
F-22
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
By Notice of Motion July 6, 1999, the Company moved to
dismiss the conversion claim. Thereafter, RSCS
cross-moved for partial summary judgement on its breach
of contract claim, which, if successful, under RSCS's
apparent theory of purported damages, presumably would
have resulted in liability to the Company of
approximately $1,387,500. By Order dated December 15,
1999, the Court granted the Company's motion and denied
RSCS's cross-motion. RSCS has filed a notice of appeal
(which it has not perfected) and a motion for
"reargument and/or renewal" of the Court's denial of the
cross-motion, which is now awaiting a decision.
On or about January 20, 2000, the Company served its
answer and counterclaims in which it denied the material
remaining allegations of the Complaint and asserted
claims against RSCS and/or Ronald Shapss individually
for breach of contract, fraudulent inducement, and a
declaration that the Company terminated any agreement it
might have had with RSCS. In addition to the
declaration, the counterclaims seek damages believed to
exceed $1 million or, alternatively, the return of
50,000 shares the Company provided to RSCS and/or Mr.
Shapss in 1997, and/or punitive damages of no less than
$5 million. The Action is now in discovery, and the
Company intends to continue vigorously to defend against
RSCS's remaining claim and to prosecute its
counterclaims.
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
================================================================================
14. Related Party Amounts due affiliates are amounts owed by the Company's
Transactions 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, 1999 and 1998, amounts due from affiliates
of $1,335,642 and $268,845 are included in accounts
receivable, respectively.
Marcum & Kliegman LLP, an accounting firm of which a
director is a member, charged the Company approximately
$104,000 and $48,000 in fees for accounting services for
the years ended December 31, 1999 and 1998,
respectively.
All sales of used cars to affiliates were made at
wholesale cost plus related fees incurred by Major Auto,
a related party owned by Bruce Bendell, 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 for the years ended December 31, 1999 and
1998.
15. Warrants and (a) Warrants
Options
(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 $0.83 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, leaving a
balance of 123,429 outstanding as of
December 31, 1999.
F-24
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
(ii) In addition, the Company issued warrants for
the purchase of 150,000 shares at a price of
$0.83 per share, in connection with the
management agreement entered into when the
Company acquired Major Fleet & Leasing Corp.
(b) Stock Options
During November 1999; the Company adopted a Stock Option
Plan ("Plan") pursuant to which 1,200,000 shares of
common stock are reserved for issuance upon the exercise
of options, designated as 1999 options. At the
discretion of the Company's Board of Directors (the
"Board"), or members of any committee the Board has
designated, options may be granted to consultants,
non-employee members of the Board, employees, officers
or anyone who performs services for the Company. The
Plan will terminate upon the date on which all shares of
the Plan have been exercised.
Options granted under the Plan expire not more than 10
years from the date of grant. Generally, options vest in
3 years beginning on the date of grant.
Except as described below, all stock options have been
granted at exercise prices approximating 85% of market
value on the date of the grant.
In consideration for certain consulting services related
to the acquisition of the Major Auto Group, the Company
has issued options to purchase 75,000 shares of the
Company's common stock for $3.00 per share (market
price), exercisable until May 2002.
During 1999, the Company granted employees and directors
options to purchase 183,000 shares of the Company's
common stock at an exercise price of approximately 85%
of the market price on the date of the grant.
F-25
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
During August 1999, the Company granted consultants
options to purchase 2,500 shares of the Company's common
stock at an exercise price of $11.00. The charge to the
Company was immaterial.
The Company applies APB Opinion 25, "Accounting for
Stock Issued to Employees" and related Interpretations,
in accounting for its stock option plan by recording as
compensation expense the excess of the fair market value
over the exercise price per share as of the date of
grant. Under APB Opinion 25, when the exercise price of
the Company's employee stock options equals at least 85%
of the market price of the underlying stock on the date
of the grant, no compensation cost is recognized.
SFAS No. 123 requires the Company to provide pro forma
information regarding net loss and earnings per share as
if compensation cost of the Company's stock option plan
had been determined in accordance with the fair value
based method prescribed in SFAS No. 123. The Company
estimates the fair value of each stock option at the
grant date by using the Black Scholes option-pricing
model with the following weighted average assumptions
used for grants during the year ended December 31, 1999.
--------------------------------------------------------
Dividend yield 0%
Risk free interest rate 5%
Expected lives 10 years
--------------------------------------------------------
F-26
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Under the accounting provisions of FASB Statement 123,
the Company's net loss and earnings per share would have
been adjusted to the pro forma amounts indicated below:
--------------------------------------------------------
Net loss before extraordinary item:
As reported $(3,482,366)
Pro forma (4,402,161)
========================================================
Basic earnings before extraordinary
item per share:
As reported $ (0.17)
Pro forma (0.21)
========================================================
A summary of the status of the Company's stock option
plan as of December 31, 1999 and changes during the year
ended December 31, 1999 is presented below:
<TABLE>
<CAPTION>
Weighted
Number of Expiration average
shares date exercise price
-------------------------------------------------------------------------
<S> <C> <C> <C>
Options outstanding at
January 1, 1998 -- -- $ --
Options granted 75,000 2002 3.00
-------------------------------------------------------------------------
Options outstanding at
December 31, 1998 75,000 2002 3.00
Options granted 185,500 2009 12.78
-------------------------------------------------------------------------
Options outstanding at
December 31, 1999 260,500 2002-2009 $ 9.97
=========================================================================
</TABLE>
F-27
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Data summarizing year-end options exercisable and
weighted average fair value of options granted during
the year ended December 31, 1999 is shown below:
Options exercisable
--------------------------------------------------------
Options exercisable at year-end 183,450
Weighted average exercise price $ 10.39
Weighted average fair value of options
granted during the year $ 8.59
Weighted average remaining
contractual life 7.40
========================================================
F-28
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
The following table summarizes information about stock
options outstanding at December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Number Weighted Number
Outstanding at Average Weighted Exercisable at Weighted
December 31, Remaining Average December 31, Average
Exercise Price Range 1999 Contractual Life Exercise Price 1999 Exercise Price
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.00 75,000 2.3 $ 3.00 75,000 $ 3.00
$16.50 - $19.13 110,500 9.8 18.85 83,450 18.99
$3.84 75,000 9.0 3.84 25,000 3.84
---------------------------------------------------------------------------------------------------------
260,500 8.0 $ 9.97 183,450 $10.39
=========================================================================================================
</TABLE>
F-29
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
16. Preferred Stock 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 three shares of common stock if the
market value is equal to or greater than $6,000,000 for
the 2,700,000 shares of common stock. If the 2,700,000
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.
During October 1999, 400,000 shares were converted into
1,200,000 shares of common stock (after the
three-for-two stock splits).
Common Stock
During 1998, the Company issued 1,140,814 shares of
common stock at estimated market prices for telephony
territories and equipment and services to unrelated
parties. 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.
On June 24,1999, the Company entered into an agreement
with three unrelated 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 and warrants to purchase
285,714 shares of common stock at a purchase price of
$23 per share, for an
F-30
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
aggregate of $6,000,000 or $21 per share. On December 8,
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 and warrants to purchase 176,472 shares of common
stock at a purchase price of $17.25 per share, for an
aggregate of $3,000,000 or $17 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 and an adjustable warrant which
will allow the investors to purchase a maximum of
207,143 shares at $0.01 based on a reset formula.
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
F-31
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
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 division, and also for working capital purposes
of the Company and its subsidiaries, including the
possible acquisition of additional car dealerships.
During 1999, the Company issued 247,587 shares of Common
Stock at estimated market prices of approximately $4.2
million for equipment and services.
17. Segment In the fourth quarter of 1998, the Company adopted the
Information 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. Since the Company's plastics and utility
businesses have no sales and are considered immaterial,
they are included in the technology segment.
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-32
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
Following is a tabulation of business segment
information for 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------------
<S> <C> <C>
Segment sales:
Automotive $209,531,993 $98,578,970
Technology 1,282,111 1,088,852
-----------------------------------------------------------------------
Total consolidated net sales $210,814,104 $99,667,822
=======================================================================
Operating income (loss):
Automotive $ 2,831,322 $ 2,021,301
Technology (6,063,688) (979,161)
-----------------------------------------------------------------------
Consolidated income (loss) before
extraordinary item and taxes on
income $ (3,232,366) $ 1,042,140
=======================================================================
Assets:
Automotive $ 48,301,458 $42,352,571
Technology 17,482,465 8,195,852
-----------------------------------------------------------------------
Total $ 65,783,923 $50,548,423
=======================================================================
</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:
1999 1998
--------------------------------------------------------
United States $203,316,159 $93,735,032
Ukraine 6,215,834 4,843,938
Canada 1,282,111 1,088,852
--------------------------------------------------------
Total consolidated net sales $210,814,104 $99,667,822
========================================================
18. Fourth Quarter The Company recorded the following adjustment in the
Adjustments fourth quarter: a $1.8 million charge for a bonus.
F-33
<PAGE>
Fidelity Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
================================================================================
19. Subsequent Events 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
(Note 16). In addition, the Company issued warrants to
the purchasers enabling them to purchase 266,667 shares
of common stock at $16.00 per share.
On February 23, 2000, the Company acquired CarsTV.com,
Inc. ("Cars"), a regional full service Internet Service
Provider (ISP) and digital subscriber line provider, as
well as a content supplier for the cable industry
focused on the automotive sector, in exchange for
575,862 shares of Company common stock. Based in
Richmond, Virginia, Internet Connections and CarsTV, two
subsidiaries of Cars, represent its Internet division
and cable divisions, respectively. Internet Connections,
operating regionally throughout the Mid-Atlantic,
provides Internet services, web design and development
to individuals and small-to-medium sized businesses.
F-34
<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-35
<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-36
<PAGE>
Major Chevrolet, Inc. and Affiliates
Combined Statements of Cash Flows
Increase (Decrease) in Cash and Cash Equivalents
================================================================================
<TABLE>
<CAPTION>
Four and one-half Year ended
months ended December 31,
May 14, 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
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
==============================================================================================================
</TABLE>
See accompanying summary of accounting policies
and notes to combined financial statements.
F-37
<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-38
<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-39
<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-40
<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 Holdings, Acquisition Corp., a wholly-owned subsidiary of
Inc. Fidelity 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
Transactions its 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-41
<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-42
Exhibit 10.70
MERGER AGREEMENT
THIS MERGER AGREEMENT ("Agreement") is made and entered into
effective as of this 18th day of January 2000 by and among Fidelity Holdings,
Inc., a Nevada corporation ("Fidelity"); Cars Acquisition, Inc., a Delaware
corporation ("Acquisition Corp."); CarsTV.com, Inc., a Virginia corporation
(together with any of its affiliates, subsidiaries, successors or assigns,
"Cars"); Jack H. Singer, an individual ("Singer"); and each of the persons other
than Singer listed on Schedule A hereto (each, a "Minority Stockholder" and
collectively the "Minority Stockholders" and with Singer the "Stockholders").
W I T N E S S E T H:
WHEREAS, Fidelity is a public company formed for the purpose of
acquiring or purchasing another company or companies; and
WHEREAS, Acquisition Corp. is a wholly-owned subsidiary of Fidelity;
and
WHEREAS, Cars is engaged in the business of providing Internet and
cable television advertising and providing full service Internet access (all
such activities of Cars, together with all other business activities of Cars,
being hereinafter referred to as the "Business"); and
WHEREAS, Singer owns 5,100,000 shares (the "Singer Shares") of
Common Stock of Cars, without par value per share ("Cars Common Stock"), which
represents 52.879% of the issued and outstanding Cars Common Stock; and
WHEREAS, the Minority Stockholders own the number of issued and
outstanding shares of Cars Common Stock set forth opposite their names on
Schedule A which, in the aggregate,
<PAGE>
consists of 4,544,624 shares of Cars Common Stock (the "Minority Shares") which
represents 47.121% of the issued and outstanding shares of Cars Common Stock;
and
WHEREAS, the Board of Directors of each of Fidelity, Acquisition
Corp., and Cars deem it to be advisable and in the best interests of said
corporations and their respective stockholders that Cars be merged with and into
Acquisition Corp. in exchange for common stock of Fidelity, par value $.01 per
share ("Fidelity Common Stock") in a transaction whereby Acquisition Corp. will
remain a wholly-owned subsidiary of Fidelity (the "Merger"), all in accordance
with the terms of this Agreement and the applicable provisions of the Delaware
General Corporation Law (the "DGCL") and the Virginia Stock Corporation Act (the
"Act"); and
WHEREAS, for Federal income tax purposes, it is intended that the
Merger will be treated as a reorganization within the meaning of Section
368(a)(2)(D) of the Internal Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the parties hereto wish to make certain representations,
warranties and covenants in connection with the Merger, to prescribe the terms
thereof and the mode of carrying it into effect, and to impose various
conditions precedent thereto.
NOW, THEREFORE, in consideration of the premises and of the mutual
representations, warranties and covenants hereinafter set forth, the parties
hereto hereby agree as follows:
SECTION I
THE MERGER
1.01. The Merger. At the Effective Time (as defined in subparagraph
1.03 hereof), subject to and upon the terms and conditions of this Agreement and
in accordance with the applicable provisions of the DGCL and the Act, Cars shall
be merged with and into Acquisition Corp., the separate corporate existence of
Cars shall cease, and Acquisition Corp. shall continue as
-2-
<PAGE>
the surviving corporation (the "Surviving Corporation"). The Merger shall have
the effects set forth in Section 259 of the DGCL and Section 13.1-721 of the
Act.
1.02. Closing. Unless this Agreement shall have been terminated and
the transactions herein contemplated shall have been abandoned pursuant to
Section XI hereof, and subject to the satisfaction or waiver of the conditions
set forth in Sections IX and X hereof, the closing of the Merger (the "Closing")
shall take place (i) at the offices of Littman Krooks Roth & Ball P.C., 655
Third Avenue, New York, New York as promptly as practicable (and in any event
within five business days) after the satisfaction or waiver of all of the
conditions set forth in Sections IX and X hereof, or (ii) at such other time,
date and/or place as may be agreed upon by the parties hereto. The date on which
the Closing occurs is hereinafter referred to as the "Closing Date".
1.03. Effective Time . As promptly as practicable after the Closing
Date, Acquisition Corp. and Cars shall (i) file in the office of the Secretary
of State of the State of Delaware and the clerk of the Virginia State
Corporation Commission, a Certificate or Articles of Merger meeting the
requirements of the DGCL and the Act, and (ii) execute, acknowledge, deliver,
file and/or record all such other instruments, and take all such other actions,
as may be required in order to cause the Merger to become effective in
accordance with the provisions of the DGCL and the Act. The later of the date
and time on which the Merger becomes effective in accordance with the applicable
provisions of the DGCL and the Act is hereinafter referred to as the "Effective
Time".
1.04. Corporate Governance.
1.04.1. Certificate of Incorporation. The Certificate of
Incorporation of Acquisition Corp., as in effect immediately prior to the
Effective Time, shall be the Certificate of Incorporation of the Surviving
Corporation until thereafter amended as provided by law or such Certificate of
Incorporation.
-3-
<PAGE>
1.04.2 By-laws. The By-laws of Acquisition Corp., as in effect
immediately prior to the Effective Time, shall be the By-laws of the Surviving
Corporation until thereafter amended as provided by law, the Certificate of
Incorporation of the Surviving Corporation or the By- laws of the Surviving
Corporation.
1.04.3 Directors . The following persons shall be the initial
members of the Board of Directors of the Surviving Corporation, each to hold
office in accordance with the applicable provisions of law:
Jack H. Singer
John S. Schneider
C. Meade Rhoads, Jr.
Barry D. Crawford
Robert M. Weber
Doron Cohen
1.04.4 Officers. The following persons shall be the initial
officers of the Surviving Corporation, each to hold office in accordance with
the applicable provisions of law:
Name Office(s)
---- ---------
Jack H. Singer President, Chief Executive Officer
Richard L. Feinstein Chief Financial Officer and Treasurer
Mordechai E. Book, Esq. Vice President, Legal and Securities
and Secretary
-4-
<PAGE>
1.05. Effect of Merger on Securities of Constituent Corporations. As
of the Effective Time, by virtue of the Merger and without any action on the
part of Acquisition Corp., Cars or any of the Stockholders:
1.05.1 Cars Common Stock . Each issued and outstanding share
of common stock of Cars, without par value per share, will be converted into and
become one fully paid and non- assessable share of common stock, par value
$.00001 per share, of the Surviving Corporation.
1.05.2 Cars Common Stock. Subject to the provisions of
subparagraph 1.05.4 below, the holders of Cars Common Stock shall receive an
aggregate 575,862 shares of Fidelity Common Stock (the "Fidelity Common Stock")
as follows:
(a) Common Stock. The holders of each issued and
outstanding share of Common Stock of Cars will receive 0.0597081 shares of
Fidelity Common Stock for each share held; provided, however, that no
Stockholder shall be entitled to receive any fractional shares of Fidelity
Common Stock. The Fidelity Common Stock shall be issued to the holders of Cars
Common Stock, on a pro-rata basis, in accordance with their respective
shareholdings in Cars as set forth on Schedule A hereto.
(b) Options and Warrants. There shall be no issued and
outstanding options or warrants to purchase shares of Cars Common Stock as of
the Closing Date
1.05.3 Cancellation of Certain Shares of Cars Common Stock.
Each and any share of Cars Common Stock that is owned by Cars or by any
subsidiary of Cars, and each share of Cars Common Stock that is owned by
Fidelity, Acquisition Corp. or any other subsidiary of Fidelity, shall be
automatically canceled and retired, and shall cease to exist, and no Fidelity
Common Stock or other consideration shall be delivered in exchange therefor.
-5-
<PAGE>
1.05.4 Adjustment of Number of Shares of Fidelity Common Stock
to be Delivered Pursuant to the Merger.
(a) Closing Date Balance Sheet. At the Closing Date,
Cars shall deliver to Fidelity and Acquisition Corp. a pro forma balance sheet
of Cars as of the date three days prior to the Closing Date, prepared in
accordance with generally accepted accounting principles (with the exception of
multi-month Internet plan revenues and liabilities) consistently applied with
past practices and fairly presents Cars' financial condition as of such date and
excluding any liabilities arising as a result of the delay of the Closing due
solely to reasons beyond the reasonable control of Cars, which have been agreed
to by Fidelity (as so adjusted, the "Closing Balance Sheet"). Representatives of
Fidelity (including its auditors) shall be entitled to review, upon reasonable
request, the supporting documentation and any analyses related to the
preparation of the Closing Date Balance Sheet to whatever extent they may elect,
at their cost and expense. In order to enable Fidelity to anticipate and plan
for assumption of the Cars' liabilities that will be shown on the Closing
Balance Sheet, Cars will provide to Fidelity a balance sheet as of the end of
the month immediately preceding the Closing Date as soon as reasonably possible.
(b) Disputes relating to the Closing Balance Sheet. In
the event that Fidelity notifies the Stockholders within 45 days of receipt of
the Closing Balance Sheet that it disputes the calculations contained in the
Closing Balance Sheet, and all of such disputes which have not been resolved by
mutual agreement of Fidelity and a majority in interest of the Stockholders
within 15 days after such notification (which resolution would be binding upon
all of the parties hereto), the matter(s) in dispute shall be, within ten days
thereafter, submitted to a nationally recognized independent accounting firm
selected by Fidelity and a majority in interest of the Stockholders, which firm
shall issue its written determination with respect to all disputed matters
within 30 days after such submission. Such determination shall be final and
binding upon all of the
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parties hereto. The fees of such accounting firm shall be borne one-half by all
of the Stockholders and one-half by Fidelity.
(c) Adjustment of Number of Shares of Fidelity Common
Stock Issuable Pursuant to Merger. If the Closing Balance Sheet indicates a net
shareholder's deficit in excess of $0.00, then, in such event, the aggregate
number of shares of Fidelity Common Stock issuable pursuant to Section 1.05.2 of
this Agreement shall be reduced by a number of shares which is equal to the
quotient obtained by dividing (i) such excess deficit by (ii) the average of the
closing price for one share of Fidelity Common Stock traded on the 20 business
days preceding the Closing Date as reported on the Nasdaq National Stock Market
(the "Fidelity Share Value").
1.05.5 Exchange of Stock Certificates . As of the Effective
Time and subject to the provisions of subparagraph 1.05.9 hereof, each holder of
an outstanding certificate or certificates representing Cars Common Stock shall
receive in exchange therefor, upon surrender of such certificate or certificates
to Fidelity, or if the holder notifies the Company or its transfer agent that
such certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such certificates, upon delivery of such agreement, one or
more certificates representing in the aggregate the number of whole shares of
Fidelity Common Stock to which such holder is entitled pursuant to Section
1.05.2 of this Agreement. Until surrendered and exchanged, the outstanding
certificates theretofore representing shares of Cars Common Stock shall be
deemed for all purposes, other than the payment of dividends or other
distributions to stockholders of Fidelity, to represent the number of whole
shares of Fidelity Common Stock to which such holder is entitled pursuant to
Section 1.05.2 of this Agreement. No dividend or other distributions which are
payable to the holders of record of Fidelity Common Stock as of any date
subsequent to the Effective Time shall be paid to the holders of outstanding
unsurrendered certificates theretofore representing shares of Cars
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Common Stock; provided, however, that upon surrender and exchange of such
outstanding certificates as provided above or upon the notification by the
holder to the Company or its transfer agent that such certificates have been
lost, stolen or destroyed and the execution of an agreement satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection with
such certificates, there shall be paid to the record holders of said
certificates the amount (without any interest thereon) of any dividends and
other distributions which became payable to holders of record of Fidelity Common
Stock as of a date between the Effective Time and the date of such surrender and
exchange, inclusive.
1.05.6 Fractional Shares. No fractional shares of Fidelity
Common Stock, and no scrip certificates, shall be issued or delivered in
connection with the Merger, and no fractional share interest shall entitle the
owner thereof to exercise any rights as a stockholder of Fidelity. In lieu of
the issuance or delivery of fractional shares, the aggregate number of shares of
Fidelity Common Stock to which each Stockholder shall be entitled as a result of
the Merger shall be rounded up to the next whole share.
1.05.7 Adjustment. If subsequent to the date hereof but prior
to the Effective Time, Fidelity Common Stock shall be changed into or exchanged
for a different number or kind of shares through reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other like change in Fidelity's capitalization, there shall be a
proportionate and appropriate adjustment in the number of shares of Fidelity
Common Stock to be delivered pursuant to the Merger.
1.05.8 No Transfers. Commencing as of the Effective Time,
there shall be no registration of transfers on the records of Cars of any shares
of Cars Common Stock. Subject to the provisions of subparagraph 1.05.9 hereof,
if a certificate for such shares is presented for transfer,
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it shall be exchanged for a certificate representing shares of Fidelity Common
Stock as herein provided.
1.05.9 Withholding of Shares; etc. Anything herein above
contained to the contrary notwithstanding, any certificates representing shares
of Fidelity Common Stock to which a Stockholder is entitled pursuant to Section
1.05.2 of this Agreement may be withheld or legended, in Fidelity's sole
discretion, pending completion of the adjustments referred to in subparagraph
1.05.4 above.
1.05.10 Subsequent Cooperation. At any time and from time to
time after the Effective Time, the last acting officers of Cars, or the
corresponding officers of the Surviving Corporation, may, in the name of Cars,
execute and deliver all such proper deeds, assignments and other instruments and
take or cause to be taken all such further or other action as they may deem
necessary or desirable in order to best perfect or confirm in the Surviving
Corporation title to and possession of all of Cars' properties, rights,
privileges, immunities, powers and purposes, and to otherwise carry out the
purposes of this Agreement.
1.05.11 Escrow Agreement. Fidelity, the Stockholders and
Littman Krooks Roth & Ball P.C. ("Escrow Agent"), shall execute and deliver at
the Closing an Escrow Agreement, substantially in the form annexed hereto as
Exhibit A (the "Escrow Agreement"), under which an aggregate of 113,557 of the
shares of Fidelity Common Stock ("Escrowed Shares") shall be deposited with the
Escrow Agent by the Significant Stockholders (as defined in the escrow
Agreement). Such Escrowed Shares shall be held (subject to the provisions of the
Escrow Agreement relating to the reduction or release of such shares in a manner
set forth therein) pursuant to the Escrow Agreement for a period ending on the
earlier to occur of (i) the date on which Fidelity files with the Securities and
Exchange Commission its Annual Report on Form 10-K for its 2000 fiscal year,
(ii) the consummation of an IPO (as defined hereinafter) and (iii) April 15,
2001 (or such
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longer period as shall be provided therein in the event a claim for
indemnification is made by Fidelity during such period). Upon termination of the
Escrow Agreement, the balance of the Escrowed Shares, if any, shall be
distributed to the Stockholders pursuant to the Escrow Agreement.
SECTION II
ADDITIONAL AGREEMENTS
2.01. Employment Agreements. At Closing or as soon thereafter as
practicable, the Surviving Corporation will enter into an employment agreement
with Singer substantially in accordance with the term sheet attached hereto as
Exhibit B, (collectively, the "Employment Term Sheet") and Fidelity shall cause
Singer to be elected to the Board of Directors of Computer Business Sciences,
Inc.
2.02. Cars Initial Public Offering. Upon Closing, Fidelity will
undertake, on a "best efforts" basis, to effectuate an initial public offering
of an aggregate of from $5-10 million of the common stock of either (i) the
Surviving Corporation or (ii) whichever of Fidelity's subsidiaries, Computer
Business Sciences, Inc. or IG2, Inc., if any, may be the parent corporation of
the Surviving Corporation (the "IPO") or the owner of a majority of the assets
of Computerized Auto Resale Services, Inc. or Internet Creations, Inc..
2.03. Cars Loan. Fidelity agrees that prior to and until the
completion of the IPO it will make a series of month-to-month unsecured loans,
without the requirement of any personal guaranty, available to Surviving
Corporation for the purpose of funding Surviving Corporation's excess cash flow
requirements in amounts not to exceed $50,000 in any one month and $500,000 in
the aggregate. Fidelity will make an initial loan in the amount of $50,000 upon
the execution of this Agreement. The initial loan and all subsequent loans shall
be evidenced by a promissory note substantially in the form attached hereto as
Exhibit C (the "Note"). All such loan amounts (the "Loan
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Amounts") shall be repaid to Fidelity upon completion of the IPO from the
proceeds thereof. The parties acknowledge that on December 14, 1999, Fidelity
loaned $50,000 to Cars pursuant to a promissory note (the "1999 Note")
guaranteed by Singer pursuant to a personal guaranty (the "Singer Guaranty").
Fidelity agrees that, effective immediately upon the Effective Time it will
cancel the 1999 Note and release Singer from all obligations pursuant to the
Singer Guaranty provided that all amounts then due to Fidelity under the 1999
Note have added to the principal amount due under the Note.
2.04. Stockholder Agreements. At Closing, the Stockholders
will enter into transfer restriction and optional conversion agreements with
Fidelity in the form attached hereto as Exhibit D ( the "Stockholder
Agreements").
SECTION III
REPRESENTATIONS AND WARRANTIES CONCERNING SINGER
Singer represents and warrants to, and agrees with, Fidelity as follows as
of the Closing Date:
3.01. Ownership of Singer's Shares. Singer is the owner,
beneficially and of record, of all of Singer's Shares and there exists no
pledge, lien, security interest, encumbrance, claim or equity of any kind with
respect to Singer's Shares. Except as otherwise indicated on Schedule 3.01
hereto, Singer is not a party to any stockholders' agreement, partnership
agreement, voting trust or other voting or similar agreement with respect to
Singer's Shares. Singer has full right and authority to transfer Singer's Shares
and, upon delivery of Singer's Shares to Fidelity pursuant to this Agreement,
Fidelity will receive good and marketable title thereto, free and clear of any
pledge, lien, security interest, encumbrance, claim or equity of any kind.
3.02. Authority of Singer. Singer is of full age and has the full
right, capacity, power and authority to enter into this Agreement and all
instruments, certificates, documents and
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agreements to be executed and/or delivered herewith or in connection with the
transactions contemplated hereby or thereby (collectively the "Documents") and
to consummate the transactions contemplated hereby and thereby. This Agreement
and the Documents have been duly executed and delivered by Singer and constitute
valid and binding obligations of Singer, enforceable against Singer in
accordance with their respective terms.
3.03. No Violations. Except as set forth in Schedule 3.03 hereto,
neither the execution and delivery of this Agreement or any of the Documents,
the performance by Singer of his obligations hereunder and thereunder nor the
consummation of the transactions contemplated hereby or thereby will, directly
or indirectly, with or without the giving of notice or the passage of time, or
both (i) violate, or be in conflict with, or constitute a default under, or
cause or permit the termination or the acceleration of the maturity of, any
agreement, personal guarantee, lease, mortgage, debt or obligation of Singer or
require the payment or any pre-payment or other penalty with respect thereto;
(ii) require notice to or the consent of any party to or beneficiary of any
agreement, personal guarantee, lease, mortgage, debt or obligation to which
Singer is a party or by which he or his properties is bound or subject,
including without limitation, any agreement or obligation containing a right of
first refusal or similar right or permitting any party to renegotiate, receive a
refund, modify or otherwise change any such agreement or obligation; (iii)
result in the creation or imposition of any lien, security interest, claim or
other encumbrance upon any property or assets of Singer under any agreement,
personal guarantee, lease, mortgage, debt or obligation to which he is a party
or by which he or his properties is bound or subject; or (iv) violate any
statute or law or any judgment, decree, order, regulation or rule of any court
or governmental authority to which Singer or his properties is or may be bound
or subject.
3.04. Consents and Approvals of Governmental Authorities. Except as
set forth in Schedule 3.04 hereto, no consent, approval or authorization of, or
declaration, filing or registration
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with, any governmental or regulatory authority is required to be made or
obtained by Singer in connection with the execution, delivery or performance by
Singer of this Agreement or the Documents or the consummation by Singer of the
transactions contemplated hereby or thereby.
3.05. Affiliate Transactions. Except as set forth in Schedule 3.05
hereto, Singer has no direct or indirect interest in any firm, corporation,
association or business enterprise which competes with Cars or is a supplier,
client, customer or agent of, or is otherwise engaged in the business engaged in
by, Cars.
3.06. Finders' Fee. There is no investment banker, broker, finder or
other intermediary which has been retained by, or is authorized to act on behalf
of, Singer who might be entitled to any fee or commission from Fidelity or Cars
or any of their affiliates upon the consumma tion of the transactions
contemplated by this Agreement or the Documents.
3.07 Disclosure. Except as would not have a Material Adverse Effect,
as defined in Section IV below, on Cars or the Surviving Corporation, no
representation or warranty of Singer contained in this Agreement or any of the
Documents or in any statement or certificate furnished or to be furnished to
Fidelity or Cars pursuant hereto or thereto in connection with the transactions
con templated hereby or thereby contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact necessary to make
the statements made herein or therein, in the light of the circumstances in
which they were made, not misleading.
SECTION IV
REPRESENTATIONS AND WARRANTIES CONCERNING CARS
When used in connection with Cars, the Surviving Corporation or
Fidelity, or any of their subsidiaries, as the case may be, the term "Material
Adverse Effect" means any change, effect, or circumstance that, individually or
when taken together with all other such changes, effects or
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circumstances that have occurred prior to the occurrence of the Material Adverse
Effect (a) is or is reasonably likely to be materially adverse to the business,
properties, assets (including tangible assets), prospects, financial condition
or results of operations of Cars or Fidelity, or (b) is delaying or preventing
or is reasonably likely to delay or prevent, the consummation of the
transactions contemplated by this Agreement. Except as would not have a Material
Adverse Effect on Cars or the Surviving Corporation, and except as set forth in
the attached Disclosure Schedules, Singer and Cars, jointly and severally,
represent and warrant to, and agree with, Fidelity as follows:
4.01. Description and Lists. Schedules 4.01(a) through 4.01(j)
hereto contain the following information and all such information is true and
correct in all material respects:
(a) Schedule 4.01(a) hereto contains: (i) a brief description of all
interests in real property leased or otherwise used or claimed by Cars, stating
the location of such property and the zoning classification of such property;
(ii) a brief description of the leases and subleases and other instruments
creating or evidencing all such interests in real property; and (iii) a brief
description of any contract or commitment by Cars to hereafter mortgage, lease
or otherwise encumber any real property interests;
(b) Schedule 4.01(b) hereto contains a list of all material
Intangible Property (as hereinafter defined) indicating any applications,
registrations, filings or notices associated therewith and indicating whether
such Intangible Property is owned or licensed and whether any other person has
the right to use the Intangible Property;
(c) Schedule 4.01(c) hereto contains a list and description of: (i)
each lease agreement in excess of $10,000 or having a remaining term of more
than six (6) months from the date hereof to which Cars is a party with respect
to personal property; (ii) each written or oral agreement or understanding of
Cars involving in excess of $10,000 or having a remaining term of more than six
(6) months from the date hereof; and (iii) each purchase order or sales order
(or series of purchase
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orders or sales orders with a single entity or related entities) to which Cars
is a party or parties involving, in each case or in a series of related cases,
in excess of $10,000;
(d) Schedule 4.01(d) hereto contains a list of: (i) the names and
current annual salary rates of all present officers, employees and agents of
Cars having an annual compensation (including, without limitation, benefits and
bonuses) in excess of $35,000 per year (including commissions, benefits and
bonuses); and (ii) all written or oral employment or compensation agreements
with each employee of Cars;
(e) Schedule 4.01(e) hereto contains a list and brief description of
each loan agreement, indenture, mortgage, pledge, conditional sale or other
instrument or arrangement regarding money borrowed or obligations guaranteed by
any Cars or letter of credit issued at the request or on behalf of any Cars;
(f) Schedule 4.01(f) hereto contains a list and identifying number
of every bank in which Cars has an account or safe deposit box and the names of
all persons having power to borrow, discount debt obligations, cash or draw
checks or otherwise act on behalf of Cars in any dealings with such banks;
(g) Schedule 4.01(g) hereto contains copies of the Articles of
Incorporation and By- laws of Cars, each as amended to date;
(h) Schedule 4.01(h) hereto contains a list and brief description
of: (i) all claims for workers compensation during the period from January 1,
1996 through December 31, 1999; and (ii) all claims, investigations, lawsuits,
proceedings, actions and any other form of investigation, arbitration or
litigation now pending or threatened against Cars or which have been pending or
were threatened against Cars at any time during the past five (5) years;
(i) Schedule 4.01(i) hereto contains a list of the names of all
persons holding powers of attorney from, or authorized to act as agents for,
Cars; and
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(j) Schedule 4.01(j) hereto contains a list and brief description of
all policies (including type, carrier and coverage) of fire, theft, liability,
casualty, title, products liability and other forms of insurance held by Cars,
together with a list and brief description of all claims of Cars which have been
submitted to any insurer but have not been finally disposed of.
Singer has furnished, and Singer has used his best efforts to cause
Cars to furnish, to Fidelity true, materially correct and complete copies of all
documents, instruments and agreements which are referred to or otherwise related
to any item referred to in Schedules 4.01(a) through 4.01(j) and all amendments,
modifications, supplements, renewals or consolidations with respect thereto.
4.02. Organization; Authority.
(a) Cars is a corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Virginia. Cars has full
corporate power and authority to carry on its business as such business is now
being conducted and to own the properties and assets it now owns. Cars is duly
qualified, admitted or licensed to do business as a foreign corporation and is
in good standing in each jurisdiction set forth on Schedule 4.02 hereto. Cars
has not maintained any office or location for the conduct of its business or has
not been qualified to do business in any jurisdiction other than the
jurisdictions set forth on Schedule 4.02, and no jurisdiction has claimed that
Cars is required to be so qualified. Since its inception, the corporate name of
Cars has been "CarsTV.com, Inc." and Cars has neither done business nor has
qualified with any appropriate governmental agencies to conduct its business
under any other name except as set forth in Schedule 4.04.
(b) The corporate records of Cars have been delivered or made
available to Fidelity. Such records are complete, correct and current in all
material respects, with all necessary signatures, and have been maintained in
accordance with good business practices.
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4.03. Capitalization. Schedule 4.03 hereto lists the authorized and
the equitable ownership of the capital stock of Cars (the "Capital Stock") and
the name and number of shares of Capital Stock owned by each shareholder of
Cars. All shares of the issued and outstanding Capital Stock are validly issued,
fully paid and non-assessable, with no personal liability attached to the
ownership thereof. Except as set forth in Schedule 4.03, there are no agreements
or understandings with respect to the voting of the Capital Stock. Except as set
forth on Schedule 4.03, there are no existing rights options, warrants, calls,
puts or similar commitments or arrangements of any character authorized, granted
or issued by Cars relating to the authorized Capital Stock or any other
securities of Cars whereby any person would have a right to acquire or require
Cars to acquire any security of Cars or any interests measured by the income,
profits or other results of the operations or conduct of the business of Cars or
by the value of the Capital Stock or other equity interest of Cars. There are no
shares of Capital Stock held in the treasury of Cars.
4.04. Subsidiaries. Except as set forth in Schedule 4.04, Cars,
directly or indirectly, owns no shares of, or controls or has any interest in,
or has any commitment to purchase any interest in, any other corporation,
partnership or other business enterprise.
4.05. No Violation. Except as set forth in Schedule 4.05 hereto,
neither the execution and delivery of this Agreement or any of the Documents by
Cars, the performance by Cars of its obligations hereunder and thereunder nor
the consummation of the transactions contemplated hereby or thereby will,
directly or indirectly, with or without the giving of notice or lapse of time,
or both: (i) violate any provisions of the Articles of Incorporation or By-laws
of Cars; (ii) violate, or be in conflict with, or constitute a default under, or
cause or permit the termination or the acceleration of the maturity of, any
agreement, lease, mortgage, debt or obligation of Cars or require the payment,
any pre-payment or other penalty with respect thereto; (iii) require notice to
or the consent of any party to any agreement or commitment to which Cars is a
party, or by which it or its properties is
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bound or subject, including without limitation, any agreement or commitment
containing a right of first refusal or similar right or permitting any party to
re-negotiate, receive a refund, modify or otherwise change any agreement or
commitment; (iv) result in the creation or imposition of any security interest,
lien, claim or other encumbrance upon any property or assets of Cars under any
agreement, lease, mortgage, debt or obligation to which it is a party or by
which it or its properties is bound or subject; or (v) violate any statute or
law or any judgment, decree, order, regulation or rule of any court or
governmental authority to which Cars or its properties is bound or subject.
4.06. Consents and Approvals of Governmental Authorities. Except as
set forth on Schedule 4.06 hereto, no consent, approval or authorization of, or
declaration, filing or registration with, any governmental or regulatory
authority is required to be made or obtained by Cars in connection with the
execution or delivery by Cars of this Agreement or the Documents, the
performance by Cars of its obligations hereunder or thereunder or the
consummation by Cars of the transactions contemplated hereby or thereby.
4.07. Financial Statements of Cars. Singer has delivered to Fidelity
materially accurate and complete copies of: (i) Cars' unaudited balance sheets
as of December 31, 1999, 1998 and 1997 and the related statements of operations,
changes in stockholders' equity and cash flow for each of the years then ended,
and the notes thereto, (the "Financial Statements"). The Financial Statements:
(a) present fairly the financial position of Cars at the dates thereof and the
results of its operations for the periods then ended; and (b) have been prepared
in conformity with generally accepted accounting principles consistently applied
(with the exception of multi-month Internet plan revenues and liabilities). All
inventory reflected in the Financial Statements is saleable in the ordinary
course of business at usual and customary prices, subject to normal returns and
markdowns consistent with Cars' past practice and experience. The books of
account and other financial records of Cars are in good order and have been
properly maintained in all material respects.
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4.08. No Undisclosed Liabilities. Except as set forth in Schedule
4.08 hereto, Cars has no direct or indirect material liability, obligation,
indebtedness, claim, loss, damage or deficiency of any nature, whether absolute,
accrued, contingent or otherwise and whether due or to become due, that were not
reflected in the Financial Statements or in the notes thereto.
4.09. Absence of Certain Changes. Except as set forth in Schedule
4.09 hereto, since the date of the Financial Statements, Cars has conducted its
business only in the ordinary course in a manner consistent with past practices
and has not, except in accordance with ordinary course of business and in a
manner consistent with past practices:
(a) suffered any Material Adverse Effect in its condition (financial
or otherwise), results of operation, assets, properties, liabilities, business
or prospects;
(b) incurred, guaranteed, assumed or became subject to, or entered
into any agreement to incur, guaranty, assume or become subject to, any
obligation or liability, including indebtedness for borrowed money;
(c) created, permitted or allowed, or agreed to create, permit or
allow, any mortgage, assignment, pledge, lien, security interest, encumbrance,
restriction or charge of any kind with respect to its properties, business or
assets;
(d) declared, paid or set aside for payment any dividend or other
distribution or, directly or indirectly, redeemed, purchased or otherwise
acquired or agreed to acquire any shares of Capital Stock or other securities;
(e) written down the value of any inventory or written off as
uncollectible any accounts receivable, or suffered any condemnation, damage,
destruction, loss or other casualty (by destruction, theft or otherwise) of or
to any of its assets or properties of a nature that would interfere with the
ordinary conduct of its business or that involves in excess of $25,000 in the
aggregate (whether or not covered by insurance);
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(f) issued or sold, or agreed to issue or sell, any stock, bonds or
other securities;
(g) sold, transferred or otherwise disposed of, or agreed to sell,
transfer or otherwise dispose of, any tangible asset or any of its Intangible
Property, or canceled or waived, or agreed to cancel or waive any debts due to
it or other claims or rights;
(h) made any change in any method of accounting or accounting
practice employed;
(i) paid, directly or indirectly, prior to the stated due date
thereof, any indebtedness or other obligation or liability owing by it;
(j) conducted its business otherwise than in the ordinary course or
made any material change in the nature of its products or their prices;
(k) experienced any labor dispute, work stoppage or slowdown or
threat thereof by or with respect to its employees;
(l) made any loan, advance or capital contribution to, or investment
in, any person;
(m) entered into any transaction between Cars, on the one hand, and
its directors, officers or stockholders or any affiliate of its directors,
officers or stockholders, on the other hand; or
(n) agreed, whether or not in writing, to do any of the foregoing.
4.10. Leases and other Property.
(a) The leasehold estates listed in Schedule 4.01(a) hereto are all
of the leasehold interests under which Cars is a lessee (or sublessee) of any
real property or interest therein (colle ctively, the "Real Property Leases").
No proceeding is pending or, to the best knowledge of Singer, threatened for the
taking or condemnation of all or any portion of the property demised under the
Real Property Leases. Cars owns good and marketable title to the leasehold
estates and to the Real Property Leases, free and clear of any encroachment,
mortgage, pledge, lien, security interest,
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encumbrance, claim, charge, covenant, conditional limitation or other
restriction of any kind, except for: (i) real property taxes, if any affecting
properties of which the premises demised under the Real Property Leases form a
part, not yet due and payable; and (ii) the matters and exceptions set forth in
Schedule 4.10(a) hereto. There is no brokerage commission or finder's fee due
and unpaid from Singer or Cars with regard to any of the Real Property Leases,
or which will become due any time in the future with regard to any Real Property
Lease.
(b) Except as set forth in Schedule 4.10(b) hereto, there are no
unrecorded covenants, deed restrictions, easements, leases, subleases or rights
of occupancy or mortgages, pledges, liens, security interests, encumbrances,
claims, charges or other restrictions of any kind which encumber the Real
Property Leases or to the knowledge of Singer, any of the properties demised
under the Real Property Leases.
(c) Except as set forth in Schedule 4.10(c) hereto, Cars has good
and marketable title or valid leasehold interests in all machinery, equipment,
tools, supplies, furniture, fixtures, personalty, vehicles, rolling stock and
other tangible personal properties shown as owned or leased by Cars on its books
and records, including without limitation, all the properties and assets
reflected on the Financial Statements and all properties and assets purchased by
and delivered to it since the date of the Financial Statements (except for
properties and assets sold or disposed of since such date in the ordinary course
of business) free and clear of any mortgages, pledges, liens, claims, security
interests or encumbrances of any kind.
(d) Except as set forth in Schedule 4.10(d) hereto, the premises
demised under the Real Property Leases and any other tangible properties and
assets owned, leased or used by Cars in the operation of such premises demised
under the Real Property Leases and the business of Cars are adequate and
sufficient for the current operation of Cars, and such properties now being used
by Cars in its businesses and operations, whether leased or owned, are in good
working order, repair and
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operating condition, are without any defects other than minimal defects which do
not affect the value or use of such properties and have been maintained in
accordance with generally accepted industry practices.
(e) Cars does not have, nor at any time since its inception has had,
title in fee simple to any real property.
4.11. Intangible Property. (a) Schedule 4.11 hereto sets forth a
complete list of (i) all patents, patent applications, trade names and trade and
service marks which have been registered or for which an application for
registration is pending and all writings for which copyright is claimed, has
been recorded or is pending, in each case which are used or held for use by
Singer or Cars, (ii) all license or other agreements pursuant to which any of
Singer or Cars is obligated to pay or entitled to receive royalties or other
fees in connection with the sale, development or licensing of the above and
(iii) all other agreements relating to technology, know-how or processes which
any of Singer or Cars is licensed or authorized to use by others or licenses or
authorizes others to use (the foregoing and all other confidential and
proprietary information of Singer and Cars is hereinafter referred to as
"Intangible Property"). Except as set forth in Schedule 4.11, Cars is the sole
and exclusive holder of all right, title and interest in and to, and is in
possession of all documentation necessary for the effective use of, such
Intangible Property and has sole and exclusive rights (without being
contractually obligated to pay any compensation to any third party in respect
thereof) to the use thereof or the material covered thereby in connection with
the services or products in respect of which they are being used, and no consent
of third parties is required for the use thereof by Cars upon completion of the
transactions contemplated hereby.
(b) No claims have been asserted by any person to the ownership or
use of any Intangible Property or challenging or questioning the validity or
effectiveness of any such license or agreement, and Singer has no knowledge of
any valid basis for any such claim. Except as set forth
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herein, the use of the Intangible Property by Cars does not infringe on the
rights of any person and there are no pending or, to the knowledge of Singer,
threatened claims nor has it been alleged that the Intangible Property is
engaged in such infringements. All of the trademark and trade name
registrations, patents and copyrights listed or required to be listed in
Schedule 4.11 are in full force and effect. No other person has any right to use
any trademark listed or required to be listed in Schedule 4.11 for similar or
related products in competition with the products of Cars, and no other person
is infringing any of the Intangible Property.
4.12. Litigation; Compliance with Laws.
(a) Except as set forth in Schedule 4.12 hereto, there is no action,
suit, proceeding or investigation pending or, to the best knowledge of Singer,
threatened against or involving Cars or any of its assets (whether or not
covered by insurance), and Singer has no knowledge of any basis for the
commencement of any action, suit, proceeding or investigation against Cars.
Except as set forth in Schedule 4.12 hereto, there is no outstanding judgment,
order, writ, injunction or decree against Cars or relating to any of its assets.
(b) Cars has complied and is in compliance with all material laws,
rules, regulations, ordinances, orders, judgments and decrees applicable to its
business, properties, structures or equipment, or to the construction,
maintenance, operation or use thereof and no condition exists which, with or
without the giving of notice or the passage of time, or both, could result in
violation of any such laws, rules, regulations, ordinances, orders, judgments or
decrees currently in effect or in effect at any time prior to the date hereof.
No notice has been received by Singer or Cars with respect to any violation of
any such legal requirements.
(c) Neither Singer nor Cars knows, or has acquired knowledge of, any
statute enacted or any official rule or regulation adopted by a legislative or
administrative body in any jurisdiction, which statute, rule or regulation
specifically addresses, affects or relates to the Business, business
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prospects or operations of Cars and which has had or would have a Materially
Adverse Effect thereon.
4.13. Taxes.
(a) Except as set forth on Schedule 4.13 hereof, and except as would
not have a Material Adverse Effect on Cars or the Surviving Corporation, all
federal, state and local tax and information returns, statements and reports of
any nature whatsoever (collectively "Tax Returns") required to be filed by or
with respect to Cars have been accurately prepared and have been duly and timely
filed. All taxes, including without limitation, levies, imposts, duties, license
and registration fees, income taxes, gross receipt taxes, real estate taxes,
transfer taxes, gains taxes, franchises taxes, sales taxes, use taxes, property
taxes, excise taxes, stamp taxes, value-added taxes, taxes and other imposts
required to be withheld from or paid in respect of employees' salaries and other
withholding taxes and obligations and all deposits required to be made by or
with respect to Cars with respect to such withholding taxes or otherwise, and
other taxes, whether or not measured in whole or in part by net income, due with
respect to such Tax Returns and any additions to taxes, and interest and
penalties with respect thereto (collectively "Taxes") of Cars have been paid, or
adequate provision for the payment thereof has been made on the balance sheet
contained in the Financial Statements. Singer has caused to be paid all Taxes
required to be paid without the filing of Tax Returns. Singer shall use his best
efforts to cause Cars to continue to file all Tax Returns on a timely basis
until the Closing Date and such Tax Returns will be complete and correct as
filed. Except as set forth on Schedule 4.13 hereof, neither Singer nor Cars has
received any notice or notification that any Tax Returns for Cars are now under
examination by the Internal Revenue Service (the "IRS") or any other
governmental authority. No waivers of statutes of limitations are in effect in
respect of any Taxes. Cars is not a "consenting corporation" within the meaning
of Section 341(f) of the Code. Singer has caused Cars to deliver to Fidelity
true, complete and correct copies of all Tax Returns and reports relating to the
operations of Cars for periods ended on or after October 31, 1998 and of all
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reports or other communications received by Cars from the IRS or any other
governmental authority relating to examinations thereof. Cars has neither agreed
nor has been requested to make any adjustment under Section 481(a) of the Code
by reason of a change in accounting method initiated by any of Cars and Singer
has no knowledge that the IRS has proposed any such adjustment or change in
accounting method.
4.14. Benefit Plans.
(a) Plans and Material Documents. Schedule 4.14 lists (A) all
employee benefit plans (as defined in Section 3(3) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) and all bonus, stock option,
stock purchase, restricted stock, incentive, deferred compensation, retiree
medical or life insurance, supplemental retirement, severance or other benefit
plans, programs or arrangements, and all employment, termination, severance or
other contracts or agreements, whether legally enforceable or not, to which Cars
is a party, with respect to which Cars has any obligation or which are
maintained, contributed to or sponsored by Cars for the benefit of any current
or former employee, officer or director of Cars, and (B) each employee benefit
plan for which Cars could incur liability under Section 4212(c) of ERISA
(collectively, the "Plans"). Each Plan is in writing and Cars has furnished
Fidelity with a complete and accurate copy of each Plan and a complete and
accurate copy of each material document prepared in connection with each such
Plan including, without limitation, (A) a copy of each trust or other funding
arrangement, (B) each summary plan description and summary of material
modifications, (C) the most recently filed Form 5500, (D) the most recently
received IRS determination letter for each such Plan and (E) the most recently
prepared actuarial report and financial statement in connection with each such
Plan. Except as disclosed on Schedule 4.14, there are no other employee benefit
plans, programs, arrangements or agreements, whether formal or informal, whether
in writing or not, to which Cars is a party, with respect to which Cars has any
obligation or which are maintained, contributed to or sponsored by Cars for the
benefit of any current or former employee, officer or
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director of Cars. Cars has no express or implied commitment, whether legally
enforceable or not, (A) to create, incur liability with respect to or cause to
exist any other employee benefit plan, program or arrangement, (B) to enter into
any contract or agreement to provide compensation or benefits to any individual
or (C) to modify, change or terminate any Plan, other than with respect to a
modification, change or termination required by ERISA or the Code. No Plan has
been terminated within the last three years.
(b) Absence of Certain Types of Plans. None of the Plans is a
multiemployer plan (within the meaning of Section 3(37) or 4001(a)(3) of ERISA)
(a "Multiemployer Plan") or a single employer pension plan (within the meaning
of Section 4001(a)(15) of ERISA) for which Cars incur liability under Section
4063 or 4064 of ERISA (a "Multiple Employer Plan"). None of the Plans provides
for the payment of separation, severance, termination or similar-type benefits
to any person or obligates Cars to pay separation, severance, termination or
similar-type benefits solely as a result of any transaction contemplated by this
Agreement or as a result of a "change in control", within the meaning of such
term under Section 280G of the Code. None of the Plans provides for or promises
retiree medical, disability or life insurance benefits to any current or former
employee, officer or director of Cars. Each of the Plans is subject only to the
laws of the United States or a political subdivision thereof.
(c) Compliance with Applicable Law. Each Plan is now and always has
been operated in all respects in accordance with the requirements of all
applicable law, including, without limitation, ERISA and the Code, and all
persons who participate in the operation of such Plans and all Plan
"fiduciaries" (within the meaning of Section 3(21) of ERISA) have always acted
in accordance with the provisions of all applicable law, including, without
limitation, ERISA and the Code. Cars has performed all obligations required to
be performed by it under, is not in any respect in default under or in violation
of, and has no knowledge of any default or violation by any party to, any Plan.
No legal action, suit or claim is pending or threatened with respect to any Plan
(other than
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claims for benefits in the ordinary course) and no fact or event exists that
could give rise to any such action, suit or claim.
(d) Qualification of Certain Plans. Each Plan which is intended to
be qualified under Section 401(a) of the Code or Section 401(k) of the Code has
received a favorable determination letter from the IRS after 1985 that is so
qualified and each trust established in connection with any Plan which is
intended to be exempt from federal income taxation under Section 501(a) of the
Code has received a determination letter from the IRS after 1985 that is so
exempt, and no fact or event has occurred since the date of such determination
letter from the IRS to adversely affect the qualified status of any such Plan or
the exempt status of any such trust. Each trust maintained or contributed to by
Cars which is intended to be qualified as a voluntary employees' beneficiary
association and which is intended to be exempt from Federal income taxation
under Section 501(c)(9) of the Code has received a favorable determination
letter from the IRS that it is so qualified and so exempt, and no fact or event
has occurred since the date of such determination by the IRS to adversely affect
such qualified or exempt status.
(e) Absence of Certain Liabilities and Events. There has been no
prohibited transaction (within the meaning of Section 406 of ERISA or Section
4975 of the Code) with respect to any Plan. Cars has not incurred any liability
for any excise tax arising under Section 4971, 4972, 4980 or 4980B of the Code
and no fact or event exists which could give rise to any such liability. Cars
has not incurred any liability under, arising out of or by operation of Title IV
of ERISA (other than liability for premiums to the Pension Benefit Guaranty
Corporation arising in the ordinary course), including, without limitation, any
liability in connection with (i) the termination or reorganization of any
employee benefit plan subject to Title IV of ERISA or (ii) the withdrawal from
any Multiemployer Plan or Multiple Employer Plan, and no fact or event exists
which could give rise to any such liability. No complete or partial termination
has occurred within the five years preceding the date hereof with respect to any
Plan. No reportable event (within the meaning of Section 4043
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of ERISA) has occurred or is expected to occur with respect to any Plan subject
to Title IV of ERISA. No Plan had an accumulated funding deficiency (within the
meaning of Section 302 of ERISA or Section 412 of the Code), whether or not
waived, as of the most recently ended plan year of such Plan. None of the assets
of Cars is the subject of any lien arising under Section 302(f) of ERISA or
Section 412(n) of the Code; Cars has not been required to post any security
under Section 307 of ERISA or Section 401(a)(29) of the Code; and no fact or
event exists which could give rise to any such lien or requirement to post any
such security.
(f) Plan Contributions and Funding. All contributions, premiums or
payments required to be made with respect to any Plan have been made on or
before their due dates. All such contributions have been fully deducted for
income tax purposes and no such deduction has been challenged or disallowed by
any government entity and no fact or event exists which could give rise to any
such challenge or disallowance. As of the Closing Date, no Plan which is subject
to Title IV of ERISA will have an "unfunded benefit liability" (within the
meaning of Section 4001(a)(18) of ERISA).
(g) Certain Employee-Benefits Assets. Each of the guaranteed
investment contracts and other funding contracts with any insurance company that
are held by any of the Plans and any annuity contracts purchased by (i) any of
the Plans or (ii) any pension benefit plans (as defined in Section 3(2) of
ERISA) that provided benefits to any current or former employees of Cars was
issued by an insurance company which received the highest rating from each of
Duff & Phelps Credit Rating Co., Standard & Poor's Insurance Rating Services,
A.M. Best Company and Moody's Investors Service, Inc., as of the date such
contract was issued, the date hereof and the Closing Date.
(h) Americans With Disability Act. Cars is in material compliance
with respect to the requirements of the American With Disability Act.
(i) Workers Adjustment and Retraining Notification Act. Cars is in
compliance with the requirements of the Workers Adjustment and Retraining
Notification Act ("WARN") and has
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no liabilities pursuant to WARN.
4.15 Labor Matters. Except as set forth in Schedule 4.15: (i) Cars
is not a party to any collective bargaining agreement or other labor union
contract applicable to persons employed by Cars or in the Business, and
currently there are no organizational campaigns, petitions or other unionization
activities seeking recognition of a collective bargaining unit which could
affect Cars; (ii) there are no controversies, strikes, slowdowns or work
stoppages pending or, to the best knowledge of Cars, threatened between Cars and
any of their respective employees, and Cars has not experienced any such
controversy, strike, slowdown or work stoppage within the past three years;
(iii) Cars has not breached or otherwise failed to comply with the provisions of
any collective bargaining or union contract, and there are no grievances
outstanding against Cars under any such agreement or contract that could have a
material adverse effect on the Business; (iv) there are no unfair labor practice
complaints pending against Cars before the National Labor Relations Board or any
other governmental authority or any current union representation questions
involving employees of Cars that could have a Material Adverse Effect on Cars or
the Surviving Corporation; (v) Cars is currently in material compliance with all
applicable laws, rules and regulations relating to the employment of labor,
including those related to wages, hours, collective bargaining and the payment
and withholding of taxes and other sums as required by the appropriate
governmental authority and has withheld and paid to the appropriate governmental
authority or is holding for payment not yet due to such governmental authority
all amounts required to be withheld from such employees of Cars and is not
liable for any arrears of wages, taxes, penalties or other sums for failure to
comply with any of the foregoing; (vi) Cars has paid in full to all employees of
Cars or adequately accrued for in accordance with generally accepted accounting
principles consistently applied all wages, salaries, commissions, bonuses,
benefits and other compensation due to or on behalf of such employees; (vii)
there is no claim with respect to payment of wages, salary or overtime pay that
has been asserted or is now pending or threatened before any governmental
authority with respect to any persons currently
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or formerly employed by Cars; (viii) Cars is not a party to, or otherwise bound
by, any consent decree with, or citation by, any governmental authority relating
to employees or employment practices; (ix) there is no charge or proceeding with
respect to a violation of any occupational safety or health standards that has
been asserted or is now pending or threatened with respect to Cars; and (x)
there is no charge of discrimination in employment or employment practices, for
any reason, including, without limitation, age, gender, race, religion or other
legally protected category, which has been asserted or is now pending or
threatened before the United States Equal Employment Opportunity Commission, or
any other governmental authority in any jurisdiction in which Cars has employed
employees.
4.16. Purchase and Sale Commitments. The outstanding purchase and
sale commitments of Cars are in conformity with the normal, ordinary and
customary requirements of the business of Cars and the contract prices to which
Cars has agreed in any outstanding purchase or sale commitment are not
excessively high or low, respectively, when compared to current market prices
for the relevant materials, products or services.
4.17. Insurance. The insurance policies set forth in Schedule
3.01(j) are valid and enforceable in accordance with their respective terms, are
in full force and effect and include coverage of the type and in amounts
customarily carried by persons conducting business similar to that of Cars, and
are sufficient to insure against all risks and liabilities described therein and
comply with all legal requirements and agreements to which Cars is a party.
Except as set forth in Schedule 4.17 hereto, the insurance policies shall
continue in full force and effect after the Closing Date with respect to
occurrences occurring prior to the Closing Date. Neither Singer nor Cars has
done or failed to do anything which has or might render any such policies of
insurance void or voidable. Neither Singer nor Cars has received any notice
from, or on behalf of, any insurance carrier issuing such policies that
insurance rates will hereafter be substantially increased, that there will
hereafter be a cancellation, an increase in a deductible (or an increase in
premiums in order to maintain an
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existing deductible) or a non-renewal of any existing policies, or that any
alteration of any equipment or any improvements to real estate leased to or by
Cars, purchase of additional equipment or modification of any of the methods of
doing business of Cars will be required or suggested.
4.18. Contracts.
(a) Schedule 4.18 lists each of the following contracts and
agreements (including oral and informal arrangements) of Singer not listed on
any other Schedule (such contracts and agreements, together with all contracts,
agreements, leases and subleases to which Singer is a party and all agreements
relating to Intellectual Property, being "Contracts"):
(i) all material contracts, agreements, invoices, purchase orders
and other arrangements, whether oral or written, for the purchase of
merchandise, supplies, spare parts, other materials or personal property
with any supplier or for the furnishing of services to Cars or otherwise
related to the Business under the terms of which Cars in the aggregate (A)
is likely to pay more than $25,000 during the calendar year ending
December 31, 1999 or (B) is likely to pay more than $25,000 over the
remaining term of the contract (provided, however, if the aggregate
obligations and liabilities of Cars under contract and agreements that are
not deemed to be "Contracts" by reason of clause (A) or (B) or this
Section 4.18(i) exceed $25,000, then all of such contracts and agreements
shall be disclosed on Schedule 4.18, as well as the Contracts);
(ii) all material broker, distributor, dealer, manufacturer's
representative, franchise, agency, sales promotion, market research,
marketing consulting and advertising contracts and agreements to which
Cars is a party;
(iii) all material management contracts or contracts with
independent contractors or consultants (or similar arrangements) to which
Cars is a party and which are not cancellable without penalty or further
payment within 30 calendar days of notice of such cancellation;
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(iv) all material indebtedness of Cars;
(v) all material contracts and agreements with any governmental
authority to which Cars is a party;
(vi) all material contracts and agreements with manufacturers to
supply raw materials to Cars;
(vii) all material contracts and agreements that limit the ability
of Cars in any line of business or with any person or entity or in any
geographic area or during any period of time;
(viii) all material contracts, agreements and other arrangements
between or among Cars or any affiliate of Cars; and
(ix) all other contracts, agreements and other arrangements, whether
or not made in the ordinary course of the Business, which are material to
Cars or the conduct of the Business.
(b) Except as disclosed in Schedule 4.18, each Contract: (i) is
valid and binding on the respective parties thereto and is in full force and
effect; (ii) is freely and fully assignable by operation of the Merger to the
Surviving Corporation without penalty or other adverse consequences; and (iii)
upon consummation of the transactions contemplated by this Agreement and the
Documents, except to the extent that any consents set forth in Schedule 4.18 are
not obtained, shall continue in full force and effect without penalty or other
adverse consequence and unaffected by such transaction. Cars is not in breach or
default under the terms of any Contract.
(c) Except as disclosed in Schedule 4.18, to the best knowledge of
Singer and Cars, no other party to any Contract is in breach or default
thereunder.
(d) Except as disclosed in Schedule 4.18, there is no contract,
agreement or other arrangement granting any person any preferential right to
purchase, other than in the ordinary course of the Business consistent with past
practice, any of the properties or assets of Cars.
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4.19. Finders' and Investment Bankers' Fees. Except as set forth in
Schedule 4.19 hereto, there is no investment banker, broker, finder or other
intermediary which has been retained by Singer or Cars who might be entitled to
any fee or commission from Fidelity or any of its affiliates in connection with
the transactions contemplated by this Agreement or the Documents.
4.20. Licenses, Permits and Authorizations. Except as set forth in
Schedule 4.20, Cars has obtained all approvals, authorizations, consents,
licenses, franchises, orders or other permits of all governmental or regulatory
agencies, whether federal, state, local or foreign (collectively, the
"Approvals") necessary to the operation of its business as presently conducted.
Such Approvals are in full force and effect and good standing. Except as set
forth in Schedule 4.20, Cars is not in default under any Approval and there
exists no basis for the termination, suspension or revocation of any of such
Approvals. Except as set forth in Schedule 4.20, the consummation of the
transactions contemplated hereby will not constitute a transfer or assignment of
any such Approval and will not require any filing or registration with or notice
to any governmental authority and all such Approvals shall remain in full force
and effect to the benefit of Cars following the Closing.
4.21 No Dealings with Officers. Except as disclosed in Schedule
4.21, Cars does not, directly or indirectly, have any contractual arrangement
with or commitment to or from any of its stockholders, officers, directors or
employees. Except as disclosed in Schedule 4.21 hereto, without limiting the
generality of the foregoing, no stockholder, officer, director or employee of
Cars was or is, directly or indirectly, a joint investor or coventurer with, or
owner, lessor, lessee, licensor or licensee of any real or personal property,
tangible or intangible, owned or used by Cars, and no such person is, directly
or indirectly, a lender to or debtor of Cars.
4.22 Receivables. Schedule 4.22 is an aged list of the receivables
of Cars ("Receivables") as of December 31, 1999 showing separately those
Receivables that as of such date had been outstanding (i) for 29 days or less,
(ii) 30 to 59 days, (iii) 60 to 89 days, (iv) 90 to 119 days and (v) more than
119 days. Except to the extent, if any, reserved for on the Financial Statements
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or set forth in Schedule 4.22, all Receivables reflected on the Financial
Statements and the Receivables existing on the Closing Date will have arisen
from, the sale of inventory or services to persons not affiliated with Cars and
in the ordinary course of the business consistent with past practice and, except
as reserved against on the Financial Statements, will constitute only valid,
undisputed claims of Cars not subject to valid claims of set-off or other
defenses or counterclaims other than normal cash discounts accrued in the
ordinary course of the Business consistent with past practice. All Receivables
reflected on the Financial Statements (subject to the reserve for bad debts, if
any, reflected on the Financial Statements) will be good and will be
collectible, without resort to litigation or extraordinary collection activity,
within 180 days of the Closing Date.
4.23 Inventories. Subject to amounts reserved therefor on the
Financial Statements, the values at which all inventories are carried on the
Financial Statements reflect the historical inventory valuation policy of Cars
of stating such inventories at the lower of cost (determined on the first-in,
first-out method) or market value. Except as set forth in Schedule 4.23, Cars
has good and marketable title to the inventories free and clear of all
encumbrances. The inventories do not consist of any items held on consignment.
Cars is under no obligation or liability with respect to accepting returns of
items of inventory or merchandise in the possession of its customers other than
in the ordinary course of the Business consistent with past practice. No
clearance or extraordinary sale of the inventories has been conducted since
December 31, 1999. Cars has no manufactured inventory for sale which is not of a
quality and quantity usable in the ordinary course of the Business consistent
with past practice and within a reasonable period of time, nor has Cars changed
the price of any inventory except for (i) reductions to reflect any reduction in
the cost thereof to Cars, (ii) reduction and increases responsive to normal
competitive conditions and consistent with Cars' past sales practices and (iii)
to reflect any increase in the cost thereof to Cars. The inventories are in good
and merchantable condition in all material respects, are suitable and usable for
the purposes for which they are intended and are in a condition such that they
can be sold in the ordinary course of the
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Business consistent with past practice.
4.24 Order Backlog. Schedule 4.24 lists all sales orders which have
been accepted by Cars, and which were open either as of December 31, 1999 or as
of the date hereof. Schedule 4.24 lists all purchase orders which have been
issued by Cars, and which were open either as of December 31, 1999 or as of the
date hereof.
4.25 Customers. Listed in Schedule 4.25 are the names and addresses
of all the customers of the Business which ordered goods or merchandise from
Cars an aggregate purchase price of $25,000 or more during the twelve-month
period ended September 30, 1999 and the amount for which each such customer was
invoiced during such period. Except as disclosed in Schedule 4.25, Cars has not
received any written notice that any significant customer of Cars has ceased, or
will cease, to use the products, equipment, goods or services of Cars or has
substantially reduced, or will substantially reduce, the use of such product,
equipment, goods or services at any time.
4.26 Suppliers. Listed in Schedule 4.26 are the names and addresses
of all the suppliers from which Cars ordered raw materials, supplies,
merchandise and other goods for the Business with an aggregate purchase price of
$25,000 or more during the twelve-month period ended September 30, 1999 and the
amount for which each such supplier invoiced Cars during such period. Except as
disclosed in Schedule 4.26, Cars has not received any written notice that any of
such suppliers will not sell raw materials, supplies, merchandise and other
goods to Cars at any time after the Closing Date on terms and conditions similar
to those imposed on current sales to the Business, subject to general and
customary price increases.
4.27. Software.
(a) Except with respect to software programs licensed to Cars, Cars
is in actual possession of the source code of each software program listed in
Schedule 4.27, and Cars is in possession of all other documentation necessary
for the effective use of each such software. Schedule 4.27 lists, by program,
all third parties which have been provided with the source code to
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any of the software listed in Schedule 4.27.
(b) There are no defects in any of the software offered by Cars in
connection with the Business which would in any material and adverse respect
affect the functioning of any such software in accordance with the
specifications therefor published by Cars or heretofore provided to Fidelity or
any customers or prospective customers of Cars, and each piece of such software,
together with all know-how and processes used in connection therewith, functions
as intended, is in machine readable form, conforms to applicable standards,
contains all current revisions of such software and includes all computer
programs, materials, tapes, know-how, object and source codes and procedures
used by Cars in the conduct of its business.
4.28. Disclosure. Except as would not have a Material adverse Effect
on Cars or the Surviving Corporation, no representation or warranty of Singer or
Cars contained in this Agreement, any of the Documents or in any statement or
certificate furnished or to be furnished to Company pursuant hereto or thereto
in connection with the transactions contemplated hereby or thereby contains or
will contain any untrue statement of a material fact or omits or will omit to
state a material fact necessary to make the statements made herein or therein,
in the light of the circumstances in which they were made, not misleading. To
the Knowledge of Singer, there is no fact or condition which materially
adversely affects, or in the future could materially adversely affect the
condition (financial or otherwise) assets, properties, liabilities, results of
operations, business or prospects of Cars which has not been set forth in this
Agreement or in the Schedules hereto.
SECTION V
REPRESENTATIONS AND WARRANTIES OF FIDELITY AND ACQUISITION CORP.
Fidelity and Acquisition Corp. hereby jointly and severally
represent and warrant to, and agree with, Cars and the Stockholders as follows:
5.01. Organization; Etc. Each of Fidelity and Acquisition Corp. is a
corporation duly
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organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation. Each of Fidelity and Acquisition Corp. has full
corporate power and authority to carry on its business as such business is now
being conducted and to own the properties and assets it now owns.
5.02. Authority of Fidelity and Acquisition Corp. Each of Fidelity
and Acquisition Corp. has full corporate power and authority to enter into this
Agreement and the Documents applicable to it and to consummate the transactions
contemplated hereby and thereby. Each of the Boards of Directors of Fidelity and
Acquisition Corp. has taken all action required to authorize the execution and
delivery of this Agreement and the Documents by Fidelity and Acquisition Corp.,
the performance of the obligations of Fidelity and Acquisition Corp. hereunder
and thereunder and the consummation by Fidelity and Acquisition Corp. of the
transactions contemplated hereby and there by. No other corporate proceedings on
the part of Fidelity or Acquisition Corp. are necessary to authorize the
execution and delivery by Fidelity and Acquisition Corp. of this Agreement or
the Documents or the performance by either Fidelity or Acquisition Corp. of its
obligations hereunder or thereunder. This Agreement is, and each Document will
be, a valid and binding agreement of Fidelity and Acquisition Corp., enforceable
against them in accordance with their terms.
5.03. No Violation. Neither the execution and delivery of this
Agreement or any of the Documents, the performance by Fidelity or Acquisition
Corp. of its obligation hereunder and thereunder nor the consummation of the
transactions contemplated hereby or thereby will, directly or indirectly, with
or without the giving of notice or lapse of time, or both: (i) violate any
provisions of the respective Certificate of Incorporation or By-laws of Fidelity
or Acquisition Corp.; (ii) violate, or be in conflict with, or constitute a
default under, or cause or permit the termination or the acceleration of the
maturity of, any agreement, lease, mortgage, debt or obligation of Fidelity or
Acquisition Corp. or require the payment, any pre-payment or other penalty with
respect thereof; (iii) require notice to or the consent of any party to any
agreement or commitment to which either Fidelity or Acquisition Corp. is a
party, or by which it or its properties is bound or subject, including without
limitation, any lease, license or any agreement containing a right of first
refusal or similar right or permitting any such party to re-negotiate, receive a
refund, modify or otherwise change any agreement or commitment; (iv) result in
the creation or imposition of any security interest, lien,
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claim or other encumbrance upon any property or assets of Fidelity or
Acquisition Corp., as the case may be, under any agreement or commitment to
which either of them is a party or by which either of them or their properties
is bound or subject; or (v) violate any statute or law or any judgment, decree,
order, regulation or rule of any court or governmental authority to which either
Fidelity or Acquisition Corp. or their properties is bound or subject.
5.04. Finders' and Investment Bankers' Fees. There is no investment
banker, broker, finder or other intermediary which has been retained by Fidelity
or Acquisition Corp. who might be entitled to any fee or commission from Cars,
the Stockholders or any of their affiliates in connection with the transactions
contemplated by this Agreement or the Documents.
5.05. Fidelity Common Stock. When issued to the Stockholders, the
Fidelity Common Stock will be fully paid and non-assessable.
5.06 Tax Covenant. It is contemplated by the parties that the Merger
will qualify as a tax free transaction pursuant to Section 368 (a) (2) (D) of
the Code ("Tax Free Transaction"). Both prior to the Merger and thereafter,
Fidelity shall: (1) prepare its books and records and file all tax returns and
schedules thereto reflecting the Merger in a manner consistent with the
treatment of the transaction as a Tax Free Transaction; (2) provide timely to
the Stockholders such tax information, reports, returns or schedules as they may
reasonably require to assist them in reporting the Merger as a Tax Free
Transaction; and (3) aid the Stockholders in defense of any assertion by the
Internal Revenue Service (the "IRS") that the Merger is not a Tax Free
Transaction and defend against all assertions that the Merger is not a Tax Free
Transaction. This covenant shall survive the Closing.
SECTION VI
INDEMNIFICATION
6.01 Indemnification by Singer. Singer agrees to indemnify and hold
Fidelity harmless from and against any and all losses, obligations,
deficiencies, liabilities, claims, damages, costs and expenses (including,
without limitation, the amount of any settlement entered into pursuant hereto,
and all reasonable legal and other expenses incurred in connection with the
investigation, prosecution or defense of any matter indemnified pursuant hereto,
(collectively,
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"Damages") which Fidelity may sustain, suffer or incur and which arise out of,
are caused by, relate to, or result or occur from or in connection with the
breach by him of any representation, warranty or covenant made by him in this
Agreement or in any agreement or instrument executed and delivered pursuant
hereto. The foregoing indemnification shall also apply to direct claims for
indemnification by Fidelity and/or Acquisition Corp. Anything herein above
contained to the contrary notwithstanding, the indemnification obligation of
Singer pursuant to this Section 6.01 shall not exceed the lesser of (i) the sum
of the dollar value of 287,931 shares of Fidelity Common Stock received by
Singer (valued in accordance with Section 1.05.2) or (ii) $3,125,000 (the
"Maximum Indemnification"). No party shall be entitled to indemnification under
this Section 6.01 until the aggregate amount of Damages incurred by such party
exceeds $50,000, in which event such party shall be entitled to indemnification
for the entire aggregate cumulative amount of all Damages up to an amount not to
exceed the Maximum Indemnification. No claim for indemnification pursuant to
this section 6.01 may be made after December 31, 2001. Any such liability shall
be paid to Fidelity in cash or in shares of Fidelity Common. The form of the
payment shall be determined by the indemnifying party.
6.02 Indemnification by Fidelity. Fidelity shall indemnify and hold
the Stockholders harmless from and against any and all losses, obligations,
deficiencies, liabilities, claims, damages, costs and expenses (including,
without limitation, the amount of any settlement entered into pursuant hereto,
and all reasonable legal and other expenses incurred in connection with the
investigation, prosecutor defense of any matter indemnified pursuant hereto),
which they may sustain, suffer or incur and which arise out of, are caused by,
relate to, or result or occur from or in connection with the breach by Fidelity
or Acquisition Corp. of any representation, warranty or covenant made by it in
this Agreement or in any agreement or instrument executed and delivered pursuant
hereto. The foregoing indemnification shall also apply to direct claims by the
Stockholders against Fidelity or Acquisition Corp. Any such liability shall be
paid to the Stockholders in cash,
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or at the option of Fidelity, in shares of Fidelity Common Stock. Anything
herein above contained to the contrary notwithstanding, the indemnification
obligation of Fidelity and Acquisition Corp. pursuant to this Section 6.02 shall
not exceed the Maximum Indemnification. No party shall be entitled to
indemnification under this Section 6.02 until the aggregate amount of Damages
incurred by such party exceeds $50,000, in which event such party shall be
entitled to indemnification for the entire aggregate cumulative amount of all
Damages up to an amount not to exceed the Maximum Indemnification. No claim for
indemnification pursuant to this section 6.02 may be made after December 31,
2001.
6.03 Third Party Claims. If a claim by a third party is made against
any party or parties hereto and the party or parties against whom said claim is
made intends to seek indemnification with respect thereto under Sections 6.01 or
6.02, the party or parties seeking such indemnification shall promptly notify
the indemnifying party or parties, in writing, of such claim; provided, however,
that the failure to give such notice promptly shall not affect the rights of the
indemnified party or parties hereunder unless such failure materially and
adversely affects the indemnifying party or parties. The indemnifying party or
parties shall have ten days after said notice is given to elect, by written
notice given to the indemnified party or parties, to undertake, conduct and
control, through counsel of their own choosing (subject to the consent of the
indemnified party or parties, such consent not to be unreasonably withheld) and
at their sole risk and expense, the good faith settlement or defense of such
claim, and the indemnified party or parties shall cooperate with the
indemnifying parties in connection therewith; provided, however, (i) in the case
of any or all of the Stockholders as the indemnifying party or parties, they
shall not permit to exist any lien, encumbrance or other adverse change upon any
of the assets of Cars, and (ii) the indemnified party or parties shall be
entitled to participate in such settlement or defense through counsel chosen by
the indemnified party or parties, provided that the fees and expenses of such
counsel shall be borne by the indemnified party or parties. So long as the
indemnifying party or parties are contesting any such
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claim in good faith, the indemnified party or parties shall not pay or settle
any such claim; provided, however, that notwithstanding the foregoing, the
indemnified party or parties shall have the right to pay or settle any such
claim at any time, provided that in such event they shall waive any right of
indemnification therefor against the indemnifying party or parties. If the
indemnifying parties do not make a timely election to undertake the good faith
defense or settlement of the claim as aforesaid, or if the indemnifying parties
fail to proceed with the good faith defense or settlement of the matter after
making such election, then, in either such event, the indemnified party or
parties shall have the right to contest, settle or compromise the claim at their
exclusive discretion, at the risk and expense of the indemnifying parties.
SECTION VII
CONDUCT OF BUSINESS PENDING CLOSING
From and after the date hereof until the Closing, and except as
otherwise specifically contemplated by this Agreement and the Documents and the
Schedules and Exhibits hereto or thereto, or consented to or approved by
Fidelity in writing, Cars shall and Singer shall cause Cars to, conform to the
following:
7.01. Regular Course of Business. Except as otherwise contemplated
by this Agreement or to the extent waived or agreed to by Fidelity in writing,
Cars shall, and Singer shall cause Cars to, carry on its business in the same
manner as heretofore conducted, and shall not engage in any transaction or
activity, enter into any agreement or make any commitment: (i) with Singer, any
Minority Stockholder or any officer, director or employee of Cars, or any person
affiliated with any of the foregoing; or (ii) except in the ordinary course of
business.
7.02. Amendments. No change or amendment shall be made in the
Articles of Incorporation, By-laws or other governing instrument of Cars.
7.03. Capital Changes. Except as set forth in Schedule A hereto,
Cars shall not issue or sell rights (including, without limitation, conversion
rights), options, warrants to purchase or to
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subscribe to, or enter into any arrangement or contract with respect to, any
shares of any of its Stock or any other securities of, or equity interest in,
Cars.
7.04. Dividends; Redemptions. Cars shall not declare, pay or set
aside for payment any dividend or other distribution in respect to any of its
Stock or directly or indirectly redeem, purchase or otherwise acquire any shares
of any of its Stock.
7.05. Organization. Cars shall use its best efforts to preserve its
properties, assets, and legal and business relationships with its employees,
suppliers, customers and others having business relations with Cars.
7.06. Contracts. Except for purchase and sales orders entered into
in the ordinary course of business, no contracts or commitments involving,
individually, in excess of $25,000 (or $50,000 in the aggregate), or having a
term of more than one (1) year, shall be entered into by or on behalf of Cars,
including without limitation, any contract or commitment: (i) to acquire
additional real property or any interest therein; (ii) to dispose of, amend,
modify, terminate or encumber any Real Property Lease, or any interest therein
or sublease the premises demised thereunder; (iii) to enter into any lease for
additional real property; or (iv) to amend, modify, extend, renew or waive any
right with respect to any existing agreement or arrangement involving (or which,
as the result of such amendment, modification, extension, renewal or waivers
would involve) in excess of $25,000 or having an unexpired term in excess of one
(1) year.
7.07. Consultation with Fidelity. To the fullest extent practicable,
Cars shall cause its executive officers to consult with and consider the views
of Fidelity in any material decisions related to operating its business through
the Closing Date.
7.08. Maintain Properties. Cars will maintain its properties and
assets, whether owned or leased, in good repair, order and condition, reasonable
wear and tear excepted.
7.09. Compensation. Cars will not grant any increase in compensation
to any officer, employee or agent or enter into or amend any Plan or any
employment or consulting agreement.
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7.10. Indebtedness/Loans. Except for loans to Cars from Fidelity as
contemplated by this Agreement, Cars will not create, incur or assume any
indebtedness (including without limitation, under existing lines of credit and
revolving loans) other than in the ordinary course of business and in an amount
not to exceed $50,000 in the aggregate, or guarantee or otherwise become liable
with respect to any indebtedness for borrowed money. Cars will not make any
capital expenditures in excess of $50,000 in the aggregate and will not make any
loan, advance, capital contribution to or investment in, any other person.
7.11. Taxes. Except for Taxes contested in good faith, Cars will pay
all Taxes upon its income, properties and business as they become due and
prepare and timely file all Tax Returns and other returns and reports which are
required to be filed in respect of Taxes.
7.12. No Disposition or Encumbrance. Cars shall not sell, lease,
mortgage, pledge or otherwise dispose of or agree to sell, lease, mortgage,
pledge or otherwise dispose of any asset or properties of Cars other than sales,
leases, mortgages, pledges and dispositions of assets and properties except in
the ordinary course of business.
7.13. Insurance. Cars will maintain insurance upon its business and
properties and insurance in respect of the kinds of risks currently insured
against, in accordance with its current practice.
7.14. No Mergers. Cars will not and shall not agree to merge or
consolidate with any other corporation, or acquire any stock, business, or
substantially all or any substantial portion of the property or assets of, any
other person, firm, association, corporation or other business organization.
7.15. No Breach. Neither Cars Stockholder shall do any act or omit
to do any act which, with or without the giving of notice or the passage of
time, or both, would result in a breach of or default under any contract,
commitment or obligation of Cars.
7.16. Due Compliance. Cars will duly comply with all laws applicable
to it and to the conduct of its Business and its Plans.
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7.17. Accounting Practice. Cars shall not change any method of
accounting practice currently employed by Cars.
SECTION VIII
ADDITIONAL COVENANTS AND AGREEMENTS
8.01. Continued Effectiveness of Representations and Warranties;
Advice of Change.
(a) From the date hereof through the Closing Date, Singer will
promptly advise Fidelity, in writing, upon obtaining knowledge of: (i) any event
which occurred on or prior to the date of execution of this Agreement that is
not disclosed herein and any event which occurs after the date of this
Agreement, in each case that would, under this Agreement or any Exhibit or
Schedule delivered pursuant hereto, have been required to be disclosed on the
date of execution of this Agreement by Singer and Cars; and (ii) any change in
the business, operations, prospects, properties, assets or condition, financial
or otherwise, of Cars.
(b) From the date hereof through the Closing Date, Singer shall use,
and shall use his best efforts to cause Cars to use, their respective
commercially reasonable best efforts to conduct their affairs in such a manner
so that, except as otherwise contemplated or permitted by this Agreement, the
representations and warranties contained in Sections IV, and V hereof shall
continue to be true and correct on and as of the Closing Date as if made on and
as of the Closing Date and Singer shall promptly notify Fidelity of any event,
condition or circumstance occurring from the date hereof through the Closing
Date that would constitute a material violation or breach by Singer of any of
such representations and warranties.
8.02. Reasonable Access. Singer shall (i) afford to Fidelity and its
authorized repre sentatives, during normal business hours, full and free access
to the properties, personnel, books and records of Cars in order that Fidelity
shall have a full opportunity to make such investigation as it shall reasonably
desire to make of the affairs of Cars and to obtain copies of relevant documents
in connection therewith, (ii) provide additional financial and other information
as to the Business as
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Fidelity or its representatives shall request and (iii) otherwise fully
cooperate with Fidelity or its representatives.
8.03. Books and Records. On the Closing Date or within a
commercially reasonable time thereafter, Singer shall cause Cars to deliver to
Fidelity all of the books and records of Cars, including without limitation, the
corporate minute book of Cars.
8.04. Intentionally Omitted.
8.05. Cooperation Regarding Plans. Singer shall use his best efforts
to cause Cars, at Cars' cost, to cooperate with Fidelity and its advisers in
preparing, filing, and diligently pursuing any and all filings, applications, or
notifications that may be necessary or advisable with respect to any of the
Plans in connection with the transactions contemplated by this Agreement.
8.06. Satisfaction of Closing Conditions. Singer shall, and Singer
shall use his best efforts to cause, Cars to use its reasonable business efforts
to cause all of the conditions to the obligations of Singer and Cars set forth
in Section IX and Section X hereof to be satisfied with respect to the Closing.
8.07. Confidentiality; Publicity.
(a) Each of Fidelity, Singer and Cars shall, and shall cause the
respective directors, officers, employees and authorized representatives of
Fidelity and Cars to, hold in strictest confidence and not disclose to others
for any reason whatsoever any information received from Fidelity or Cars or
their respective directors, officers, employees and authorized representatives,
in connection with the transactions contemplated hereby or by the Documents,
except as otherwise required by law.
(b) Neither Cars, nor any Stockholder (nor any of their affiliates
or members of their respective families) shall utilize any confidential
information in connection with the purchase or sale of Fidelity's Common Stock
in open market transactions.
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8.08. Other Offers. From the date hereof until the termination
hereof, Singer shall not, and Singer shall use his best efforts to cause Cars
and its directors, officers, employees, affiliates and their representatives not
to, (i) take any action to solicit or solicit any offer from any person with
respect to any Acquisition Proposal (as hereinafter defined) or (ii) engage in
negotiations with or disclose any nonpublic information relating to Cars or its
business or afford access to the properties, books or records of Cars to any
person with respect to an Acquisition Proposal without the express written
consent of Fidelity. "Acquisition Proposal" means any proposal for a merger or
other business transaction to which Singer, or Cars is or would be a party or
involving the acquisition of any substantial equity interest in, or a
substantial portion of the assets of, Cars or Singer Shares, other than the
transactions contemplated by this Agreement. Singer shall promptly notify
Fidelity if he or Cars receives any inquiry from any person with respect to an
Acquisition Proposal, which notice shall contain the name of the person involved
and the nature of the Acquisition Proposal.
8.09. Additional Instruments. Singer, Cars, the Minority
Stockholders, Fidelity, as the case may be, at the request of one of the others,
at or after the Closing will execute and deliver, or cause to be executed and
delivered, to the other, such documents and instruments as may reasonably be
necessary or desirable to carry out or implement any provision of this
Agreement.
8.10. Litigation. From the date hereof through the Closing Date,
Singer shall promptly notify Fidelity of any actions or proceedings of the type
referred to in Section 4.12 hereof that from the date hereof are threatened or
commenced against Singer, Cars or any director, officer, employee, property or
asset of Singer or Cars, and of any requests for additional information or
documentary materials by any governmental or regulatory body in connection with
the transactions contemplated hereby.
8.11. Consents. Singer shall use his best efforts to obtain all
consents, approvals and waivers of third parties or authorities set forth in
Schedules 3.03, 3.04, 4.06, 4.11, 4.18 and 4.20 hereto and to satisfy the
conditions set forth in Section IX hereof no later than the Closing.
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8.12. Supplements to Exhibits. Singer shall deliver to Fidelity, as
soon as possible after Singer or Cars becomes aware thereof, but not later than
the Closing, supplemental information updating the information set forth in the
Schedules hereto, so that such Schedules supplemented by such information shall
be true and correct as of the Closing Date as if then made, provided that the
foregoing shall not be deemed to permit any transaction not otherwise permitted
by this Agreement or to constitute a waiver by Fidelity of any misrepresentation
or breach by Singer or Cars of any agreement, covenant or warranty made therein.
Singer agrees to disclose to Fidelity any misrepresentation or breach of any
covenant or warranty of Singer or Cars when such breach becomes known any of
them.
SECTION IX
CONDITIONS TO FIDELITY'S OBLIGATIONS
The obligations of Fidelity to consummate the transactions contemplated by
this Agreement and the Documents with respect to the Closing shall be subject to
the satisfaction, on or before the Closing, of each of the following conditions:
9.01. Representations and Warranties. The representations and
warranties made by the Stockholders and Cars in this Agreement and in the
Documents (including all Exhibits and Schedules hereto or thereto), shall be
true and correct, individually and in the aggregate, in all material respects on
and as of the Closing Date with the same force and effect as though made on and
as of the Closing Date.
9.02. Performance. With respect to agreements, covenants,
obligations and conditions required to be performed or complied with by Singer,
the Minority Stockholders and Cars at or prior to the Closing, Singer, the
Minority Stockholders and Cars shall have performed in all material respects,
such agreements, covenants, obligations and conditions, including, without
limitation, the execution and delivery of the agreements contemplated herein.
9.03. Approvals and Filings. All Approvals, consents, authorizations
and approvals
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from, and all declarations, filings and registrations with, third parties and
government agencies required to consummate the transactions contemplated hereby
shall have been obtained or made, shall be in full force and effect and shall be
satisfactory in form and substance to Fidelity.
9.04. Certificates. At Closing, there shall be delivered to Fidelity
certificates in a form acceptable to Fidelity dated the appropriate Closing
Date, and signed by the Stockholders and an officer of Cars, certifying that the
conditions set forth in Sections 9.01, 9.02 and 9.03 hereof have been fulfilled.
9.05. No Injunction. There shall not be in effect any preliminary or
permanent injunction or other order issued by any state or federal court or
governmental body of competent jurisdiction or any statute, rule or regulation
which prevents the transactions contemplated hereby. No action or proceeding
before any court or governmental body shall be pending or threatened wherein an
unfavorable judgment, decree or order would prevent the carrying out of this
Agreement, the Documents or any of the transactions contemplated hereby or
thereby, declare unlawful the trans actions contemplated by this Agreement or
the Documents or cause such transactions to be rescinded.
9.06. Opinion of Counsel. There shall have delivered to Fidelity an
opinion of Leclair Ryan, a Professional Corporation, counsel to the Stockholders
and Cars, dated the Closing Date, in the form of Exhibit I hereto.
9.07. Approval of the Merger by the Stockholders. Holders of at
least ninety-eight percent (98%) of the outstanding voting shares of Cars
Capital Stock shall have consented to the Merger.
9.08. Waiver of Rights as Stockholders. At the Closing, Singer and
each Minority Stockholder shall waive and release, pursuant to waiver and
releases substantially in the form of Exhibit H hereto, any and all rights and
claims each of them may have against Cars, arising out of
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or related to their status as shareholders of Cars.
9.09. Investor Representation Letters. The Stockholders shall have
executed and delivered to Fidelity, investor representation letters, in
substantially the form of Exhibit E attached hereto and made a part hereof.
9.10. Agreements. Singer shall have executed and delivered to
Fidelity, the Employment Term Sheet, in substantially the form of Exhibit B
attached hereto and made a part hereof, and the Stockholders shall have executed
and delivered to Fidelity, the Stockholder Agreements, in substantially the form
of Exhibit D attached hereto and made a part hereof.
SECTION X
CONDITIONS TO STOCKHOLDERS OBLIGATIONS
The obligations of Stockholders to consummate the transactions
contemplated by this Agreement and the Documents shall be subject to the
satisfaction, on or before the Closing of each of the following conditions:
10.01. Representations and Warranties. The representations and
warranties made by Fidelity in this Agreement and in the Documents (including
all Exhibits and Schedules hereto or thereto) shall be true and correct,
individually and in the aggregate, in all material respects on and as of the
Closing Date with the same force and effect as though made on and as of the
Closing Date.
10.02. Performance. With respect to agreements, covenants,
obligations and conditions required to be performed or complied with by Fidelity
at or prior to the Closing, Fidelity shall have performed in the aggregate, in
all material respects, such agreements, covenants, obliga tions and conditions,
including, without limitation, the execution and delivery of the agreements
contemplated herein.
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10.03. Approvals and Filings. All Approvals, consents,
authorizations and approvals from, and all declarations, filings and
registrations with, third parties and government agencies required to consummate
the transactions contemplated hereby and by the Documents, to the extent
required to be obtained by Fidelity, shall have been obtained or made, shall be
in full force and effect and shall be satisfactory in form and substance to
Singer or Cars and their counsel.
10.04. Certificates. At Closing, there shall be delivered to Singer
a certificate, in a form acceptable to Singer, dated the appropriate Closing
Date, and signed by an officer of Fidelity certifying that the conditions set
forth in Sections 10.01, 10.02 and 10.03 have been fulfilled.
10.05. No Injunction. There shall not be in effect any preliminary
or permanent injunction or other order issued by any state or federal court or
governmental body of competent jurisdiction or any statute, rule or regulation
which prevents the transactions contemplated hereby. No action or proceeding
before any court or governmental body shall be pending or threatened wherein an
unfavorable judgment, decree or order would prevent the carrying out of this
Agreement, the Documents or any of the transactions contemplated hereby or
thereby, declare unlawful the trans actions contemplated by this Agreement or
the Documents or cause such transactions to be rescinded.
10.06. Approval of Proceedings. All actions, proceedings,
instruments and documents required to carry out this Agreement and the
transactions contemplated hereby, or incidental thereto, and all other related
legal matters shall have been approved by counsel for Singer.
10.07. Opinion of Counsel for Fidelity. Fidelity shall have
delivered to Singer an opinion of counsel to Fidelity, dated the Closing date,
in the form of Exhibit J hereto.
SECTION XI
TERMINATION
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11.01 Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by mutual consent of Fidelity, Cars, Singer and the Majority in
Interest (as hereinafter defined) of the Minority Stockholders; or
(b) by Singer or Cars after January 31, 2000, if the Closing shall
not have been consummated on or prior to the Closing Date so long as the party
terminating this Agreement pursuant to this Section 11.01(b) has not made any
material misrepresentation or materially breached an agreement, covenant
obligation or condition of such party herein contained and if, and only if, all
Loan Amounts have been repaid; or
(c) by Fidelity, if Singer or Cars shall file a petition or commence
a voluntary case seeking to take advantage of any law relating to bankruptcy,
insolvency, reorganization or similar actions, shall make a general assignment
for the benefit of creditors or a proceeding shall be commenced against Singer
or Cars seeking the reorganization, liquidation, dissolution or winding up of
him or it or the appointment of a trustee or receiver for any such person or his
or its assets which is not dismissed within sixty (60) days after filing; or
(d) By either Fidelity, on the one hand, or Cars and the
Stockholders, on the other hand, if (i) the Merger shall not have been
consummated by January 31, 2000; provided, however, that either Fidelity, on the
one hand, and Cars and the Stockholders on the other hand, may extend such date
until February 29, 2000; provided, further, however, that the right to terminate
this Agreement under this subparagraph 11.01(d)(i) shall not be available to any
party whose failure to fulfill any obligation under this Agreement has been the
cause of, or resulted in, the failure of the Effective Time to occur on or
before such date, or (ii) a court of competent jurisdiction or governmental,
regulatory or administrative agency or commission shall have issued an order,
decree or ruling or taken any other action (which order, decree, ruling or other
action the parties hereto shall
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have used their reasonable best efforts to vacate), in each case permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated by
this Agreement, or (iii) by either party if (b) there has been a breach of a
representation or warranty by the other such that the conditions to this
Agreement cannot be satisfied, or (ii) there has been a willful breach of a
covenant by the other which has not been cured by the breaching party; or
(e) by Singer, and Cars on the one hand, and Fidelity, on the other
hand, in the event the other(s) make a material misrepresentation or breaches a
covenant, agreement, warranty, obligation or condition of such parties herein
contained, but such non-misrepresenting or non- breaching party's election to
terminate shall not limit, waive or prejudice such party's remedies at law, in
equity or pursuant to this Agreement.
(f) In the event this Agreement is terminated as provided in Section
11.01(a), (b), (c) or (d), this Agreement shall become void and of no further
force and effect and no party hereto shall have any further liability to any
other party hereto except that:
(i) In the event of termination of this Agreement by Fidelity due to
the failure of the conditions set forth in Sections 9.01 or 9.02 hereof,
then Singer and Cars shall pay to Fidelity an amount equal to all damages,
losses, costs, expenses (including reasonable attorney fees) and
liabilities incurred in connection with the transactions contemplated in
this Agreement or resulting from the failure of such conditions to occur,
in each case, incurred by Fidelity. Notwithstanding the provisions of the
immediately preceding sentence, if the Closing shall not have occurred as
a result of a breach of any representation or warranty by Singer, any
Minority Stockholder or Cars, such breach occurring without the knowledge
of Singer, such Minority Stockholder or Cars, as the case may be, or a
non-intentional breach by Singer, any Minority Stockholder or Cars of any
covenants or agreements of Singer, any Minority Stockholder or Cars, as
the case may be, so as to constitute a failure of either or
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both of the conditions set forth in Sections 9.01 or 9.02 hereof, then
Fidelity shall be entitled to obtain relief at law or in equity against
Cars for an amount equal to its out-of-pocket expenses incurred in
connection with this Agreement; provided, however, that in the event of a
breach of a representation or warranty giving rise to the failure of the
condition set forth in Section 9.01 hereof or a breach of a covenant or
agreement giving rise to the failure of the condition set forth in Section
9.02 hereof, resulting from the action or failure to act of any third
party or the occurrence of any event or circumstance, which action,
failure to act or occurrence was not within the control of Cars or the
Singer, and, in the case of a breach of representation or warranty, in the
event that such representation or warranty was true as of the date hereof
but became untrue on or prior to the Closing Date, this Agreement shall
forthwith become void and there shall be no liability or further
obligation on the part of any party thereto.
(ii) In the event of the termination of this Agreement by Singer,
the Majority in Interest of the Minority Stockholders and Cars due to the
failure of the conditions set forth in Sections 10.01 and 10.02 hereof,
then Fidelity shall pay to Cars an amount equal to all damages, losses,
costs, expenses (including reasonable attorney fees) and liabilities
incurred by Cars in connection with the transactions contemplated in this
Agreement or resulting from the failure of such conditions to occur,
incurred by Cars as the result of the failure of such conditions to occur.
SECTION XII
MISCELLANEOUS PROVISIONS
12.01. Nature and Survival of Representations and Warranties. All
statements
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<PAGE>
contained herein or in any certificate, schedule or other document delivered
pursuant hereto shall be deemed representations and warranties. All
representations and warranties shall survive the Closing until December 31, 2001
and shall not be affected by any investigation at any time made by or on behalf
of any party hereto. If Closing occurs, all representations, warranties,
covenants and agreements of Cars made to Fidelity pursuant to this Agreement and
the Documents shall be deemed to be representations, warranties, covenants and
agreements solely of Singer.
12.02. Amendment and Modification. This Agreement may be amended,
modified or supplemented only by written agreement of the parties hereto;
provided, however, that an amendment of this Agreement may be made on behalf of
all Stockholders by an instrument in writing executed by that number of
Stockholders who are holders of 51% of the issued and outstanding shares of Cars
Common Stock (the "Majority in Interest").
12.03. Waiver. Any breach of any obligation, covenant, agreement or
condition contained herein shall be deemed waived by the non-breaching party,
only by a writing, setting forth with particularity the breach being waived and
the scope of the waiver, but such waiver shall not operate as a waiver of, or
estoppel with respect to, any subsequent or other breach. No failure or duly by
any party in exercising any right, power or privilege hereunder or under the
Documents and no course of dealing by any party shall operate as a waiver and
any right, power or privilege hereunder or under any Document nor shall any
single or partial exercise thereof or the exercise of any other right, power or
privilege.
12.04. Notices. All notices, requests, demands and other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered by hand or a recognized next day
delivery service:
(a) If to Singer, Cars or any Selling Stockholder, to:
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<PAGE>
CarsTV.com, Inc.
6008 Hermitage Road
Richmond, Virginia 23228
Attn: Jack H. Singer, President
With a copy to:
Leclair Ryan, a Professional Corporation
11th Floor, 707 East Main Street
Richmond, Virginia 23219
Attn: Gary D. LeClair, Esq.
or to such other person or address as Singer, Cars or any Selling Stockholder
shall furnish Fidelity in writing.
(b) If to Fidelity to:
Fidelity Holdings, Inc.
80-02 Kew Gardens Road
Kew Gardens, New York 11415
Attn: Doron Cohen, President
with a copy to:
Littman Krooks Roth & Ball P.C.
655 Third Avenue
New York, New York 10017
Attn: Mitchell C. Littman, Esq.
or to such other person or address as Fidelity shall furnish Singer and Cars in
writing.
12.05. Binding Nature; Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall
-55-
<PAGE>
be assigned by any of the parties hereto without prior written consent of the
other parties; provided, however ,that the rights of Fidelity hereunder may be
assigned to any lender or financing institution as security for a loan or loans
granted or equity raised in order to facilitate participation in the transaction
contemplated herein.
12.06. Governing Law; Submission to Jurisdiction. This Agreement and
the legal relations among the parties hereto shall be governed by and construed
in accordance with the laws of the State of New York applicable to contracts
made and performed therein. The parties hereby: (i) in any legal proceeding
brought in connection with this Agreement or any of the Documents or the
transactions contemplated hereby or thereby, irrevocably submit to the
nonexclusive in personam jurisdiction of (A) any state or Federal court of
competent jurisdiction sitting in the State of New York, County of New York or
(B) in the event that any party is a defendant in any legal proceeding in which
he or it seeks to join the other as a third party defendant, then, any state or
Federal court in which such proceeding has properly been brought, and consents
to suit therein; and (ii) the venue of such proceeding shall be brought in the
appropriate state or federal court in New York, New York.
12.07. Public Announcements. Prior to the Closing, except as
required by applicable law the parties hereto agree not to make any disclosure
or public announcement concerning the transactions contemplated hereby without
the prior consent of the other parties hereto; provided, however, that in
connection with the transactions contemplated herein, with respect to any
disclosure or public announcement which a party reasonably deems to be necessary
pursuant to any state or federal law or regulation, such party may make such
disclosure or public announcement without the consent of any other party so long
as the party making such announcement or disclosure has used reasonable efforts
to provide to each other party hereto advance notice of such disclosure or
public announcement. In connection with any disclosure required by law the party
making such disclosure shall use its best efforts to obtain, to the extent
available, confidential treatment with respect to
-56-
<PAGE>
information concerning the transaction contemplated herein.
12.08. Expenses. Except as otherwise provided herein, all costs and
expenses incurred in connection with this Agreement and the Documents shall be
paid by the party incurring such cost or expense.
12.09. Counterparts. This Agreement may be executed simultaneously
in one or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
12.10. Headings. The headings contained in this Agreement are
inserted for convenience only and shall not constitute a part hereof.
12.11. Entire Agreement. This Agreement and the Documents together
with the Schedules herein and therein and Exhibits hereto and thereto,
constitute the entire agreement between the parties hereto pertaining to the
subject matter hereof and supersede all prior and contemporaneous agreements,
understandings, documents, negotiations and discussions, whether oral or
written, of the parties hereto.
12.12. Obligations of Predecessors. When any provision of this
Agreement or any Document refers to or contemplates: (i) any agreement, lease,
license, permit or authorization to which Cars is a party or by which its assets
are bound or subject; (ii) any other obligation or duty of Cars of any kind or
nature; or (iii) the existence or absence of any fact or matter such provision
shall be deemed to include, in addition to any contract, document, agreement,
lease, license, permit or authorization or other obligation or duty of Cars or
the existence or absence of any fact or matter; (x) any contract, document,
agreement, lease, license, permit or authorization or other obligation or duty
assigned to or assumed by Cars or its predecessors, directly or indirectly, by
agreement, by operation of law or otherwise and (y) the existence of any fact or
matter to the extent relevant to any such predecessor.
-57-
<PAGE>
When any provision of this Agreement or any Document refers to a
"predecessor" such reference shall be deemed to include any corporation,
partnership, joint venture or other business, business organization or entity
which is the predecessor of Cars and shall include any or all of the foregoing
to the extent that Cars is the direct or indirect successor thereof.
12.13. Knowledge of Singer and Cars. When any provision of this
Agreement or any Document refers to or contemplates the knowledge of Singer or
Cars, it shall mean: (i) with respect to any matter relating to third parties,
actual knowledge of Singer and executive officers of Cars with regard to such
third parties; and (ii) with respect to Singer or any of his obligations, rights
or properties, the actual knowledge of Singer.
12.14. Remedies Exclusive. Prior to the Closing, the rights,
remedies and obligations of the parties hereto under this Agreement and the
Documents set forth in Section XI hereof shall be deemed to be exclusive of all
other rights, remedies and obligations under this Agreement and the Documents
that would otherwise be available to the parties hereto. After the Closing, the
rights, remedies and obligations under this Agreement and the Documents of the
parties hereto set forth in Section VI hereof shall be deemed to be exclusive of
all other rights, remedies and obligations under this Agreement and the
Documents that would otherwise be available to the parties hereto.
Notwithstanding the foregoing, the parties agree that the business of Cars is
unique and that remedies at law may be inadequate, and accordingly, Fidelity, in
addition to other remedies it may have, shall have the right to enforce the
obligation of the Singer to consummate the Merger upon the terms contemplated
hereunder by an action or actions for specific performance, injunction or other
appropriate equitable remedies.
12.15. Disclosure on Schedules. For purposes of this Agreement, a
disclosure by any party hereto of any fact on any Schedule shall be deemed a
disclosure on every Schedule of any party hereto to the extent such disclosure
properly could have been made thereon but was not made.
-58-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed the day and year first above written.
--------------------------------------------
Jack H. Singer
CARSTV.COM, INC.
By:
----------------------------------------
Jack H. Singer, President
FIDELITY HOLDINGS, INC.
By:
----------------------------------------
Bruce Bendell, Chief Executive Officer
ACQUISITION CORP.
By:
----------------------------------------
Bruce Bendell, Chief Executive Officer
-59-
<PAGE>
MINORITY STOCKHOLDERS
--------------------------------------------
C. Meade Rhoads, Jr.
Bear Stearns c/f John Schneider SEP
IRA (616-48014)
By:
John S. Schneider
Springfield Land Development Co., L.L.C.
By:
----------------------------------------
Stuart E. Haynes, Jr., Manager
Stuart E. Haynes, Jr. and Sharon C.
Haynes, tenants by the entireties with
right of survivorship as at common law
--------------------------------------------
Stuart E. Haynes, Jr.
--------------------------------------------
Sharon C. Haynes
--------------------------------------------
William S. Greenleaf
--------------------------------------------
O. V. Maiden
--------------------------------------------
John F. Senn
David Jones & Associates, Ltd.
By:
----------------------------------------
David N. Jones
Robert E. And Marian M. Weber Trust
By:
----------------------------------------
Robert M. Weber, Trustee
By:
----------------------------------------
Elaine L. McGhie, Trustee
-60-
<PAGE>
--------------------------------------------
Brian M. Raskin, D.D.S.
--------------------------------------------
Brian M. Raskin, D.D.S., custodian
for Steven Raskin, a minor
--------------------------------------------
Brian M. Raskin, D.D.S., custodian
for Geoffrey Raskin, a minor
--------------------------------------------
Edmund R. Rhoads
--------------------------------------------
T. K. Hughes
--------------------------------------------
Robert J. Holmquist
Donald G. Agee, Jr. and Lisa G. Agee,
tenants by the entireties with right of
survivorship as at common law
--------------------------------------------
Donald G. Agee, Jr.
--------------------------------------------
Lisa G. Agee
--------------------------------------------
Barry D. Crawford
--------------------------------------------
H. R. Pollard, IV
--------------------------------------------
Ellen K. November
--------------------------------------------
Shelly N. Gouldin
--------------------------------------------
Debra N. Brown
--------------------------------------------
C. Raine Sydnor, III
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<PAGE>
Robert M. Weber and Siobhan A.
Weber, tenants by the entireties with
right of survivorship as at common law
--------------------------------------------
Robert M. Weber
--------------------------------------------
Siobhan A. Weber
--------------------------------------------
Christopher Arlis Hanes
--------------------------------------------
Richard F. Popp
--------------------------------------------
Robert B. Stone
James L. Aldrich, Jr. and Lisa T.
Aldrich, tenants by the entireties with
right of survivorship as at common
law
--------------------------------------------
James L. Aldrich, Jr.
--------------------------------------------
Lisa T. Aldrich
--------------------------------------------
John Daniel Zodun
James N. Breissinger and Linda M.
Breissinger, tenants by the entireties
with right of survivorship as at
common law
--------------------------------------------
James N. Breissinger
--------------------------------------------
Linda M. Breissinger
Bob Wood and Janet L. Wood, tenants
by the entireties with right of
survivorship as at common law
--------------------------------------------
Bob Wood
--------------------------------------------
Janet L. Wood
--------------------------------------------
-62-
<PAGE>
Lynn Martel Ferguson
Dwayne E. Carter and Sasha M.
Carter, tenants by the entireties with
right of survivorship as at common
law
--------------------------------------------
Dwayne E. Carter
--------------------------------------------
Sasha M. Carter
--------------------------------------------
D. Brandon Creekmore
--------------------------------------------
Tadd Stiles Bartley
--------------------------------------------
Richard V. Meyers
--------------------------------------------
Bryan M. Mark
Aubrey H. Perry, III and Anne P.
Perry, tenants by the entireties with
right of survivorship as at common
law
--------------------------------------------
Aubrey H. Perry, III
--------------------------------------------
Anne P. Perry
--------------------------------------------
Stephen H. Garrison
--------------------------------------------
John W. Porter, Jr.
--------------------------------------------
Antonio S. Burgess
--------------------------------------------
Roy P. Fernbach
-63-
<PAGE>
--------------------------------------------
Brian K. Evans
--------------------------------------------
Justin L. Hall
--------------------------------------------
Amanda M. Schenck
--------------------------------------------
Lillian E. Rosenberger
--------------------------------------------
Patricia K. Hurst
--------------------------------------------
Kathleen B. Canada
--------------------------------------------
Seth L. Belkin
--------------------------------------------
Hooi Min Ong
--------------------------------------------
Angela M. Hower
--------------------------------------------
Jeffrey R. Bush
--------------------------------------------
Phillip V. Daffron, Jr.
--------------------------------------------
April R. Doom
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<PAGE>
SCHEDULE A
Stockholders
Total CarsTV
Stockholder Shares
----------- ------
Jack H. Singer 5,100,000
C. Meade Rhoads, Jr. 385,785
Bear Stearns c/f John Schneider SEP IRA (616-48014) 385,785
Springfield Land Development Co., L.L.C. 57,868
Stuart E. Haynes & Sharon C. Haynes, TbyEWROS 38,578
William S. Greenleaf 38,578
O.V. Maiden 38,578
John F. Senn 38,578
David Jones Associates, Ltd. 38,578
Robert E. and Marian M. Weber Trust 38,578
Brian Raskin, DDS 38,578
Brian Raskin, DDS, custodian for Steven Raskin, a minor 19,290
Brian Raskin, DDS, custodian for Geoffrey Raskin, a minor 19,290
Edmund R. Rhoads 19,290
T.K. Hughes 19,290
Robert J. Holmquist 19,290
Donald G. Agee & Lisa G. Agee, TbyEWROS 7,716
Barry D. Crawford 121,291
H.R. Pollard, IV 121,291
Ellen K. November 40,430
Shelly N. Gouldin 40,430
Debra N. Brown 40,430
C. Raine Sydnor, III 231,471
Robert M. Weber & Siobhan A. Weber, TbyEWROS 964,462
Christopher Arlis Hanes 964,462
Richard F. Popp 192,892
Robert B. Stone 96,446
James L. Aldrich, Jr. & Lisa T. Aldrich, TbyEWROS 96,446
John Daniel Zodun 48,223
James N. Breissinger & Linda M. Breissinger, TbyEWROS 38,578
Bob Wood & Janet L. Wood, TbyEWROS 30,863
Lynn Martel Ferguson 30,863
Dwayne E. Carter & Sasha M. Carter, TbyEWROS 23,147
D. Brandon Creekmore 9,259
Tadd Stiles Bartley 154,314
Richard V. Meyers 23,147
Bryan M. Mark 7,716
Aubrey H. Perry III & Anne P. Perry, TbyEWROS 7,716
Stephen H. Garrison 7,716
John W. Porter, Jr. 7,716
-65-
<PAGE>
Antonio S. Burgess 6,173
Roy P.Fernbach 6,173
Brian K. Evans 3,858
Justin L. Hall 3,858
Amanda M. Schenk 3,086
Lillian E. Rosenberger 3,086
Patricia K. Hurst 3,086
Kathleen B. Canada 1,543
Seth L. Belkin 1,543
Hooi Min Ong 1,543
Angela M. Hower 772
Jeffrey R. Bush 3,858
Philip V. Daffron, Jr. 1,543
April R. Doom 1,543
-----
Total 9,644,624
-66-
<PAGE>
LIST OF SCHEDULES
A. - Stockholders
1.05.2 - Unvested Option Holders
3.01 - Ownership of Singer
3.03 - Singer Violations
3.04 - Singer Consents and Approvals
3.05 - Singer Affiliate Transactions
4.01 (a) - Real Property
(b) - Intangible Property
(c) - Material Agreements
(d) - Employees and Compensation Arrangements
(e) - Debt (Including Security Agreements and Mortgages)
(f) - Banks
(g) - Charter Documents
(h) - Litigation
(i) - Power of Attorney
(j) - Insurance
4.02 - States Where Qualified to do Business
4.03 - Capitalization
4.05 - Violations, Accelerations, Consents
4.06 - Approvals
4.08 - Undisclosed Liabilities
4.09 - Certain Changes
4.10 (a) - Exceptions
(b) - Encumbrances
(c) - Title to Personal Property
(d) - Adequacy and Condition of Property
4.11 - Intellectual Property
4.12 - Litigation
4.13 - Taxes
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<PAGE>
4.14 - Benefit Plans
4.15 - Labor Matters
4.17 - Insurance
4.18 - Contracts
4.19 - Finders and Investment Bankers
4.20 - Required Approvals
4.21 - Transactions with Officers
4.22 - Receivables
4.23 - Inventory
4.24 - Orders
4.25 - Customers
4.26 - Suppliers
4.27 - Software
-68-
<PAGE>
LIST OF EXHIBITS
Exhibit A - Form of Escrow Agreement
Exhibit B - Form of Singer Employment Term Sheet
Exhibit C - Cars Promissory Note
Exhibit D - Form of Stockholders Agreement
Exhibit E - Form of Investor Representation Letter
Exhibit F - Form of Shareholders Waiver
Exhibit G - Form of Opinion of Counsel to Singer, the
Company and the Minority Stockholders
Exhibit H - Form of Opinion of Counsel to Fidelity
-69-
<PAGE>
Schedule 3.01
CarsTV, Inc. Stockholders Agreement dated December 1, 1998 as
amended August 30, 1999.
-70-
<PAGE>
Schedule 3.03
Not Applicable
-71-
<PAGE>
Schedule 3.04
Not Applicable
-72-
<PAGE>
Schedule 3.05
Not Applicable
-73-
<PAGE>
Schedule 4.01 (a)
Sublease the premises at 6008 Hermitage Road, Richmond VA 23228
Lease a retail space in the Old Dominion University student center in Norfolk,
Virginia
Sublease by and between William C. Cunningham (Landlord), Acosta Sales Company,
Inc., a Florida corporation (Sublessor), and Internet Creations, Inc., a
Virginia corporation (Sublessee) dated September 17, 1997. The sublease and
underlying lease expire 7/01/99.
Commonwealth of Virginia Standard Contract No. 99-221-0050=YB
Not Applicable
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<PAGE>
Schedule 4.01 (b)
Patent Pending Titled Automated Internet and Cable Television Auto Sales System,
application number 09/134, 976 filed 8/17/98. Continuing data was added 4/29/99
(application # 09/301, 926 and # 09/301/925) to add Employment and Real Estate
to the Patent Pending.
-75-
<PAGE>
Schedule 4.01 (c)
Lease dated 5/22/97 by and between Affiliated Capital Corporation (Lessor) and
Internet Creation, Inc. (Lessee). Lease commenced 6/30/97 and expires 6/29/00.
Lease was for a U.S. Robotics Total Control Chassis, total cost $15,201.
Lease No. 001.9701102.401
Lease dated 7/8/99 by and between Affiliated Capital Corporation (Lessor) and
Internet Creations, Inc. (Lessee). Lease commenced 8/30/99 and expires 8/29/02.
Lease was for a Cisco Model 7200 Router, total cost $22,107.
Lease No. 002.9701102.402
Lease dated 10/27/99 by and between Affiliated Capital Corporation (Lessor) and
Internet Creations, Inc. (Lessee). Lease commenced 10/28/99 and expires
10/27/02. Lease was for Compaq Proliant Server, total cost $23,225.
Lease No. 002.9701102.403
-76-
<PAGE>
Schedule 4.01 (d)
Annual Compensation
1) Christopher A. Hanes $60,000
2) Dwayne E. Carter $40,000
3) J. Daniel Zodun $36,000 (plus commissions)
4) Jack H. Singer $95,000
5) Richard F. Popp $78,000 (includes commissions)
6) Richard V. Meyers $36,000 (plus commissions)
7) Robert B. Stone $40,000
8) Robert M. Weber $70,000
9) Aubrey P. Perry III $36,000 (plus commissions)
10) Bob Wood $45,000 (plus $10,000 bonus potential)
11) James L. Aldrich, Jr. $36,000 (plus commissions)
12) C. Raine Sydnor, III $48,000 (plus commissions)
13) Tadd S. Bartley $70,000
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<PAGE>
Schedule 4.01 (e)
Not Applicable
79-
<PAGE>
Schedule 4.01 (f)
Wachovia Bank
Account Numbers
7901143255
7911940706
1850042066
1850133817
All Wachovia accounts accessible by: Jack H. Singer
Mary W. Singer
Robert M. Weber
First Union
Account Number
2000004787712
Accessible by: Robert M. Weber
80-
<PAGE>
Schedule 4.01 (g)
See Attached
81-
<PAGE>
Schedule 4.01 (h)
Not Applicable
82-
<PAGE>
Schedule 4.01 (i)
Not Applicable
83-
<PAGE>
Schedule 4.01 (j)
Nationwide Insurance (Policy # 53PR194328-3001T)
Internet Creations, Inc.
Commercial Property Coverage $1,000,000
Commercial General Liability Coverage $1,000,000
Commercial Inland Marine Coverage $ 25,000
Personal Property $ 10,000
Fire Damage $ 50,000
Medical Expense (per person) $ 5,000
Cars, Inc. (Policy # 53PR581218-3001T)
Coverage equivalent to above except no Inland Marine Coverage plus
Business Auto Insurance with $500,000 liability
Media Special Perils Advertiser Policy (Policy LS 010906 -
Media/Professional Insurance). For Cable and Internet Advertising E & O.
$1,000,000 liability coverage with $5,000 deductible.
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<PAGE>
Schedule 4.02
6008 Hermitage Road
Richmond, VA 23228
Old Dominion University satellite office:
Old Dominion University
Internet Creations, Inc.
Webb University Center, Suite 1543
Norfolk, VA 23529-0524
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<PAGE>
Schedule 4.03
See Attached for Capitalization Schedule - Note that the additional shares will
be issued as a part of Closing and will thus be converted into FDHG shares.
Also - The CarsTV.com, Inc. Stock Incentive Plan, effective June 1, 1999 will be
terminated at Closing.
86-
<PAGE>
Schedule 4.04
CarsTV.com, Inc. has three (3) wholly owned subsidiaries:
Internet Creations, Inc., a Virginia corporation (dba Internet Connections)
Computerized Auto Resale Service, Inc., a Virginia corporation (dba CARS)
Internet Telecommunications, Inc., a Virginia corporation
87-
<PAGE>
Schedule 4.05
The Merger will require a supermajority (98%) approval of all current
CarsTV.com, Inc. shareholders.
88-
<PAGE>
Schedule 4.06
Not Applicable
89-
<PAGE>
Schedule 4.07
(See Attached)
90-
<PAGE>
Schedule 4.08
Not Applicable
91-
<PAGE>
Schedule 4.09
4.09 (f)
As a part of closing we intend to issue restricted stock to a number of
employees and stockholders (refer to Schedule 4.03)
92-
<PAGE>
Schedule 4.10 (a) (b) (c) (d)
Not Applicable
93-
<PAGE>
Schedule 4.11
Patent Pending Titled Automated Internet and Cable Television Auto Sales System,
Application No. 09/134, 976, filed 8/17/98 Continuing data was added 4/29/99 (
Application # 09/301, 926 and 09/301, 925) to add Employment and Real Estate to
the Patent Pending
94-
<PAGE>
Schedule 4.12
Not Applicable
95-
<PAGE>
Schedule 4.13
Not Applicable
96-
<PAGE>
Schedule 4.14
CarsTV.com, Inc. 1999 Stock Incentive Plan, effective June 1, 1999 (Note: This
plan will be terminated as a part of closing)
We currently have a NON-DFI Simple IRA dated 9/11/1998 with Lord, Abbett & Co.
Plan No. is 223 664 and currently only three people participate, but five more
become eligible effective 1/1/2000
97-
<PAGE>
Schedule 4.15
Not Applicable
98-
<PAGE>
Schedule 4.17
Not Applicable
99-
<PAGE>
Schedule 4.18
1) Agreement dated August 30, 1999 between Net 2000, a Delaware Corporation
and Internet Creations, Inc.
2) Programming Agreement by and between CoxCom, Inc. d/b/a Cox Communications
Roanoke and CarsTV.com, Inc.
3) Terms and Conditions dated August 19, 1998 by and between Computerized
Auto Resale Service, Inc. and Comcast Cable Communications.
4) Leased Access Programming Agreement dated March 5, 1998 by and between
CoxCom, Inc. d/b/a Cox Communications Hampton Roads and Computerized Auto
Resale Service, Inc.
5) Agreement for Local Cable Advertising between Adelphia Communications
Corporation dba Media Partners and Computerized Auto Resale Service, Inc.
dated April 23, 1998.
100-
<PAGE>
Schedule 4.19
Not Applicable
101-
<PAGE>
Schedule 4.20
Not Applicable
102-
<PAGE>
Schedule 4.21
Jack H. Singer has made a number of loans to Computerized Auto Resale Service,
Inc. and Internet Creations, Inc. which are accounted for on their respective
balance sheets.
103-
<PAGE>
Schedule 4.22
See Attached
104-
<PAGE>
Schedule 4.23
Not Applicable
105-
<PAGE>
Schedule 4.24
Not Applicable
106-
<PAGE>
Schedule 4.25
Internet Creations
Online@VCU
Virginia Commonwealth University $ 326,647.50
P.O. Box 843012
Richmond, VA 23284-3012
CARS
Haynes Jeep-Eagle $ 59,296.75
9520 W. Broad St
Richmond, VA 23294
Richmond Ford $ 26,540.44
4600 W. Broad St
Richmond, VA 23261
107-
<PAGE>
Schedule 4.26
Internet Creations
Adelphia Business Solutions $ 47,944.53
f/k/a Hyperion Communications
5401 Staples Mill Road
Richmond, VA 23228
Net2000 Communications $ 33,028.92
8614 Westwood Center Drive
Suite 700
Vienna, VA 22182
CARS
Cable Rep Advertising $ 69,000.00
Cox Cable Roanoke
P.O. Box 13726
Roanoke, VA 24036
Comcast Cablevision of Chesterfield $ 55,912.73
9327 Midlothian Turnpike, Suite 2-G
Richmond, VA 23236
Cable Rep - Hampton Roads $ 48,402.34
575 Lynnhaven Parkway
Virginia Beach, VA 23452
Media Partners $ 151,987.50
Main at Water Street
Coudersport, PA 16915
108-
<PAGE>
Schedule 4.27
The CARSTV system provides dealerships a single mechanism for maintaining
vehicle inventory on a variety of advertising media. Presently, these media are
Internet web sites, kiosk systems (both in-showroom and mall), window stickers,
and cable television. From a central management interface, dealers are able to
change information on all media in near-real-time. To effect changes on the
various media, the CARSTV system utilizes the thin-client technology offerings
of Citrix Systems, Inc. The tremendous benefit of Citrix is its ability to give
an application high-bandwidth access to all the resources of a LAN and the
Internet as well as access to all the resources of the client (e.g. local files
and printer). In the CARSTV system, this allows the dealership to propagate
inventory changes very quickly. From a Citrix session running the CARSTV
management application, a single click of the mouse sends a dealer's changes
(both database and photos) to the central data warehouse on the LAN. As all
Internet sites produced by CARSTV pull from this warehouse, update of the data
warehouse effectively updates the dealership's search engine. Update of a
dealership's cable television content also relies on the central data warehouse.
Every CARSTV head-end consists of a server connected to the Internet. Another
server on the CARSTV LAN communicates continuously with the head-end servers and
sends updates as changes become available on the data warehouse. In this way,
changes are made available to each head-end in a near-real tiUpdate of. a
dealer's showroom kiosk also relies upon the central data warehouse. This Citrix
software application run by the dealership scans a dealer's kiosk gathering
inventory information. The application compares this information with the latest
data for the dealership on the data warehouse, creates an incremental update,
and installs the update on the kiosk machine. This approach became necessary in
order to provide affiliated dealerships with the ability to cross-sell
inventory. Suppose a dealership has 4 locations and wants to cross-sell from
each location. By scanning the data warehouse, the Citrix software is able to
"see" changes made at all dealer locations and create an incremental update
reflecting only the changes made at each dealership. Once the update is
installed, the showroom kiosk provides both sales staff and customers with the
latest inventory information at all locations. Other features of
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<PAGE>
the CARSTV Citrix not yet mentioned include printing window stickers and buyer
guides and reporting on Internet traffic statistics, price comparisons, and
historical logs of web site and station updates. It should also be noted that
this Citrix application can run stand alone at the dealership with all
network-related features disabled. It is our intention, as bandwidth becomes
more readily available, to phase out all such local use. In summary, the CARSTV
system consists of the following software components: kiosk software, management
software running under Citrix, broadcast software running on each head-end, a
data warehouse composed of a Netscape web server linked to a Microsoft SQL
Server, and miscellaneous server applets. Nearly all software developed by
CARSTV is written in Visual Basic 5 and stored procedures. The management
application used by the dealer is presently being migrated from Winframe 1.7 to
MetaFrame 1.8. We are also in process of migrating from Microsoft SQL Server 6.5
to 7.0. Core servers on the CARSTV LAN are all Intel Pentium II class machines
running Microsoft NT. Cable head-end servers are also Pentium II class IBM
servers running NT4. Each head-end server runs the following software: a web
server, miscellaneous cgi- bins, ftp server, CARSTV broadcast software
(generates the actual broadcast seen by viewers), CARSTV UNISERVER (for handling
db and blob updates over the Internet). Additional hardware on each head-end
machine includes a modem, a sound card, and an MPEG-2 decoder card.
110-
Exhibit 10.71
TRANSFER RESTRICTION AND OPTIONAL CONVERSION AGREEMENT
This Transfer Restriction and Optional Conversion Agreement (the
"Agreement") is entered into as of the 18th day of January, 2000 by and among
Jack Singer, an individual ("Singer"); the persons and entities set forth on
Schedule 1 attached hereto (the "Investor Group 1"); the persons and entities
set forth on Schedule 2 attached hereto (the "Investor Group 2"); the persons
and entities set forth on Schedule 3 attached hereto (the "Insider Group"); and
such other persons or entities who consent in writing to be bound by the terms
of this Agreement (the "Additional Parties") (Singer, Investor Group 1, Investor
Group 2, the Insider Group and the Additional Parties are sometimes collectively
referred to herein as the "Stockholders"); FIDELITY HOLDINGS, INC., a Nevada
corporation (the "Company"); Cars Acquisition, Inc., a Delaware corporation
("Acquisition Corp."), and CarsTV.com, Inc., a Virginia corporation ("Cars").
RECITALS
WHEREAS, the Company, Acquisition Corp., Cars, Singer, Investor
Group 1, Investor Group 2, and the Insider Group have entered into that certain
Merger Agreement (the "Merger Agreement") dated as of January 18, 2000, pursuant
to which Cars is being merged with and into Acquisition Corp. in a transaction
intended to qualify as a reorganization pursuant to Section 368(a)(2)(D) of the
Internal Revenue Code of 1986, as amended, whereby Acquisition Corp. will remain
a wholly-owned subsidiary of the Company (the "Merger");
WHEREAS, it is a condition to the consummation of the transactions
contemplated by the Merger Agreement that the Company and the Stockholders enter
into this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the mutual
covenants and agreements herein contained and other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, the
parties hereby agree as follows:
1. Definitions. As used in this Agreement, the following terms shall
have the following
meanings:
a. "Affiliate" means, with respect to any specified Person,
any Person that, directly or indirectly, controls, is controlled by, or is under
common control with, such specified Person, whether by contract, through one or
more intermediaries, or otherwise. Unless otherwise qualified, all references to
an "Affiliate" or to "Affiliates" in this Agreement shall refer to an Affiliate
or Affiliates of the Company.
b. "Business Days" shall mean all days other than Saturday or
Sunday or any day on which banking institutions in New York, New York are
authorized or obligated by law to close.
c. "Common Stock" shall mean: (i) the common stock of the
Company, par value $0.01 per share; (ii) any other capital stock of the Company
into which such common stock is converted, exchanged, reclassified or
reconstituted; (iii) any warrants or options exercisable for any of the
foregoing; and (iv) any right to receive any of the foregoing other than upon
conversion of any security convertible into any of the foregoing.
d. " Conversion Period " shall mean the period of time
commencing from the effective date of a Qualified Initial Public Offering and
terminating on the closing date of a Qualified Initial Public Offering.
<PAGE>
e. "Company Market Price" shall mean the 10 day trailing
average closing price of the Company's Common Stock on the NASDAQ National
Market or Small Cap Market, as the case may be, immediately before the exercise
of the Company Optional Conversion.
f. "IPO Company " shall mean either (i) Acquisition Corp. or
(ii) any directly or indirectly owned subsidiary of the Company which in turn
either (a) owns all or a majority of the issued and outstanding capital stock of
Cars or (b) owns all or a majority of the issued and outstanding capital stock
or assets of Computerized Auto Resale Services, Inc. or Internet Creations,
Inc., the wholly-owned subsidiaries of Cars on the date of this Agreement,
whichever first consummates a Qualified Initial Public Offering.
g. "IPO Company Common Stock" shall mean: (i) the common stock
of the IPO Company; (ii) any other capital stock of the IPO Company into which
such common stock is converted, exchanged, reclassified or reconstituted; (iii)
any warrants or options exercisable for any of the foregoing; and (iv) any right
to receive any of the foregoing other than upon conversion of any security
convertible into any of the foregoing.
h. "IPO Company Market Price" shall mean the 10 day trailing
average closing price of the IPO Company's Common Stock on the NASDAQ National
Market, Small Cap Market or OTC Bulletin Board, as the case may be, immediately
before the exercise of the Stockholder Optional Conversion.
i. "IPO Price" shall mean the offering price of IPO Company
Common Stock in a Qualified Initial Public Offering.
j. "Merger Shares" shall mean the 575,862 shares of Common
Stock issued to the Stockholders in the Merger allocated as follows (i) Singer -
304,511 shares of Common Stock, (ii) Investor Group 1 - 71,868 shares of Common
Stock, (iii) Investor Group 2 - 21,726 shares of Common Stock, and (iv) Insider
Group - 177,757 shares of Common Stock.
k. "Person" means any individual, firm, corporation,
partnership, trust, incorporated or unincorporated association, joint venture,
joint stock company, limited liability company, governmental authority or other
entity of any kind, and shall include any successor (by merger or otherwise) of
such entity.
l. "Qualified Initial Public Offering" shall mean the initial
public offering, underwritten by an underwriter selected by the Company,
pursuant to an effective registration statement under the Securities Act, of an
IPO Company.
m. "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations promulgated thereunder.
2. Restrictions on Sale or Transfer of Shares.
a. General Prohibition. No Stockholder shall sell, assign,
transfer, give, pledge, encumber or in any way dispose of (collectively, a
"Transfer") any Merger Shares, or enter into an agreement to Transfer any Merger
Shares, other than an agreement which is expressly subject to compliance with
the provisions of this Section 2, without the express written consent of the
Company. Any purported Transfer in violation of any provision of this Agreement
shall be void and ineffective and shall not operate to Transfer any interest or
title to the purported transferee. The prohibitions set forth in this Section
2(a) shall include, but shall not be limited to, unless specifically permitted
hereunder, any agreement to limit, restrict or grant any voting rights with
respect to any Merger Shares. The restrictions on Transfer contained in this
Section 2 shall terminate three years from the date hereof.
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<PAGE>
b. Permitted Transfers. (i) Subject to compliance with
applicable Federal and state securities laws, each of Singer, and each member of
the Insider Group, shall have the right to Transfer up to thirty three and
one-third (33 1/3%) percent of his or its Merger Shares during the one year
period commencing on the first anniversary of the closing date of the Merger, up
to sixty-six and two-thirds (66 2/3%) percent of his or its Merger Shares during
the one year period commencing on the second anniversary of the closing date of
the Merger, and one hundred (100%) percent of his or its Merger Shares on or
after the third anniversary of the closing date of the Merger, provided,
however, that no Transfer of greater than 15,000 Merger Shares, with respect to
Singer or any Person who is a member of the Insider Group, shall take place in
any such one year period and no Transfer of greater than 3,750 Merger Shares,
with respect to Singer or any Person who is a member of the Insider Group, shall
take place in any three consecutive month periods within such one year period.
(ii) Subject to compliance with applicable Federal and
state securities laws, each member of Investor Group I and Investor Group II,
shall have the right to Transfer up to fifty (50%) percent of his or its Merger
Shares during the one year period commencing on the first anniversary of the
closing date of the Merger and up to one hundred (100%) percent of his or its
Merger Shares on or after the second anniversary of the closing date of the
Merger, provided, however, that no Transfer of greater than 15,000 Merger
Shares, with respect to any Person who is a member of Investor Group I or
Investor Group II, shall take place in any such one year period and no Transfer
of greater than 3,750 Merger Shares, with respect to any Person who is a member
of Investor Group I or Investor Group II, shall take place in any three
consecutive month periods within such one year period.
(iii) The 3,750 Merger Share quarterly and 15,000 Merger
Share annual Transfer limitations provided in clauses (i) and (ii) above shall
be proportionately adjusted to reflect any one or more stock dividends, stock
split-ups, subdivisions or consolidations of shares undertaken by the Company
subsequent to the closing date of the Merger or any merger or consolidation of
the Company with any other entity subsequent to the closing date of the Merger
("Post-Mergers Change in Capitalization").
c. Exempt Transfer. As used herein, the term "Exempt Transfer"
shall mean (i) Transfers by any Stockholder to his or its respective Related
Parties (as defined in Section 2(d)), (ii) Transfers by any of a Stockholder's
Related Parties to such Stockholder, (iii) a Transfer by a Stockholder upon
death of such Stockholder by inheritance or operation of law to the heirs or
devises of such Stockholder, (iv) Transfers by any Stockholder solely to finance
the payment of personal taxes of such Stockholder and only with the prior
written consent of the Chief Financial Officer of the Company which consent
shall not be unreasonably withheld, and (v) Transfers by a Stockholder of Merger
Shares as collateral security for loans made to such Stockholder of up to
$100,000 per Stockholder, provided, however, that (A) no such Transfer pursuant
to this paragraph (c) (except as set forth in clauses (iv) and (v) above) shall
be an Exempt Transfer unless the transferee agrees in writing to be bound by
this Agreement as a Stockholder with respect to the shares received by such
transferee and (B) the number of Merger Shares subject to foreclosure upon any
lien, pledge or security interest granted pursuant to an Exempt Transfer
described in clause (v) and any Transfer of such Merger Shares subsequent to
such foreclosure shall count toward the annual and quarterly limitations on the
Transfer of Merger Shares except that if such Foreclosure or Transfer subsequent
to such foreclosure causes the Stockholder to exceed such annual or quarterly
limitations, any excess over such annual or quarterly limitations shall be
allowed without penalty and shall be treated as a Transfer or Transfers made
during subsequent annual or quarterly periods.
d. Related Party. As used herein, the term "Related Party"
with respect to any Stockholder means, as of the time of any Transfer, (i) any
person or entity that, directly or indirectly, through one or more
intermediaries, has voting control of, or is under common voting control with,
such Stockholder, (ii) with respect to individuals, such Stockholder's spouse,
parents, children, siblings and/or grandchildren, or (iii) a trust, corporation,
partnership, limited liability company or other entity, whose beneficiaries,
stockholders, partners, members or owners, or other persons or entities holding
a controlling interest in
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<PAGE>
which, consist of such Stockholder and/or such other persons or entities
referred to in the immediately preceding clauses (i) or (ii), or (iv) with
respect to any Stockholder which is a partnership, a limited liability company
or a corporation, such Stockholders' current limited and general partners,
members or Stockholders, respectively, in proportion to their ownership.
e. Opinion of Counsel. Notwithstanding any provision herein to
the contrary, no Stockholder shall Transfer any Merger Shares unless such
Stockholder shall first obtain an opinion of counsel satisfactory to the Company
(which expense shall be borne by the Company) to the effect that such Transfer
is either exempt from the registration provisions of the Securities Act or that
the Securities Act is inapplicable to such Transfer.
3. Company Conversion. The Company shall have the following rights
with respect to the conversion of the Merger Shares into IPO Company Common
Stock in connection with a Qualified Initial Public Offering (the "Company
Optional Conversion"):
a. Company Optional Conversion. Subject to and in compliance
with the provisions of this Section 3, up to fifty (50%) percent of any
Stockholder's Merger Shares (the "Mandatory Merger Shares"), at the option of
the Company, may be converted at any time during the Conversion Period into
fully-paid and nonassessable shares of IPO Company Common Stock. The number of
shares of IPO Company Common Stock to which a Stockholder shall be entitled upon
conversion shall be the product obtained by multiplying the "Company Conversion
Rate" then in effect (determined as provided in Section 3(b)) by the number of
Mandatory Merger Shares being converted.
b. Company Conversion Rate. The Company conversion rate in
effect at any time during the Conversion Period for conversion of the Mandatory
Merger Shares (the "Company Conversion Rate") shall be the quotient obtained by
dividing the Company Market Price by the product of (i) 90% and (ii) the IPO
Price.
c. Mechanics of Conversion. Upon the occurrence of the event
specified in Section 3(a) above, the outstanding Mandatory Merger Shares shall
be converted into IPO Company Common Stock automatically without any further
action by the holders of such Mandatory Merger Shares and whether or not the
certificates representing such shares are surrendered to the Company or its
transfer agent; provided, however, that the IPO Company shall not be obligated
to issue certificates evidencing the shares of IPO Company Common Stock issuable
upon such conversion unless the certificates evidencing such shares of Mandatory
Merger Shares are either delivered to the Company or its transfer agent as
provided below, or the holder notifies the Company or its transfer agent that
such certificates have been lost, stolen or destroyed and executes an agreement
reasonably satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection with such certificates. Upon surrender by any
holder of the certificates formerly representing shares of Mandatory Merger
Shares, or the delivery of the indemnification agreement described above, at the
office of the Company or any transfer agent for such securities, there shall be
issued and delivered to such holder promptly at such office and in its name as
shown on such surrendered certificate or certificates, a certificate or
certificates for the number of shares of IPO Company Common Stock into which the
Mandatory Merger Shares surrendered were convertible on the date on which such
automatic conversion occurred. Until surrendered as provided above, each
certificate formerly representing shares of Mandatory Merger Shares shall be
deemed for all corporate purposes to represent the number of shares of IPO
Company Common Stock resulting from such automatic conversion.
d. No Fractional Shares. No fractional shares of IPO Company
Common Stock shall be issued upon conversion of Mandatory Merger Shares; if the
conversion would otherwise result in the issuance of any fractional share, in
lieu of a fractional share, the Stockholder will receive one additional share of
IPO Company Common Stock.
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<PAGE>
4. Stockholder Conversion. Each Stockholder shall have the following
rights with respect to the conversion of the Merger Shares into IPO Company
Common Stock (the "Stockholder Optional Conversion") :
a. Stockholder Optional Conversion. Subject to and in
compliance with the provisions of this Section 4, in the event, and only in the
event, that the Company does not exercise the Company Optional Conversion in
whole or in part, up to fifty (50%) percent (taken together with any Mandatory
Merger Shares converted in connection with any Company Optional Conversion) of
any Stockholder's Merger Shares, at the option of such Stockholder, may be
converted at any time during the Conversion Period into fully-paid and
nonassessable shares of IPO Company Common Stock. The number of shares of IPO
Company Common Stock to which a Stockholder shall be entitled upon conversion
shall be the product obtained by multiplying the "Stockholder Conversion Rate"
then in effect (determined as provided in Section 4(b)) by the number of Merger
Shares being converted.
b. Stockholder Conversion Rate. The IPO Company conversion
rate in effect at any time during the Conversion Period for conversion of the
Merger Shares (the "Stockholder Conversion Rate") shall be the quotient obtained
by dividing the Company Market Price by the product of (i) 90% and (ii) the IPO
Price.
c. Mechanics of Conversion. Each holder of Merger Shares who
desires to convert the same into shares of IPO Company Common Stock pursuant to
this Section 4 shall surrender the certificate or certificates therefor, duly
endorsed, at the office of the Company or any transfer agent for such securities
or if such certificates have been lost, stolen or destroyed the holder notifies
the Company or its transfer agent that such certificates have been lost, stolen
or destroyed and executes an agreement reasonably satisfactory to the Company to
indemnify the Company from any loss incurred by it in connection with such
certificates, and shall give written notice to the Company at such office that
such holder elects to convert the same. Such notice shall state the number of
shares of Merger Shares being converted. Thereupon, the Company shall cause the
IPO Company to promptly issue and deliver at such office to such holder a
certificate or certificates for the number of shares of IPO Company Common Stock
to which such holder is entitled. Such conversion shall be deemed to have been
made at the close of business on the date of such surrender of the certificate
representing the shares of Merger Shares to be converted or the delivery of the
indemnification agreement described above, and the person entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder of such shares of Common Stock on such date.
d. No Fractional Shares. No fractional shares of IPO Company
Common Stock shall be issued upon conversion of Merger Shares; if the conversion
would otherwise result in the issuance of any fractional share, in lieu of a
fractional share, the Stockholder will receive one additional share of IPO
Company Common Stock.
5. Legend on Stock Certificates. (a) Each Stockholder agrees that
the certificates representing Shares subject to the provisions of this Agreement
shall be endorsed as follows:
"The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended, or the
securities laws of any state and may not be sold or otherwise
disposed of except pursuant to an effective registration statement
under such Act and applicable state securities laws or pursuant to
an applicable exemption to the registration requirements of such Act
or such laws.
The shares of stock represented by this certificate are subject to a
Transfer Restriction and Optional Conversion Agreement dated as of
January 18,
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<PAGE>
2000, as may be amended from time to time, and said shares may not
be sold, transferred, assigned, hypothecated or otherwise disposed
of except in accordance with the terms of such Agreement. Such
Agreement may be examined at the principal place of business of the
Company and a copy thereof will be furnished without charge to the
holder of this certificate upon receipt by the Company at its
principal place of business or registered office of a written
request from the Stockholder."
(b) The Company agrees that the second paragraph of the endorsement
or legend specified in section 5(a) above may be removed from certificates
representing Merger Shares upon the request of any Stockholder holding such
Merger Shares upon the occurrence of any of the following: (i) the termination
of this Agreement, (ii) with respect to any Merger Shares held by a transferee
upon any Transfer, or any Exempt Transfer other than an Exempt Transfer
specified in Section 2(c)(i)-(iii) above, immediately upon such Transfer or
Exempt Transfer, or (iii) three years from the date hereof.
6. Miscellaneous.
a. Termination. This Agreement shall terminate upon the
occurrence of the earliest of the following to occur: (i) the mutual written
consent of each party hereto, or (ii) ten years from the date hereof. Upon such
termination all rights and obligations of the parties hereto shall terminate.
b. Notices. All offers, notices, acceptances, requests of
other communications hereunder shall be in writing and shall be delivered (i) in
person, (ii) by certified or registered mail, return receipt requested (or if
certified or registered mail or return receipt is not available, then by similar
means), (iii) by Federal Express or other nationally recognized overnight
carrier service which issues confirmation of delivery, or (iv) by confirmed
facsimile transmission, to the Company at its principal office and to the
Stockholders at the addresses or facsimile numbers set forth on Schedule 1
hereto or to such other addresses or facsimile number, as applicable, as any
party hereto may designate to the other in writing. Any such notice shall be
deemed to be given (i) when delivered, if delivered personally or by Federal
Express or other nationally recognized overnight courier service, (ii) on the
third (3rd) Business Day after the date of mailing, if sent by certified or
registered mail, or (iii) upon confirmation of receipt, if delivered by
facsimile transmission.
c. Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the parties hereto, their successors, heirs,
personal representatives and assigns.
d. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the principles of conflicts of law of such state.
e. Severability. If any provision of this Agreement is invalid
or unenforceable, such invalidity shall not invalidate or render unenforceable
any other part of this Agreement, but the Agreement shall be construed as not
containing the particular provision or provisions held to be invalid or
unenforceable, and the rights and obligations of the parties hereto shall be
construed and enforced accordingly.
f. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original and all of which taken
together, shall constitute one and the same instrument.
g. Headings. Section numbers and headings are provided for
convenience only and for no other purpose. Such headings shall have no effect
upon the terms of this Agreement including,
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<PAGE>
but not limited to, the limitation or expansion of any provision hereof.
h. Amendment. This Agreement and any of the terms hereof may
be amended, changed, waived or discharged only by an instrument in writing
signed by all of the parties hereto.
7. Confidential and/or Proprietary Information. The Stockholders
will have access to confidential information consisting of trade secrets,
Company data, business methods and know-how, including, but not limited to, the
Company's customers or accounts and all customer lists, sales information,
employee lists, financial records and information with respect to the business
of the Company (the "Confidential and/or Proprietary Information"). All of the
Confidential and/or Proprietary Information shall be the sole and exclusive
property of the Company and none of the Confidential and/or Proprietary
Information shall, without the express written consent of the Company, (a) be
disclosed to a third party other than persons associated with the Stockholders
or a Related Party and such persons' financial and legal advisors, provided,
however, that any Stockholder may disclose any such Confidential and/or
Proprietary Information which it is required to disclose to any governmental
authority by law or subpoena or judicial process or in connection with a
registered public offering under the Securities Act, or (b) be used by any
Stockholder or Related Party for any purpose other than in connection with such
persons' investment in the Company and Company purposes. Confidential and/or
Proprietary Information shall not include information (i) in the public domain
(other than as a result of a breach of this Agreement), (ii) in a Stockholder's
possession prior to its receipt from the Company pursuant to this Agreement or
(iii) independently known through a party other than the Company, which party
has no duty of confidentiality to the Company.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK. SIGNATURES FOLLOW ON NEXT
PAGE]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed and
delivered this Agreement or caused this Agreement to be duly executed and
delivered by their respective partners, officers, trustees or authorized
representatives, as the case may be, thereunto duly authorized as of the date
first above written.
_______________________________________
Jack H. Singer
FIDELITY HOLDINGS, INC.
By:____________________________________
Bruce Bendell, Chief Executive Officer
CARS ACQUISITION, INC.
By:____________________________________
CarsTV.com, Inc.
By:____________________________________
_______________________________________
C. Meade Rhoads, Jr.
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<PAGE>
Bear Stearns c/f John Schneider SEP
IRA (616-48014)
By:___________________________________
John S. Schneider
Springfield Land Development Co.,
L.L.C.
By:___________________________
Stuart E. Haynes, Jr., Manager
Stuart E. Haynes, Jr. and Sharon C.
Haynes, tenants by the entireties with
right of survivorship as at common law
______________________________________
Stuart E. Haynes, Jr.
______________________________________
Sharon C. Haynes
______________________________________
William S. Greenleaf
______________________________________
O. V. Maiden
______________________________________
John F. Senn
David Jones & Associates, Ltd.
By:___________________________________
David N. Jones
Robert E. And Marian M. Weber Trust
By:___________________________________
Robert M. Weber, Trustee
By:___________________________________
Elaine L. McGhie, Trustee
______________________________________
Brian M. Raskin, D.D.S.
______________________________________
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<PAGE>
Brian M. Raskin, D.D.S., custodian for
Steven Raskin, a minor
______________________________________
Brian M. Raskin, D.D.S., custodian for
Geoffrey Raskin, a minor
______________________________________
Edmund R. Rhoads
______________________________________
T. K. Hughes
______________________________________
Robert J. Holmquist
Donald G. Agee, Jr. and Lisa G. Agee,
tenants by the entireties with right
of survivorship as at common law
______________________________________
Donald G. Agee, Jr.
______________________________________
Lisa G. Agee
______________________________________
Barry D. Crawford
______________________________________
H. R. Pollard, IV
______________________________________
Ellen K. November
______________________________________
Shelly N. Gouldin
______________________________________
Debra N. Brown
______________________________________
C. Raine Sydnor, III
Robert M. Weber and Siobhan A.
Weber, tenants by the entireties with
right of survivorship as at common law
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<PAGE>
______________________________________
Robert M. Weber
______________________________________
Siobhan A. Weber
______________________________________
Christopher Arlis Hanes
______________________________________
Richard F. Popp
______________________________________
Robert B. Stone
James L. Aldrich, Jr. and Lisa T.
Aldrich, tenants by the entireties
with right of survivorship as at
common law
______________________________________
James L. Aldrich, Jr.
______________________________________
Lisa T. Aldrich
______________________________________
John Daniel Zodun
James N. Breissinger and Linda M.
Breissinger, tenants by the entireties
with right of survivorship as at
common law
______________________________________
James N. Breissinger
______________________________________
Linda M. Breissinger
Bob Wood and Janet L. Wood, tenants
by the entireties with right of
survivorship as at common law
______________________________________
Bob Wood
______________________________________
Janet L. Wood
______________________________________
Lynn Martel Ferguson
Dwayne E. Carter and Sasha M.
Carter, tenants by the entireties with
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<PAGE>
right of survivorship as at common law
______________________________________
Dwayne E. Carter
______________________________________
Sasha M. Carter
______________________________________
D. Brandon Creekmore
______________________________________
Tadd Stiles Bartley
______________________________________
Richard V. Meyers
______________________________________
Bryan M. Mark
Aubrey H. Perry, III and Anne P.
Perry, tenants by the entireties with
right of survivorship as at common law
______________________________________
Aubrey H. Perry, III
______________________________________
Anne P. Perry
______________________________________
Stephen H. Garrison
______________________________________
John W. Porter, Jr.
______________________________________
Antonio S. Burgess
______________________________________
Roy P. Fernbach
______________________________________
Brian K. Evans
______________________________________
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<PAGE>
______________________________________
Justin L. Hall
______________________________________
Amanda M. Schenck
______________________________________
Lillian E. Rosenberger
______________________________________
Patricia K. Hurst
______________________________________
Kathleen B. Canada
______________________________________
Seth L. Belkin
______________________________________
Hooi Min Ong
______________________________________
Angela M. Hower
______________________________________
Jeffrey R. Bush
______________________________________
Phillip V. Daffron, Jr.
______________________________________
April R. Doom
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<PAGE>
SCHEDULE 1
C. Meade Rhoads, Jr.
Bear Stearns c/f John Schneider SEP IRA (616-48014)
Springfield Land Development Co., L.L.C.
Stuart E. Haynes & Sharon C. Haynes, TbyEWROS
William S. Greenleaf
O.V. Maiden
John F. Senn
David M. Jones*
Robert E. and Marian M. Weber Trust
Brian Raskin, DDS
Brian Raskin, DDS, custodian for Steven Raskin, a minor
Brian Raskin, DDS, custodian for Geoffrey Raskin, a minor
Edmund R. Rhoads
T.K. Hughes
Robert J. Holmquist
Donald G. Agee & Lisa G. Agee, TbyEWROS
* Note: Mr. Jones would like any new certificates registered as follows: Dave
Jones and Associates, Ltd.
-14-
<PAGE>
SCHEDULE 2
Barry D. Crawford
H.R. Pollard, IV
Ellen K. November
Shelly N. Gouldin
Debra N. Brown
<PAGE>
SCHEDULE 3
C. Raine Sydnor, III
Robert M. Weber and Siobhan A. Weber, TbyEWROS
Christopher Arlis Hanes
Richard F. Popp
Robert B. Stone
James L. Aldrich, Jr. and Lisa T. Aldrich, TbyEWROS
John Daniel Zodun
James N. Breissinger and Linda M. Breissinger, TbyEWROS
Bob Wood and Janet L. Wood, TbyEWROS
Lynn Martel Ferguson
Dwayne E. Carter and Sasha M. Carter, TbyEWROS
D. Brandon Creekmore
Tadd Stiles Bartley
Richard V. Meyers
Bryan M. Mark
Aubrey H. Perry, III and Anne P. Perry, TbyEWROS
Stephen H. Garrison
John W. Porter, Jr.
Antonio S. Burgess
Roy P. Fernbach
Brian K. Evans
Justin L. Hall
Amanda M. Schenck
Lillian E. Rosenberger
Patricia K. Hurst
Kathleen B. Canada
Seth L. Belkin
Hooi Min Ong
Angela M. Hower
Jeffrey R. Bush
Phillip V. Daffron, Jr.
April R. Doom
-17-
Exhibit 10.72
ESCROW AGREEMENT
ESCROW AGREEMENT (the "Agreement"), dated as of this 18th day of January,
2000, by and among Fidelity Holdings, Inc. ("Fidelity"), CarsTV.com, Inc.
("Cars"), Jack H. Singer ("Singer"), and each of the persons other than Singer
listed on Schedule A hereto (each, including Singer, a "Significant Stockholder"
and with Singer the "Significant Stockholders"), and the law firm of Littman
Krooks Roth & Ball P.C., as escrow agent (the "Escrow Agent").
W I T N E S S E T H
WHEREAS, concurrently herewith, Fidelity is acquiring all of the issued
and outstanding capital stock of Cars pursuant to an Merger Agreement dated
January 18, 2000 (the "Merger Agreement") by and among Fidelity, Cars
Acquisition, Inc. ("Acquisition Corp."), and Cars; and
WHEREAS, upon consummation of the Merger, Cars will merge with and into
Acquisition Corp., which will be the surviving corporation, in a transaction
whereby Acquisition Corp. will remain a wholly-owned subsidiary of Fidelity (the
"Merger"); and
WHEREAS, Section 1.05.11 of the Merger Agreement contemplates the deposit
by the parties thereto with the Escrow Agent of 113,557 shares of Fidelity
Common Stock otherwise issuable to the Significant Stockholders pursuant to the
Merger, to be held in escrow subject to and in accordance with the terms of this
Agreement.
NOW THEREFORE, in consideration of the mutual agreements hereinafter set
forth, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. Appointment of Agent; Delivery of Escrowed Shares; Escrow
Termination Date. Fidelity, Cars and the Significant Stockholders hereby appoint
the Escrow Agent, as their agent to hold and to release the Escrowed Shares (as
defined below) on the terms and conditions set forth herein, and the Escrow
Agent hereby accepts such appointment.
(a) Delivery of Escrowed Shares. Simultaneously herewith,
Fidelity is delivering to the Escrow Agent an aggregate of 113,557 shares of
Fidelity Common Stock otherwise issuable to the Significant Stockholders
pursuant to the Merger (the "Escrowed Shares"). Exhibit A annexed hereto sets
forth the number of Escrowed Shares being deposited on behalf of each of the
Significant Stockholders.
(b) Escrow Period. Subject to the provisions of Section 5
hereof, the escrow period (the "Escrow Period") shall begin with the Closing and
shall terminate upon the earlier to occur of the following dates (the "Escrow
Termination Date"):
(i) the date upon which the Escrow Agent confirms that
it has released all of the Escrowed Shares; or
<PAGE>
(ii) the earlier to occur of (A) the date on which
Fidelity files with the Securities and Exchange Commission its Annual Report on
Form 10-KSB for its 2000 fiscal year, (B) the consummation of an IPO (as defined
in the Merger Agreement or (C) April 15, 2001.
2. Escrow Agent to Hold and Disburse Escrowed Shares. The Escrow
Agent will hold and disburse the Escrowed Shares received by it pursuant to the
terms of this Agreement, as follows:
(a) in accordance with written instructions executed by
Fidelity and the Significant Stockholders; and
(b) in accordance with Section 3 hereof; provided, that in the
event there is any dispute or uncertainty concerning any action to be taken by
the Escrow Agent, pursuant to Section 3 hereof, whether with respect to the
release of the Escrowed Shares or otherwise, or if circumstances arise which the
Escrow Agent determines may result in liability, cost or expense to the Escrow
Agent, then the Escrow Agent shall be entitled to take the action set forth in
Section 3(d) below.
3. Manner of Asserting Claims Against Escrowed Shares.
(a) In the event that Fidelity believes that it is entitled to
indemnification pursuant to the provisions of Section 7 hereof, Fidelity shall
give notice thereof ("Indemnification Notice") to the Escrow Agent, with a copy
to the Significant Stockholders, certifying in such Indemnification Notice (i)
that Fidelity is entitled to indemnification pursuant to Section 6 of the Merger
Agreement; (ii) the grounds upon which a claim for indemnification (the "Claim")
is made, including the particular section of the Merger Agreement or other
agreement or instrument under which such Claim is made and, if applicable, the
nature of the misrepresentation or the breach of covenant to which such Claim is
applicable; and (iii) the amount or the estimated amount of the Claim to the
extent then feasible, which estimate shall not be conclusive of the final amount
of the Claim and which may be amended from time to time upon further notice by
Fidelity to the Escrow Agent and the Significant Stockholders. Any such
Indemnification Notice shall state whether the losses described therein are
final or estimated. Upon resolution of the final amount of a Claim relating to
the estimated losses specified in an Indemnification Notice, such
Indemnification Notice shall be amended as provided in this Section 3 to reflect
the final amount of the claimed losses.
(b) The Significant Stockholders shall have 20 business days
from the date of receipt of the Indemnification Notice (the "Notice Period") to
deliver notice to the Escrow Agent and Fidelity which disputes the Claim
("Dispute Notice") setting forth in such notice the grounds upon which it
believes that Fidelity is not entitled to the amount set forth in the
Indemnification Notice. In the event that the Escrow Agent has not received a
Dispute Notice from the Significant Stockholders within the Notice Period, the
Significant Stockholders shall be deemed to have accepted the Claim in the
amount specified in the Indemnification Notice.
(c) If Fidelity asserts a Claim in the manner specified in
Section 3(a)
2
<PAGE>
with respect to an amount designated in the Indemnification Notice as being the
final amount of such losses, and the Significant Stockholders either accept or
fail to send a Dispute Notice within the Notice Period, the Escrow Agent shall
thereupon release a portion of the Escrowed Shares to Fidelity equal to, when
valued at the "Fidelity Share Value" (which term, when used in this Agreement,
shall have the meaning assigned it in Section 1.05.04(c) of the Merger
Agreement), the lesser of (i) the amount of losses specified in the
Indemnification Notice; or (ii) the remaining Escrowed Shares. If Fidelity
asserts a Claim in the manner specified in Section 3(a) hereof with respect to
an amount designated in the Indemnification Notice as being an estimate and the
Significant Stockholders either accept or fail to dispute such Claim within the
Notice Period, the Escrow Agent shall reserve an amount equal to the lesser of:
(i) the amount of the estimated losses, as specified in the Indemnification
Notice; or (ii) the entire amount of remaining Escrowed Shares. To the extent
the Escrowed Shares remain and are released from escrow in satisfaction of a
Claim, such Escrowed Shares shall be valued at the Fidelity Share Value.
(d) If the Significant Stockholders send a Dispute Notice to
the Escrow Agent and Fidelity during the Notice Period, the Escrow Agent shall
continue to hold the balance of the Escrowed Shares pursuant to the terms of
this Agreement, until otherwise directed pursuant to either (i) a written
instrument signed by Fidelity and the Significant Stockholders or (ii) a
non-appealable final order, decree or judgment by a court of competent
jurisdiction, which order, decree or judgment shall have determined whether and
to what extent Fidelity is entitled to the amount set forth in the
Indemnification Notice.
4. Purchase Price Adjustment. In the event Fidelity disputes the
Closing Date Balance Sheet in accordance with Section 1.05.04 (b) of the Merger
Agreement, Fidelity shall provide written notice to the Escrow Agent. In the
event that a determination is made in accordance with the provisions of Section
1.05.04 of the Merger Agreement that there existed a net shareholder's deficit
in excess of $0.00 at Closing, Fidelity and the Significant Shareholders shall
provide written notice to Escrow Agent. In such case, Escrow Agent shall deliver
to Fidelity a number of Escrowed Shares equal to the quotient obtained by
dividing (i) such excess deficit by (ii) the Fidelity Share Value.
5. Distribution and Termination. As soon as practicable after the
Escrow Termination Date, the Escrow Agent shall deliver the Escrowed Shares, as
then constituted, to the Significant Stockholders according to their pro-rata
percentages; provided, however, that if Fidelity notifies the Escrow Agent in
writing that a claim by Fidelity for indemnity under the Merger Agreement has
been made prior to the Escrow Termination Date and remains pending on the Escrow
Termination Date, the Escrow Agent shall withhold such number of Escrowed Shares
equal to Fidelity's good faith estimate of the maximum amount of all such
pending claims (including, without limitation, expenses as specified by Fidelity
in such notice), and shall distribute the balance of the Escrowed Shares to the
Significant Stockholders. With respect to the Escrowed Shares which remain in
escrow, the provisions hereof shall continue to apply, including the disposition
of the Escrow Shares in accordance with Section 3 hereof. At each such time as
any claim pending on the Escrow Termination Date is no longer pending, the
Escrow Agent shall distribute to the Significant Stockholders any balance of the
Escrowed Shares withheld in respect of that claim remaining after disposition
thereof. When all Escrowed Shares have been distributed in accordance with
Section 3 and/or this Section 5, this Agreement shall terminate.
3
<PAGE>
6. Representations and Warranties as to the Significant
Stockholders. Each of the Significant Stockholders hereby severally, and not
jointly, represents and warrants to Fidelity as follows:
(a) This Agreement is, and each of the agreements, documents
and instruments which may be delivered by him or it, as the case may be,
pursuant hereto (all of the foregoing, including this Agreement, being
hereinafter sometimes collectively called the "Significant Stockholder Executed
Agreements"), when executed and delivered by him or it, as the case may be, will
be, his or its, as the case may be, valid and binding obligations in accordance
with its terms, except as enforceability may be limited (i) by applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditors' rights generally, and (ii) to the extent that the
remedies of specific performance and injunctive or other forms of equitable
relief are subject to certain equitable defenses and to the discretion of the
court before which any proceeding therefor may be brought.
(b) Neither the execution and delivery by him or it, as the
case may be, of any of the Significant Stockholder Executed Agreements, nor the
consummation of any of the transactions contemplated thereby, nor the
performance by Significant Stockholders of any of his or its, as the case may
be, obligations thereunder, will (nor with the giving of notice or the lapse of
time or both would) (i) conflict with, violate, breach, or constitute a default
under, accelerate any obligation under, or give rise to a right of termination,
amendment, or cancellation of any right or benefit under any of the terms,
conditions or provisions of any note, bond, mortgage, debt instrument, credit
facility, security agreement, lease, deed of trust, franchise, indenture,
license, agreement or other instrument, commitment or obligation to which he or
it, as the case may, is a party or by which any his or its, as the case may be,
property of assets is bound, or require any consent, approval or notice under
the terms of any such document or instrument, or (ii) conflict or violate any
applicable order, writ, injunction, decree, law, statute, ordinance, rule,
judgment, regulation or other restriction of any Governmental Entity having
jurisdiction over him or it, as the case may be, or by which any his or its, as
the case may be, property or assets is bound or affected.
(c) He or it, as the case may be, is the record and beneficial
owner of the number of the shares of Cars Common Stock which is set forth
opposite his name on Schedule A to the Merger Agreement. He or it, as the case
may be, has good and valid title to said shares of Cars Common Stock, free and
clear of any and all liens, and encumbrances of any nature whatsoever, and has
sole possession of all rights incident to said ownership, including, but not
limited to, the right to vote said shares and dispositive power with respect to
said shares. He or it, as the case may be, has voted or will vote, as the case
may be, the shares of Cars Common Stock which are owned by him or it, as the
case may be, in favor of the Merger.
(d) No consent, approval or authorization of, or declaration,
filing or registration with, any third party or governmental or administrative
authority is required in connection with the execution and delivery by him or
it, as the case may be, of any of the Significant Stockholder Executed
Agreements, the performance by him or it, as the case may be, of any of his or
its, as the case may be, obligations thereunder, or the consummation of any
4
<PAGE>
of the transactions contemplated thereby.
7. Indemnification by Significant Stockholders.
(a) Each of the Significant Stockholders hereby agrees to indemnify
and hold Fidelity harmless from and against any and all losses, obligations,
deficiencies, liabilities, claims, damages, costs and expenses (including,
without limitation, the amount of any settlement entered into pursuant hereto,
and all reasonable legal and other expenses incurred in connection with the
investigation, prosecution or defense of any matter indemnified pursuant hereto)
which Fidelity may sustain, suffer or incur and which arise out of or are caused
by the breach of any representation or warranty made by Cars in Section IV, and
with respect to Singer only, any representation or warranty made by Singer in
Section III, of the Merger Agreement. Anything contained in the Merger Agreement
or this Agreement to the contrary notwithstanding, the indemnification
obligation of each of the Significant Stockholders shall not exceed the value of
the number of Escrowed Shares being deposited hereunder on behalf of such
Significant Shareholders, such value being determined at the time of the release
of such Escrowed Shares, if ever, from the Escrow Agent to Fidelity hereunder.
Any indemnification claim under this Agreement may be satisfied by forfeiture of
the Escrowed Shares, valued as provided in the previous sentence, or by payment
in cash (in which case an equivalent number of the Escrowed Shares valued as
provided in the previous sentence shall be released from this Agreement). The
form of the payment shall be determined by each of the Significant Stockholders.
(b) If a claim by a third party is made against Fidelity and
Fidelity intends to seek indemnification with respect thereto under this Section
7, Fidelity shall promptly notify the Significant Stockholders of such claim in
accordance with Section 3 hereof; provided, however, that the failure to give
such notice promptly shall not affect the rights of Fidelity hereunder unless
such failure adversely affects the Significant Stockholders. In case such action
is brought against Fidelity and it notifies the Significant Stockholders of the
commencement thereof, the Significant Stockholders shall have the right to
participate in, and, to the extent that it may wish, jointly with any other
Significant Stockholder similarly notified, to assume the defense thereof, with
counsel reasonably satisfactory to Fidelity, provided, however, if the
defendants in any action include both Fidelity and the Significant Stockholders
and Fidelity shall have reasonably concluded that there may be legal defenses
available to it which are different from or in addition to those available to
the Significant Stockholders, or if there is a conflict of interest which would
prevent counsel for the Significant Stockholders from also representing
Fidelity, Fidelity has the right to select separate counsel to participate in
the defense of such action on behalf of Fidelity. After notice from the
Significant Stockholders to Fidelity of its election so to assume the defense
thereof, the Significant Stockholders will not be liable to Fidelity pursuant to
the provisions of this Section 7 for any legal or other expense subsequently
incurred by Fidelity in connection with the defense thereof other than
reasonable costs of investigation unless the Significant Stockholders shall not
have employed counsel reasonably satisfactory to Fidelity to represent Fidelity
within a reasonable time after the notice of the commencement of the action or
the Significant Stockholders have authorized the employment of counsel for
Fidelity at the expense of the Significant Stockholders.
8. Waiver of Conflict. The parties hereto acknowledge and consent to
the legal
5
<PAGE>
representation of Fidelity by the Escrow Agent and hereby waive any conflict of
interest claims arising from such representation of Fidelity by the Escrow
Agent.
9. Duties and Obligations. It is agreed that the duties and
obligations of Escrow Agent are those herein specifically provided and no other.
Escrow Agent shall not have any liability under, or duty to inquire into, the
terms and provisions of any agreement, other than this Agreement. The duties of
the Escrow Agent are ministerial in nature and Escrow Agent shall not incur any
liability whatsoever so long as it has acted in good faith except for willful
misconduct or gross negligence.
Escrow Agent may consult with counsel of its choice, and shall not
be liable for any action taken, suffered or omitted by it in accordance with the
advice of such counsel. Escrow Agent shall not be bound by any modification,
amendment, termination, cancellation, rescission or supersession of this
Agreement unless the same shall be in writing and signed by all of the other
parties hereto and, if its duties as Escrow Agent hereunder are affected
thereby, unless it shall have given its prior written consent thereto.
In the event that the Escrow Agent shall be uncertain as to its
duties or rights hereunder or shall receive instructions, claims or demands from
any party hereto which, in its opinion, conflict with any of the provisions of
this Agreement, it shall be entitled to refrain from taking any action and its
sole obligation shall be to keep safely all property held in escrow until it
shall be directed otherwise in writing by the parties hereto or by a final
judgment or order of a court of competent jurisdiction.
Escrow Agent shall not incur any liability for following the
instructions herein contained or expressly provided for, or written instructions
given by the parties hereto in accordance with the terms of this Agreement.
Escrow Agent shall not have any responsibility for the genuineness
or validity of any document or other item deposited with it or any liability for
action in accordance with any written instructions or certificates given to it
hereunder and believed by it to be signed by the proper parties.
Escrow Agent shall not be required to institute legal proceedings of
any kind and shall not be required to initiate or defend any legal proceedings
which may be instituted against it in respect of the subject matter of these
instructions. If it does elect to act, it will do so only if it is indemnified
to its satisfaction against the cost and expense of such defense or initiation.
10. Resignation of Escrow Agent. Escrow Agent may at any time resign
hereunder by giving written notice of its resignation to the parties hereto at
their address set forth below, at least 10 days prior to the date specified for
such resignation to take effect, and, upon the effective date of such
resignation, all property then held by Escrow Agent hereunder shall be delivered
by it to such person as may be designated in writing by the parties hereto,
whereupon all of Escrow Agent's obligations hereunder shall cease and terminate.
If no such person shall have been designated by such date, all obligations of
Escrow Agent hereunder shall nevertheless cease and terminate. Escrow Agent's
sole responsibility thereafter shall be to keep safely all property then held by
it and to deliver the same to a person designated by the
6
<PAGE>
parties hereto or in accordance with the directions of a final order or judgment
of a court of competent jurisdiction.
11. Indemnification in favor of Escrow Agent. The parties hereto
agree (jointly and severally) to indemnify, defend and hold Escrow Agent
harmless from and against any and all loss, damage, tax, liability and expense
that may be incurred by Escrow Agent arising out of or in connection with the
acceptance of its appointment as Escrow Agent and the performance of its duties
hereunder, except as caused by its gross negligence or willful misconduct,
including the legal costs and expenses of defending itself against any claim or
liability in connection with its performance hereunder.
12. Expenses. Reasonable fees and expenses of the Escrow Agent shall
be paid by Fidelity.
13. Notices. All notices, requests, demands and other communications
given hereunder shall be in writing and shall be deemed to have been duly given:
(i) on the date of delivery, if delivered personally or by messenger, (ii) on
the first business day following the date of timely deposit with Federal Express
or other nationally recognized overnight courier service, if sent by such
courier specifying next day delivery, (iii) upon receipt of confirmation of
transmission, if transmitted by telecopier; and (iv) on the third business day
after mailing, if mailed by registered or certified mail (postage prepaid,
return receipt requested); provided, however, that a notice of change of address
or telecopier number shall not be deemed to have been given until actually
received by the addressee. All such notices, requests, demands and other
communications shall be addressed as set forth below or to such other address or
telecopier number as either party hereto may designate to the other party hereto
by like notice:
If to Fidelity to:
Fidelity Holdings, Inc.
80-02 Kew Gardens Road
Kew Gardens, New York 11415
Telecopier No.: (718) 793-2455
Attn: Doron Cohen, President
with a copy to:
Littman Krooks Roth & Ball P.C.
655 Third Avenue
New York, NY 10017
Telecopier No.: (212) 490-2990
Attn: Mitchell C. Littman, Esq.
If to the Escrow Agent to:
Littman Krooks Roth & Ball P.C.
655 Third Avenue
New York, NY 10017
Telecopier No.: (212) 490-2990
7
<PAGE>
Attn: Mitchell C. Littman, Esq.
If to the Significant Stockholders to:
Jack H. Singer
4480 Springfield Road
Glen Allen, VA 23060
Robert M. Weber
10673 Anna Marie Drive
Glen Allen, VA 23060
Christopher A. Hanes
555 Hockett Road
Manakin, VA 23103
C. Raine Sydnor, III
1434 Daniel Avenue
Norfolk, VA 23505
Richard F. Popp
13230 Drakewood Road
Midlothian, VA 23113
Tadd S. Bartley
17600 Burbank, Boulevard, Apt. 211
Encino, CA 91316
with a copy to:
Leclair Ryan, a Professional Corporation
11th Floor, 707 East Main Street
Richmond, Virginia 23219
Attn: Gary D. LeClair, Esq.
or to such other address as any party shall have specified by notice in writing
to the other in compliance with this Section 13.
14. Miscellaneous. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors, heirs,
executors, administrators and assigns. This Agreement shall be governed by and
interpreted under the laws of the State of New York applicable to contracts made
and performed therein without giving effect to the principles of conflict of
laws thereof. Capitalized terms used in this Agreement which are not otherwise
defined herein shall have the meanings ascribed to them in the Merger Agreement.
Any amendment or waiver of the provisions hereof shall be in writing and shall
be signed by the parties against whom such amendment or waiver is sought to be
enforced. This Agreement
8
<PAGE>
may be executed in any number of counterparts, each of which shall be deemed to
be an original, but collectively all of such counterparts shall constitute one
and the same agreement.
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Escrow
Agreement on the date first above written.
FIDELITY HOLDINGS, INC.
By:____________________________________
Name:
Title:
CARSTV.COM, INC.
By:____________________________________
Name:
Title:
_______________________________________
Jack H. Singer
Littman Krooks Roth & Ball P.C.
By:_______________________________________________
An Officer of the Professional Corporation
______________________________________
Robert M. Weber
______________________________________
Christopher A. Hanes
______________________________________
C. Raine Sydnor, III
______________________________________
Richard F. Popp
______________________________________
Tadd S. Bartley
10
<PAGE>
SCHEDULE A
SIGNIFICANT STOCKHOLDERS
Jack H. Singer
Robert M. Weber
Christopher A. Hanes
C. Raine Sydnor, III
Richard F. Popp
Tadd S. Bartley
10
<PAGE>
Exhibit A
Significant Stockholder Contribution
Name Number of Shares Percentage of Total Escrowed Shares
Jack H. Singer 76,128 67.0
Robert M. Weber 14,396 12.7
Christopher A. Hanes 14,396 12.7
C. Raine Sydnor,III 3,455 3.0
Richard F. Popp 2,879 2.5
Tadd S. Bartley 2,303 2.0
-------
Total 113,557
12
================================================================================
SECURITIES PURCHASE AGREEMENT
Among
FIDELITY HOLDINGS, INC.
and
THE INVESTORS SIGNATORY HERETO
Dated as of March 14, 2000
================================================================================
<PAGE>
Exhibit 10.73
SECURITIES PURCHASE AGREEMENT (this "Agreement"), dated as of March 14,
2000, among Fidelity Holdings, Inc., a Nevada corporation (the "Company"), and
the investors signatory hereto on the date hereof (each such investor is a
"Purchaser" and all such investors are, collectively, the "Purchasers").
WHEREAS, subject to the terms and conditions set forth in this Agreement,
the Company desires to issue and sell to the Purchasers and the Purchasers,
severally and not jointly, desire to purchase from the Company an aggregate of
50,000 shares (the "Shares") of the Company's common stock, $.01 par value per
share (the "Common Stock"), at a purchase price of $13.90 per Share, and
warrants to acquire during the five years following the date hereof an aggregate
of 50,000 additional shares of Common Stock at an exercise price of $16.00 per
share of Common Stock (the "Warrants").
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this
Agreement, and for other good and valuable consideration the receipt and
adequacy are hereby acknowledged, the Company and the Purchasers agree as
follows:
ARTICLE I
PURCHASE AND SALE
1. The Closing.
(a) The Closing. (i) The closing of the purchase and sale of the
Shares and Warrants (the "Closing") shall take place at the offices of Robinson
Silverman Pearce Aronsohn & Berman LLP ("Robinson Silverman"), 1290 Avenue of
the Americas, New York, New York 10104, immediately following the execution
hereof or such later date as the parties shall agree. The date of the Closing is
hereinafter referred to as the "Closing Date."
(ii) At the Closing, the parties shall deliver or shall cause
to be delivered the following: (A) the Company shall deliver to each Purchaser
(1) a stock certificate representing the number of Shares indicated below such
Purchaser's name on the signature page of this Agreement, (2) Warrants, in the
form of Exhibit A, to acquire the number of Shares indicated below such
Purchaser's name on the signature page to this Agreement, and (3) an executed
Registration Rights Agreement, dated the date hereof, among the Company and the
Purchasers, in the form of Exhibit B (the "Registration Rights Agreement"); and
(B) each Purchaser shall deliver to the Company (1) the purchase price indicated
below such Purchaser's name on the signature page to this Agreement in United
States dollars in immediately available funds by wire transfer to an account
designated for such purpose prior to the Closing Date in writing by the Company,
and (2) an executed Registration Rights Agreement.
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES
2. Representations and Warranties of the Company. The Company hereby makes
the following representations and warranties to the Purchasers:
(a) Authorization; Enforcement. The Company has the requisite
corporate power and authority to enter into and to consummate the transactions
contemplated by each of this Agreement, the Warrants and the Registration Rights
Agreement (the "Transaction Documents") and otherwise to carry out its
obligations thereunder. The execution and delivery of each of the Transaction
Documents by the Company and the consummation by it of the transactions
contemplated thereby have been duly authorized by all necessary corporate action
on the part of the Company and no further action is required by the Company.
Each of the Transaction Documents has been duly executed by the Company and,
when delivered in accordance with the terms hereof, will constitute the valid
and binding obligation of the Company enforceable against the Company in
accordance with its terms. Neither the Company nor any subsidiary is in
violation of any of the provisions of its respective certificate of
incorporation, by-laws or other charter or organizational documents.
(b) Issuance of the Securities. The Shares, the Warrants and the
shares of Common Stock issuable upon exercise of the Warrants are duly
authorized, have been duly reserved for issuance to the Purchasers and, when
issued and paid for in accordance with the terms hereof, will be duly and
validly issued, fully paid and nonassessable, free and clear of all liens,
encumbrances and rights of first refusal of any kind.
(c) Restatement of the Company's Representation and Warranties
contained in Article II of the February Agreement. The representations and
warranties of the Company contained in the Securities Purchase Agreement dated
as of February 8, 2000 among the Company and the Purchasers (the "February
Agreement")) are true and correct as of the Closing Date as though first made on
and as of the Closing Date (other than representations and warranties which
relate to a specific date (which shall not include representations and
warranties relating to the "date hereof") which representations and warranties
shall be true as of such specific date). For all purposes of the February
Agreement, the term "Transaction Documents" (as defined herein) shall replace
the term "Transaction Documents" (as defined in the February Agreement) and the
term "Securities" shall refer to the Shares, the Warrants and the shares of
Common Stock issuable upon exercise thereof.
(d) Restatement of the Purchasers' Representation and Warranties
contained in Article II of the February Agreement. The representations and
warranties of each Purchaser contained in the February Agreement are true and
correct as of the Closing Date as though made on and as of the Closing Date
(other than representations and warranties which relate to a specific date
(which shall not include representations and warranties relating to the "date
hereof") which representations and warranties shall be true as of such specific
date).
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ARTICLE III
OTHER AGREEMENTS OF THE PARTIES
3. Restatement of the Parties' Agreements contained in Article III
of the February Agreement. The agreements of the Company and each Purchaser
contained in the February Agreement are reiterated as of the Closing Date,
mutatis mutandis.
ARTICLE IV
MISCELLANEOUS
4.1 Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 8:00 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Agreement later than 8:00 p.m. (New
York City time) on any date and earlier than 11:59 p.m. (New York City time) on
such date, (iii) the Business Day following the date of mailing, if sent by
nationally recognized overnight courier service, or (iv) if sent other than by
the methods set forth in (i)-(iii) of this Section 4.3, upon actual receipt by
the party to whom such notice is required to be given. The address for such
notices and communications shall be as follows:
If to the Company: Fidelity Holdings, Inc.
80-02 Kew Gardens Road, Suite 5000
Kew Gardens, New York 11415
Facsimile No.: (718) 793-2455
Attn: Doron Cohen, President
With copies to: Littman Krooks Roth & Ball P.C.
655 Third Avenue
New York, New York 10017-5617
Attn: Mitchell C. Littman, Esq. and
James J. Quinlan, Esq.
Facsimile No.: (212) 490-2990
or such other address as may be designated in writing hereafter, in the same
manner, by such Person.
4.2 Governing Law. The corporate laws of the State of Nevada shall
govern all issues concerning the relative rights of the Company and its
stockholders. All other questions concerning the construction, validity,
enforcement and interpretation of the Transaction Documents shall be governed by
and construed and enforced in accordance with the internal laws of the State of
New York, without regard to the principles of conflicts of law thereof. Each
party hereby irrevocably submits to the exclusive jurisdiction of the state and
federal courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection
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herewith or with any transaction contemplated hereby or discussed herein
(including with respect to the enforcement of the any of the Transaction
Documents), and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address in effect for notices to it
under this Agreement and agrees that such service shall constitute good and
sufficient service of process and notice thereof. Nothing contained herein shall
be deemed to limit in any way any right to serve process in any manner permitted
by law.
4.3 Survival. The representations, warranties, agreements and
covenants contained herein shall survive the Closing, the delivery and exercise
of the Warrants.
4.4 Independent Nature of Purchasers' Obligations and Rights. The
obligations of each Purchaser under any Transaction Document is several and not
joint with the obligations of any other Purchaser, and no Purchaser shall be
responsible in any way for the performance of the obligations of any other
Purchaser under any Transaction Document. Nothing contained herein or in any
Transaction Document, and no action taken by any Purchaser pursuant thereto,
shall be deemed to constitute the Purchasers as a partnership, an association, a
joint venture or any other kind of entity, or create a presumption that the
Purchasers are in any way acting in concert with respect to such obligations or
the transactions contemplated by the Transaction Document. Each Purchaser shall
be entitled to independently protect and enforce its rights, including without
limitation the rights arising out of this Agreement or out of the Transaction
Documents, and it shall not be necessary for any other Purchaser to be joined as
an additional party in any proceeding for such purpose.
4.5 Incorporation of February Agreement Sections. Sections of the
February Agreement relating to severability, entire agreement, assignment,
amendment, waiver, headings and specific performance are hereby incorporated in
their entirety in this Agreement as if fully set forth herein and shall be
binding upon this Agreement and the transactions contemplated herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGES FOLLOW]
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IN WITNESS WHEREOF, the parties hereto have caused this Securities
Purchase Agreement to be duly executed by their respective authorized
signatories as of the date first indicated above.
FIDELITY HOLODINGS, INC.
By:_____________________________________
Name:
Title:
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
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STRONG RIVER INVESTMENTS, INC.
By:_____________________________________
Kenneth L. Henderson
Attorney-in-fact
Purchase Price: $695,000
Number of Shares Purchased: 50,000
Number of Shares underlying Warrant: 50,000
Address for Notice:
Strong River Investments, Inc.
c/o Gonzalez-Ruiz & Aleman (BVI) Limited
Wickhams Cay I, Vanterpool Plaza
P.O. Box 873
Road Town, Tortolla, BVI
With copies to:
Robinson Silverman Pearce Aronsohn & Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630 and (212) 541-1432
Attn: Eric L. Cohen, Esq.
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Exhibit 10.74
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of March 14, 2000 among Fidelity Holdings, Inc., a Nevada
corporation (the "Company"), and the investors signatory hereto (each such
investor is a "Purchaser" and all such investors are, collectively, the
"Purchasers").
This Agreement is made pursuant to the Securities Purchase
Agreement, dated as of the date hereof, among the Company and the Purchasers
(the "Purchase Agreement").
The Company and the Purchasers hereby agree as follows:
1. Definitions
Capitalized terms used and not otherwise defined herein that are
defined in the Purchase Agreement shall have the meanings given such terms in
the Purchase Agreement. As used in this Agreement, the following terms shall
have the following meanings:
"Advice" shall have meaning set forth in Section 6(e).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly controls or is controlled by or under common control with
such Person. For the purposes of this definition, "control," when used with
respect to any Person, means the possession, direct or indirect, of the power to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise;
and the terms of "affiliated," "controlling" and "controlled" have meanings
correlative to the foregoing.
"Business Day" means any day except Saturday, Sunday and any day
which shall be a federal legal holiday or a day on which banking institutions in
the state of New York generally are authorized or required by law or other
governmental action to close.
"Closing Date" shall have the meaning set forth in the Purchase
Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's common stock, $.01 par value per
share.
"Effectiveness Date" means the 90th day following the Closing Date.
"Effectiveness Period" shall have the meaning set forth in Section
2(a).
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Filing Date" means the 40th day following the Closing Date.
"Holder" or "Holders" means the holder or holders, as the case may
be, from time to time of Registrable Securities.
"Indemnified Party" shall have the meaning set forth in Section
5(c).
"Indemnifying Party" shall have the meaning set forth in Section
5(c).
"Losses" shall have the meaning set forth in Section 5(a).
"Person" means an individual or a corporation, partnership, trust,
incorporated or unincorporated association, joint venture, limited liability
company, joint stock company, government (or an agency or political subdivision
thereof) or other entity of any kind.
"Proceeding" means an action, claim, suit, investigation or
proceeding (including, without limitation, an investigation or partial
proceeding, such as a deposition), whether commenced or threatened.
"Prospectus" means the prospectus included a Registration Statement
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by such
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
"Registration Delay Payments" shall have the meaning set forth in
Section 2(e).
"Registrable Securities" means (i) the Shares and (ii) the shares of
Common Stock issuable upon exercise of the Warrants.
"Registration Statements" means the registration statements
and any additional registration statements contemplated by Sections 2(a) and
2(f), including (in each case) the Prospectus, amendments and supplements to
such registration statements or Prospectus, including pre- and post-effective
amendments, all exhibits thereto, and all material incorporated by reference or
deemed to be incorporated by reference in such registration statements.
"Rule 144" means Rule 144 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any rule
or regulation hereafter adopted by the Commission to replace such Rule.
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"Rule 158" means Rule 158 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any rule
or regulation hereafter adopted by the Commission to replace such Rule.
"Rule 415" means Rule 415 promulgated by the Commission pursuant to
the Securities Act, as such Rule may be amended from time to time, or any rule
or regulation hereafter adopted by the Commission to replace such Rule.
"Securities Act" means the Securities Act of 1933, as amended.
"Shares" means the shares of Common Stock issued to the Purchasers
on the Closing Date pursuant to the Purchase Agreement.
"Special Counsel" means one special counsel to the Holders for which
the Holders will be reimbursed by the Company pursuant to Section 4.
"Transaction Documents" shall have the meaning set forth in the
Purchase Agreement.
"Underwritten Registration or Underwritten Offering" means a
registration in connection with which securities of the Company are sold to an
underwriter for reoffering to the public pursuant to an effective registration
statement.
"Warrants" shall have the meaning set forth in the Purchase
Agreement.
2. Shelf Registration
(a) On or prior to the Filing Date, the Company shall prepare
and file with the Commission a "Shelf" Registration Statement covering all
Registrable Securities for an offering to be made on a continuous basis pursuant
to Rule 415. The Registration Statement shall be on Form S-3 (except if the
Company is not then eligible to register for resale the Registrable Securities
on Form S-3, in which case such registration shall be on another appropriate
form in accordance herewith as the Holders may consent). The Company shall use
its best efforts to cause the Registration Statement to be declared effective
under the Securities Act as promptly as possible after the filing thereof, but
in any event prior to the Effectiveness Date, and shall use its best efforts to
keep such Registration Statement continuously effective under the Securities Act
until the date which is two (2) years after the date that such Registration
Statement is declared effective by the Commission or such earlier date when all
Registrable Securities covered by such Registration Statement have been sold or
may be sold without volume restrictions pursuant to Rule 144(k) as determined by
the counsel to the Company pursuant to a written opinion letter to such effect,
addressed and acceptable to the Company's transfer agent (the "Effectiveness
Period"), provided, however, that the Company shall not be deemed to have used
its best efforts to keep the Registration Statement effective during the
Effectiveness Period if it voluntarily takes any action that would result in the
Holder not being able to sell the Registrable Securities covered by such
Registration Statement during the Effectiveness Period, unless such action is
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<PAGE>
required under applicable law or the Company has filed a post-effective
amendment to the Registration Statement and the Commission has not declared it
effective.
(b) The initial Registration Statement to be filed hereunder shall
include (but not be limited to) 100,000 shares of Common Stock (such number, the
"Initial Minimum).
(c) If the Holders of a majority of the Registrable Securities then
outstanding so elect, an offering of Registrable Securities pursuant to a
Registration Statement may be effected in the form of an Underwritten Offering.
In such event, and, if the managing underwriters advise the Company and such
Holders in writing that in their opinion the amount of Registrable Securities
proposed to be sold in such Underwritten Offering exceeds the amount of
Registrable Securities which can be sold in such Underwritten Offering, there
shall be included in such Underwritten Offering the amount of such Registrable
Securities which in the opinion of such managing underwriters can be sold, and
such amount shall be allocated pro rata among the Holders proposing to sell
Registrable Securities in such Underwritten Offering.
(d) If any of the Registrable Securities are to be sold in an
Underwritten Offering, the investment banker in interest that will administer
the offering will be selected by the Company upon consultation with the Holders
of a majority of the Registrable Securities. No Holder may participate in any
Underwritten Offering hereunder unless such Holder (i) agrees to sell its
Registrable Securities on the basis provided in any underwriting agreements
approved by the Persons entitled hereunder to approve such arrangements and (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents required under the terms of such
arrangements.
(e) If (i) the initial Registration Statement covering the
Registrable Securities to be covered thereby as set forth herein is not filed on
or before the Filing Date (if the Company files such Registration Statement
without affording the Holder the opportunity to review and comment on the same
as required by Section 3(a) hereof, the Company shall not be deemed to have
satisfied this clause (i)), or (ii) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 12d1-2 promulgated
under the Exchange Act within five (5) Business Days of the date that the
Company is notified (orally or in writing, whichever is earlier) by the
Commission that a Registration Statement will not be "reviewed" or is not
subject to further review, or (iii) the initial Registration Statement filed
hereunder is not declared effective by the Commission on or before the thirtieth
(30) day following the Effectiveness Date, or (iv) after a Registration
Statement has been declared effective by the Commission, such Registration
Statement is either not effective as to all Registrable Securities required to
be covered thereby throughout the Effectiveness Period for a period of more than
three (3) aggregate days or the Holders are not permitted for any reason to make
sales thereunder during such period, (v) an amendment to the Registration
Statement is not filed by the Company with the Commission within ten (10) days
of the Commission's notifying the Company that such amendment is required in
order for a Registration Statement to be declared effective, (vi) the Company
shall become ineligible to register securities for resale with the Commission
under Form S-3, or (vii) trading in the Common Stock shall be suspended from the
NASDAQ (as defined herein) or a Subsequent Market (as defined herein) for more
than three (3) Business Days (which need not be
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consecutive days) (any such failure or breach being referred to as an "Event,"
and for purposes of clauses (i), (iii) and (vi) the date on which such Event
occurs, or for purposes of clause (ii) the date on which such five (5) Business
Day period is exceeded, or for purposes of clause (v) the date on which such ten
(10) day period is exceeded, or for purposes of clause (iv) the date on which
such three (3) day period is exceeded, or for purposes of clause (vii) the date
on which such three (3) Business Day period is exceeded being referred to as
"Event Date"), then, in any such case, as partial relief for the damages
suffered therefrom by the Holder (which remedy shall not be exclusive of any
other remedies available at law or in equity), the Company shall on the Event
Date and on each monthly anniversary thereof until the triggering Event is
cured, pay to the Holder an amount in cash, as liquidated damages for the
estimated cost to the Holders of not having liquid securities in the time
contemplated by the Transaction Documents and not as a penalty, equal to 1% (the
"Percentage") of the purchase price paid by such Holder pursuant to the Purchase
Agreement and the pro-rata portion for partial months until the applicable Event
is cured, provided, that (i) after the Event Date, the Percentage shall equal 3%
and (ii) in the case of an Event under clause 2(e)(iii), on and after the
ninetieth (90th) day following the Effectiveness Date, the Percentage shall
equal 5%. The payments to which the Holders shall be entitled pursuant to this
Section are referred to herein as "Registration Delay Payments." Registration
Delay Payments shall be calculated on a cumulative basis and paid within five
(5) Business Days of the Event Date and each monthly anniversary thereof. If the
Company fails to make Registration Delay Payments in a timely manner, such
Registration Delay Payments shall bear interest at the rate of 2.0% per month
(or the maximum rate permitted by law), pro-rated for partial months, until paid
in full. Notwithstanding anything to the contrary, the Company shall not be
required to make any Registration Delay Payments if an Event described above
arises solely as a result of comments by the Commission relating to or directed
at any of the Holders in connection with a Registration Statement and no other
comments relating to the Registration Statement remain outstanding.
3. Registration Procedures
In connection with the Company's registration obligations hereunder,
the Company shall:
(a) Prepare and file with the Commission on or prior to the Filing
Date, a Registration Statement on Form S-3 (or if the Company is not then
eligible to register for resale the Registrable Securities on Form S-3 such
registration shall be on another appropriate form in accordance herewith, or, in
connection with an Underwritten Offering hereunder, such other form agreed to by
the Company and the Holders) which shall contain the "Plan of Distribution"
attached hereto as Annex A (except if otherwise directed by the Holders), and
cause the Registration Statement to become effective and remain effective as
provided herein; provided, however, that not less than five (5) Business Days
prior to the filing of a Registration Statement or any related Prospectus or any
amendment or supplement thereto, the Company shall, (i) furnish to the Holders,
their Special Counsel and any managing underwriters, copies of all such
documents proposed to be filed, which documents will be subject to the review of
such Holders, their Special Counsel and such managing underwriters, and (ii)
cause its officers and directors, counsel and independent certified public
accountants to respond to such inquiries as shall be
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necessary, in the reasonable opinion of respective counsel to such Holders and
such underwriters, to conduct a reasonable investigation within the meaning of
the Securities Act. The Company shall not file the Registration Statement or any
such Prospectus or any amendments or supplements thereto to which the Holders of
a majority of the Registrable Securities, their Special Counsel, or any managing
underwriters, shall reasonably object on a timely basis.
(b) (i) Prepare and file with the Commission such amendments,
including post-effective amendments, to the Registration Statement and the
Prospectus used in connection therewith as may be necessary to keep the
Registration Statement continuously effective as to the applicable Registrable
Securities for the Effectiveness Period and prepare and file with the Commission
such additional Registration Statements in order to register for resale under
the Securities Act all of the Registrable Securities; (ii) cause the related
Prospectus to be amended or supplemented by any required Prospectus supplement,
and as so supplemented or amended to be filed pursuant to Rule 424 (or any
similar provisions then in force) promulgated under the Securities Act; (iii)
use its best effort to respond as quickly as possible, and, in case the
obtainment of information requested by the Commission which is within the
control of the Company, no later than ten (10) Business Days of receipt thereof,
to all comments received from the Commission with respect to the Registration
Statement or any amendment thereto and as promptly as possible provide the
Holders true and complete copies of all correspondence from and to the
Commission relating to the Registration Statement; and (iv) comply in all
material respects with the provisions of the Securi ties Act and the Exchange
Act with respect to the disposition of all Registrable Securities covered by the
Registration Statement during the applicable period in accordance with the
intended methods of disposition by the Holders thereof set forth in the
Registration Statement as so amended or in such Prospectus as so supplemented.
(c) (i) File additional Registration Statements if the number of
Registrable Securities at any time exceeds 85% of the number of shares of Common
Stock then registered in a Registration Statement. The Company shall have 30
days to file such additional Registration Statements after its receipt of notice
of the requirement thereof which the Holders may give at any time when the
Registrable Securities exceeds 85% of the number of shares of Common Stock then
registered in a Registration Statement hereunder. In such event, the
Registration Statement required to be filed by the Company shall include a
number of shares of Common Stock equal to no less than the Initial Minimum and
any other Registrable Securities not then registered in a Registration
Statement.
(ii) File such supplements or attach "stickers" to the
Registration Statement or Prospectus as and when required by the Commission to
evidence a material amount of resales by a Holder pursuant to a Prospectus. In
connection therewith, if such supplements or "stickers" are periodically
required by the Commission, the Company shall, within four (4) Business Days,
file such supplements or attach such "stickers" whenever a Holder has sold 50%
of the Registrable Securities covered by the then outstanding Prospectus (as
last supplemented or "stickered") in order to cover 100% of the number of the
outstanding Registrable Securities.
(d) Notify the Holders of Registrable Securities to be sold, their
Special Counsel and any managing underwriters as promptly as reasonably possible
(and, in the case of
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(i)(A) below, not less than three (3) Business Days (or, in the case of a
supplement or "sticker" required to be filed or attached pursuant to Section
3(c)(ii), within one (1) Business Day) prior to such filing) and (if requested
by any such Person) confirm such notice in writing no later than one (1)
Business Day following the day (i)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment to the Registration Statement is proposed
to be filed; (B) when the Commission notifies the Company whether there will be
a "review" of such Registration Statement and whenever the Commission comments
in writing on such Registration Statement (the Company shall provide true and
complete copies thereof and all written responses thereto to each of the
Holders, which the Holders shall keep confidential); and (C) with respect to the
Registration Statement or any post-effective amendment, when the same has become
effective; (ii) of any request by the Commission or any other Federal or state
governmental authority for amendments or supplements to the Registration
Statement or Prospectus or for additional information; (iii) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement covering any or all of the Registrable Securities or the
initiation of any Proceedings for that purpose; (iv) if at any time any of the
representations and warranties of the Company contained in any agreement
(including any underwriting agreement) contemplated hereby ceases to be true and
correct in all material respects; (v) of the receipt by the Company of any
notification with respect to the suspen sion of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any Proceeding for such
purpose; and (vi) of the occurrence of any event or passage of time that makes
the financial statements included in the Registration Statement ineligible for
inclusion therein or any statement made in the Registration Statement or
Prospectus or any document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires any revisions to the
Registration Statement, Prospectus or other documents so that, in the case of
the Registration Statement or the Prospectus, as the case may be, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(e) Use its best efforts to avoid the issuance of, or, if issued,
obtain the withdrawal of (i) any order suspending the effectiveness of the
Registration Statement, or (ii) any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction, at the earliest practicable moment.
(f) If requested by any managing underwriter or the Holders of a
majority in interest of the Registrable Securities to be sold in connection with
an Underwritten Offering, (i) promptly incorporate in a Prospectus supplement or
post-effective amendment to the Registration Statement such information as such
managing underwriters and such Holders reasonably request should be included
therein, and (ii) make all required filings of such Prospectus supplement or
such post-effective amendment as soon as practicable after the Company has
received notification of the matters to be incorporated in such Prospectus
supplement or post-effective amendment; provided, however, that the Company
shall not be required to take any action pursuant to this Section 3(f) that
would, in the opinion of counsel for the Company or the Board of Directors of
the Company, violate applicable law or be materially detrimental to the business
prospects of the Company.
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(g) Furnish to each Holder, their Special Counsel and any managing
underwriters, without charge, at least one conformed copy of each Registration
Statement and each amendment thereto, including financial statements and
schedules, all documents incorporated or deemed to be incorporated therein by
reference, and all exhibits to the extent requested by such Person (including
those previously furnished or incorporated by reference) promptly after the
filing of such documents with the Commission.
(h) Promptly deliver to each Holder, their Special Counsel, and any
underwriters, without charge, as many copies of the Prospectus or Prospectuses
(including each form of prospectus) and each amendment or supplement thereto as
such Persons may reasonably request; and the Company hereby consents to the use
of such Prospectus and each amendment or supplement thereto by each of the
selling Holders and any underwriters in connection with the offering and sale of
the Registrable Securities covered by such Prospectus and any amendment or
supplement thereto.
(i) Prior to any public offering of Registrable Securities, use its
commercially reasonable efforts to register or qualify or cooperate with the
selling Holders, any underwriters and their Special Counsel in connection with
the registration or qualification (or exemption from such registration or
qualification) of such Registrable Securities for offer and sale under the
securities or Blue Sky laws of such jurisdictions within the United States as
any Holder or underwriter requests in writing, to keep each such registration or
qualification (or exemption therefrom) effective during the Effectiveness Period
and to do any and all other acts or things necessary or advisable to enable the
disposition in such jurisdictions of the Registrable Securities covered by a
Registration Statement; provided, however, that the Company shall not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action that would subject it to general service
of process in any such jurisdiction where it is not then so subject or subject
the Company to any material tax in any such jurisdiction where it is not then so
subject or make any change in its charter or by-laws, which in each case the
Board of Directors of the Company determines to be contrary to the best
interests of the Company and its stockholders.
(j) Cooperate with the Holders and any managing underwriters to
facilitate the timely preparation and delivery of certificates representing
Registrable Securities to be delivered to a transferee pursuant to a
Registration Statement, which certificates shall be free, to the extent
permitted by applicable law, of all restrictive legends, and to enable such
Registrable Securities to be in such denominations and registered in such names
as any such managing underwriters or Holders may request.
(k) Upon the occurrence of any event contemplated by Section
3(d)(vi), as promptly as reasonably possible, prepare a supplement or amendment,
including a post-effective amendment, to the Registration Statement or a
supplement to the related Prospectus or any document incorporated or deemed to
be incorporated therein by reference, and file any other required document so
that, as thereafter delivered, neither the Registration Statement nor such
Prospectus will contain an untrue statement of a material fact
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or omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading.
(l) Use its best efforts to cause all Registrable Securities
relating to such Registration Statement to be listed on the Nasdaq National
Market ("NASDAQ") or on any other stock market or trading facility on which the
shares of Common Stock are traded, listed or quoted (each a "Subsequent Market")
as and when required pursuant to the Purchase Agreement.
(m) In the event of an Underwritten Offering, enter into such
agreements (including an underwriting agreement in form, scope and substance as
is customary in Underwritten Offerings) and take all such other actions in
connection therewith (including those reasonably requested by any managing
underwriters and the Holders of a majority of the Registrable Securities being
sold) in order to expedite or facilitate the disposition of such Registrable
Securities, and whether or not an underwriting agreement is entered into, (i)
make such representations and warranties to such Holders and such underwriters
as are customarily made by issuers to underwriters in underwritten public
offerings, and confirm the same if and when requested; (ii) obtain and deliver
copies thereof to each Holder and the managing underwriters, if any, of opinions
of counsel to the Company and updates thereof addressed to each Holder and each
such underwriter, in form, scope and substance reasonably satisfactory to any
such managing underwriters and Special Counsel to the selling Holders covering
the matters customarily covered in opinions requested in Underwritten Offerings
and such other matters as may be reasonably requested by such Special Counsel
and underwriters; (iii) immediately prior to the effectiveness of the
Registration Statement, and, in the case of an Underwritten Offering, at the
time of delivery of any Registrable Securities sold pursuant thereto, use its
reasonable best efforts to obtain and deliver copies to the Holders and the
managing underwriters, if any, of "cold comfort" letters and updates thereof
from the independent certified public accountants of the Company (and, if
necessary, any other independent certified public accountants of any subsidiary
of the Company or of any business acquired by the Company for which financial
statements and financial data is, or is required to be, included in the
Registration Statement), addressed to the Company in form and substance as are
customary in connection with Underwritten Offerings; (iv) if an underwriting
agreement is entered into, the same shall contain indemnification provisions and
procedures no less favorable to the selling Holders and the under writers, if
any, than those set forth in Section 5 (or such other provisions and procedures
acceptable to the managing underwriters, if any, and holders of a majority of
Registrable Securities participating in such Underwritten Offering); and (v)
deliver such documents and certificates as may be reason ably requested by the
Holders of a majority of the Registrable Securities being sold, their Special
Counsel and any managing underwriters to evidence the continued validity of the
representations and warranties made pursuant to Section 3(m)(i) above and to
evidence compliance with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company.
(n) In the event of an Underwritten Offering, make available for
inspection by any underwriter participating in any disposition of Registrable
Securities, and any Special Counsel at the offices where normally kept, during
reasonable business hours, all financial and other records, pertinent corporate
documents and properties of the Company and its subsidiaries,
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<PAGE>
and cause the officers, directors, agents and employees of the Company and its
subsidiaries to supply all information in each case reasonably requested by any
such person; provided, however, that any information that is determined in good
faith by the Company in writing to be of a confidential nature at the time of
delivery of such information shall be kept confidential by such Persons, unless
(i) disclosure of such information is required by court or administrative order
or is necessary to respond to inquiries of regulatory authorities; (ii)
disclosure of such information, in the opinion of counsel to such Person, is
required by law; (iii) such information becomes generally available to the
public other than as a result of a disclosure or failure to safeguard by such
Person; or (iv) such information becomes available to such Person from a source
other than the Company and such source is not known by such Person to be bound
by a confidentiality agreement with the Company.
(o) Comply with all applicable rules and regulations of the
Commission.
(p) The Company may require each selling Holder to furnish to the
Company such information regarding the distribution of such Registrable
Securities and the beneficial ownership of Common Stock held by such Holder as
is required by law to be disclosed in the Registration Statement, and the
Company may exclude from such registration the Registrable Securities of any
such Holder who unreasonably fails to furnish such information within a
reasonable time after receiving such request. If the Registration Statement
refers to any Holder by name or otherwise as the holder of any securities of the
Company, then such Holder shall have the right to require (if such reference to
such Holder by name or otherwise is not required by the Securities Act or any
similar Federal statute then in force) the deletion of the reference to such
Holder in any amendment or supplement to the Registration Statement filed or
prepared subsequent to the time that such reference ceases to be required.
4. Registration Expenses
(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company, except as and to the extent
specified in Section 4(b), shall be borne by the Company whether or not pursuant
to an Underwritten Offering and whether or not the Registration Statement is
filed or becomes effective and whether or not any Registrable Securities are
sold pursuant to the Registration Statement. The fees and expenses referred to
in the foregoing sentence shall include, without limitation, (i) all
registration and filing fees (including, without limitation, fees and expenses
(A) with respect to filings required to be made with the NASDAQ and any
Subsequent Market on which the Common Stock is then listed for trading, and (B)
reasonably incurred in compliance with state securities or Blue Sky laws
(including, without limitation, fees and disbursements of counsel for the
Holders in connection with Blue Sky qualifications or exemptions of the
Registrable Securities and determination of the eligibility of the Registrable
Securities for investment under the laws of such jurisdictions as the managing
underwriters, if any, or the Holders of a majority of Registrable Securities may
reasonably designate)), (ii) printing expenses (including, without limitation,
expenses of printing certificates for Registrable Securities and of printing
prospectuses if the printing of prospectuses is requested by the managing
underwriters, if any, or by the holders of a majority of the Registrable
Securities included in the Registration Statement), (iii) messenger, telephone
and
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delivery expenses of the Company, (iv) fees and disbursements of counsel for the
Company and Special Counsel for the Holders, up to an aggregate of $7,500 (v)
Securities Act liability insurance, if the Company so desires such insurance,
and (vi) fees and expenses of all other Persons retained by the Company in
connection with the consummation of the transactions contemplated by this
Agreement. In addition, the Company shall be responsible for all of its internal
expenses incurred in connection with the consummation of the transactions
contemplated by this Agreement (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting duties),
the expense of any annual audit, the fees and expenses incurred in connection
with the listing of the Registrable Securities on any securities exchange as
required hereunder.
(b) If the Holders require an Underwritten Offering pursuant to the
terms hereof, the Company shall be responsible for all costs, fees and expenses
in connection therewith, except for the fees and disbursements of the
Underwriters (including any underwriting commissions and discounts) and their
legal counsel and accountants. By way of illustration which is not intended to
diminish from the provisions of Section 4(a), the Holders shall not be
responsible for, and the Company shall be required to pay the fees or
disbursements incurred by the Company (including by its legal counsel and
accountants) in connection with, the preparation and filing of a Registration
Statement and related Prospectus for such offering, the maintenance of such
Registration Statement in accordance with the terms hereof, the listing of the
Registrable Securities in accordance with the requirements hereof, and printing
expenses incurred to comply with the requirements hereof. Notwithstanding the
foregoing, except in connection with a block trade by a broker who as a result
of the trade may be deemed an underwriter, if at any time the Company has (i)
timely filed the Registration Statement on or prior to the applicable Filing
Date, (ii) caused the Registration Statement to be declared effective as
promptly as possible after the filing thereof but in any event prior to the
applicable Effectiveness Date and (iii) kept the Registration Statement
continuously effective under the Securities Act, all in accordance with the
terms of this Agreement, and if at any such time the Holders require an
Underwritten Offering pursuant to the terms hereof, then Holders shall be
responsible for all costs, fees and expenses in connection with such
Underwritten Offering.
5. Indemnification
(a) Indemnification by the Company. The Company shall,
notwithstanding any termination of this Agreement, indemnify and hold harmless
each Holder, the officers, directors, agents (including any underwriters
retained by such Holder in connection with the offer and sale of Registrable
Securities), brokers (including brokers who offer and sell Registrable
Securities as principal as a result of a pledge or any failure to perform under
a margin call of Common Stock), investment advisors and employees of each of
them, each Person who controls any such Holder (within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act) and the officers,
directors, agents and employees of each such controlling Person, to the fullest
extent permitted by applicable law, from and against any and all losses, claims,
damages, liabilities, costs (including, without limitation, costs of preparation
and attorneys' fees) and expenses (collectively, "Losses"), as incurred, arising
out of or relating to any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any Prospectus or any form of
prospectus or in any amendment or supplement thereto or in any
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<PAGE>
preliminary prospectus, or arising out of or relating to any omission or alleged
omission of a material fact required to be stated therein or necessary to make
the statements therein (in the case of any Prospectus or form of prospectus or
supplement thereto, in light of the circumstances under which they were made)
not misleading, except to the extent, but only to the extent, that (1) such
untrue statements or omissions are based solely upon information regarding such
Holder furnished in writing to the Company by such Holder expressly for use
therein, or to the extent that such information relates to such Holder or such
Holder's proposed method of distribution of Registrable Securities and was
reviewed and expressly approved in writing by such Holder expressly for use in
the Registration Statement, such Prospectus or such form of Prospectus or in any
amendment or supplement thereto or (2) in the case of an occurrence of an event
of the type specified in Section 3(d)(ii)-(vi), the use by such Holder of an
outdated or defective Prospectus after the Company has notified such Holder in
writing that the Prospectus is outdated or defective and prior to the receipt by
such Holder of the Advice contemplated in Section 6(e). The Company shall notify
the Holders promptly of the institution, threat or assertion of any Proceeding
of which the Company is aware in connection with the transactions contemplated
by this Agreement.
(b) Indemnification by Holders. Each Holder shall, severally and not
jointly, indemnify and hold harmless the Company, its directors, officers,
agents and employees, each Person who controls the Company (within the meaning
of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the
directors, officers, agents or employees of such controlling Persons, to the
fullest extent permitted by applicable law, from and against all Losses (as
determined by a court of competent jurisdiction in a final judgment not subject
to appeal or review) arising solely out of or based solely upon any untrue
statement of a material fact contained in the Registration Statement, any
Prospectus, or any form of prospectus, or in any amendment or supplement
thereto, or arising solely out of or based solely upon any omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading to the extent, but only to the extent, that such untrue
statement or omission is contained in any information so furnished in writing by
such Holder to the Company specifically for inclusion in the Registration
Statement or such Prospectus or to the extent that such information relates to
such Holder or such Holder's proposed method of distribution of Registrable
Securities and was reviewed and expressly approved in writing by such Holder
expressly for use in the Registration Statement, such Prospectus or such form of
Prospectus, or in any amendment or supplement thereto. In no event shall the
liability of any selling Holder hereunder be greater in amount than the dollar
amount of the net proceeds received by such Holder upon the sale of the
Registrable Securities giving rise to such indemnification obligation.
(c) Conduct of Indemnification Proceedings. If any Proceeding shall
be brought or asserted against any Person entitled to indemnity hereunder (an
"Indemnified Party"), such Indemnified Party shall promptly notify the Person
from whom indemnity is sought (the "Indemnifying Party") in writing, and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to the Indemnified Party and the payment of all
fees and expenses incurred in connection with defense thereof; provided, that
the failure of any Indemnified Party to give such notice shall not relieve the
Indemnifying Party of its obligations or liabilities pursuant to this Agreement,
except (and only) to the extent that it shall
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<PAGE>
be finally determined by a court of competent jurisdiction (which determination
is not subject to appeal or further review) that such failure shall have
proximately and materially adversely prejudiced the Indemnifying Party.
An Indemnified Party shall have the right to employ separate counsel
in any such Proceeding and to participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of such Indemnified Party
or Parties unless: (1) the Indemnifying Party has agreed in writing to pay such
fees and expenses; or (2) the Indemnifying Party shall have failed promptly to
assume the defense of such Proceeding and to employ counsel reasonably
satisfactory to such Indemnified Party in any such Proceeding; or (3) the named
parties to any such Proceeding (including any impleaded parties) include both
such Indemnified Party and the Indemnifying Party, and such Indemnified Party
shall have been advised by counsel that a conflict of interest is likely to
exist if the same counsel were to represent such Indemnified Party and the
Indemnifying Party (in which case, if such Indemnified Party notifies the
Indemnifying Party in writing that it elects to employ separate counsel at the
expense of the Indemnifying Party, the Indemnifying Party shall not have the
right to assume the defense thereof and such counsel shall be at the expense of
the Indemnifying Party). The Indemnifying Party shall not be liable for any
settlement of any such Proceeding effected without its written consent, which
consent shall not be unreasonably withheld. No Indemnifying Party shall, without
the prior written consent of the Indemnified Party, effect any settlement of any
pending Proceeding in respect of which any Indemnified Party is a party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability on claims that are the subject matter of such Proceeding.
All fees and expenses of the Indemnified Party (including reasonable
fees and expenses to the extent incurred in connection with investigating or
preparing to defend such Proceeding in a manner not inconsistent with this
Section) shall be paid to the Indemnified Party, as incurred, within ten (10)
Business Days of written notice thereof to the Indemnifying Party (regardless of
whether it is ultimately determined that an Indemnified Party is not entitled to
indemnification hereunder; provided, that the Indemnifying Party may require
such Indemnified Party to undertake to reimburse all such fees and expenses to
the extent it is finally judicially determined that such Indemnified Party is
not entitled to indemnification hereunder).
(d) Contribution. If a claim for indemnification under Section 5(a)
or 5(b) is unavailable to an Indemnified Party (by reason of public policy or
otherwise), then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Losses, in such proportion as is
appropriate to reflect the relative fault of the Indemnifying Party and
Indemnified Party in connection with the actions, statements or omissions that
resulted in such Losses as well as any other relevant equitable considerations.
The relative fault of such Indemnifying Party and Indemnified Party shall be
determined by reference to, among other things, whether any action in question,
including any untrue or alleged untrue statement of a material fact or omission
or alleged omission of a material fact, has been taken or made by, or relates to
information supplied by, such Indemnifying Party or Indemnified Party, and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such action, statement or omission.
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<PAGE>
The amount paid or payable by a party as a result of any Losses shall be deemed
to include, subject to the limita tions set forth in Section 5(c), any
reasonable attorneys' or other reasonable fees or expenses incurred by such
party in connection with any Proceeding to the extent such party would have been
indemnified for such fees or expenses if the indemnification provided for in
this Section was available to such party in accordance with its terms.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 5(d) were determined by pro rata
allocation or by any other method of allo cation that does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
Notwithstanding the provisions of this Section 5(d), no Holder shall be required
to contribute, in the aggregate, any amount in excess of the amount by which the
proceeds actually received by such Holder from the sale of the Registrable
Securities subject to the Proceeding exceeds the amount of any damages that such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
The indemnity and contribution agreements contained in this Section
are in addition to any liability that the Indemnifying Parties may have to the
Indemnified Parties.
6. Miscellaneous
(a) Remedies. In the event of a breach by the Company or by a
Holder, of any of their obligations under this Agreement, each Holder or the
Company, as the case may be, in addition to being entitled to exercise all
rights granted by law and under this Agreement, including recovery of damages,
will be entitled to specific performance of its rights under this Agreement. The
Company and each Holder agree that monetary damages would not provide adequate
compensation for any losses incurred by reason of a breach by it of any of the
provisions of this Agreement and hereby further agrees that, in the event of any
action for specific performance in respect of such breach, it shall waive the
defense that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor any of its
subsidiaries has entered, as of the date hereof, nor, during the Effectiveness
Period, shall the Company or any of its subsidiaries, on or after the date of
this Agreement, enter into any agreement with respect to the registration of the
Common Stock that is inconsistent with the rights granted to the Holders in this
Agreement or otherwise conflicts with the provisions hereof. Except as and to
the extent specified in Schedule 6(b) hereto, neither the Company nor any of its
subsidiaries has previously entered into any agreement granting any registration
rights with respect to the registration of the Common Stock to any Person that
have not been satisfied. Without limiting the generality of the foregoing,
without the written consent of the Holders of a majority of the then outstanding
Registrable Securities, the Company shall not grant to any Person the right to
request the Company to register shares of the Common Stock under the Securities
Act unless the rights so granted are subject in all respects to the prior rights
in full of
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<PAGE>
the Holders set forth herein, and are not otherwise in conflict or inconsistent
with the provisions of this Agreement.
(c) No Piggyback on Registrations. Except as and to the extent
specified in Schedule 6(b) hereto, neither the Company nor any of its security
holders (other than the Holders in such capacity pursuant hereto) may include
securities of the Company in the Registration Statement other than the
Registrable Securities, and the Company shall not after the date hereof enter
into any agreement providing any such right to any of its security holders.
(d) Compliance. Each Holder covenants and agrees that (i) it will
not sell any Registrable Securities under the Registration Statement until it
has received copies of the Prospectus as then amended or supplemented as
contemplated in Section 3(h) and notice from the Company that such Registration
Statement and any post-effective amendments thereto have become effective as
contemplated by Section 3(d) and (ii) it and its officers, directors or
Affiliates, if any, will comply with the prospectus delivery requirements of the
Securities Act as applicable to any of them in connection with sales of
Registrable Securities pursuant to the Registration Statement.
(e) Discontinued Disposition. Each Holder agrees by its acquisition
of such Registrable Securities that, upon receipt of a notice from the Company
of the occurrence of any event of the kind described in Sections 3(d)(ii),
3(d)(iii), 3(d)(iv), 3(d)(v) or 3(d)(vi), such Holder will forthwith discontinue
disposition of such Registrable Securities under the Registration Statement
until such Holder's receipt of the copies of the supplemented Prospectus and/or
amended Registration Statement contemplated by Section 3(k), or until it is
advised in writing (the "Advice") by the Company that the use of the applicable
Prospectus may be resumed, and, in either case, has received copies of any
additional or supplemental filings that are incorporated or deemed to be
incorporated by reference in such Prospectus or Registration Statement. The
Company may provide appropriate stop orders to enforce the provisions of this
paragraph.
(f) Piggy-Back Registrations. (i) If at any time, during the period
from the date hereof until two (2) years from the date hereof, when there is not
an effective Registration Statement covering all of the Registrable Securities,
the Company shall determine to prepare and file with the Commission a
registration statement relating to an offering for its own account or the
account of others under the Securities Act of any of its equity securities,
other than on Form S-4 or Form S-8 (each as promulgated under the Securities
Act) or their then equivalents relating to equity securities to be issued solely
in connection with any acquisition of any entity or business or equity
securities issuable in connection with stock option or other employee benefit
plans, then the Company shall send to each Holder of Registrable Securities
written notice of such determination and, if within fifteen (15) days after
receipt of such notice, any such holder shall so request in writing, the Company
shall include in such registration statement all or any part of such Registrable
Securities such holder requests to be registered, subject, in the event of an
underwritten offering, to customary cutbacks and lock-ups requested by the
managing underwriter of all selling stockholders thereunder, on a pro-rata basis
with such other selling stockholders.
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<PAGE>
(ii) It shall be a condition precedent to the obligations of
the Company to take any action pursuant to this Section 6(f) with respect to the
Registrable Securities of any selling Holder, that such Holder shall furnish to
the Company such information regarding it, the Registrable Securities held by
it, and the intended method of disposition of such securities as shall be
required under the Securities Act to effect the registration of such Holder's
Registrable Securities and to execute such documents (including, without
limitation, any underwriting agreement) in connection with such registration as
the Company may reasonably request.
(g) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the same shall be in writing and signed by the Company
and the Holders of at least 80% of the then outstanding Registrable Securities.
Notwithstanding the foregoing, a waiver or consent to depart from the provisions
hereof with respect to a matter that relates exclusively to the rights of
Holders and that does not directly or indirectly affect the rights of other
Holders may be given by Holders of at least a majority of the Registrable
Securities to which such waiver or consent relates; provided, however, that the
provisions of this sentence may not be amended, modified, or supplemented except
in accordance with the provisions of the immediately preceding sentence.
(h) Notices. Any and all notices or other communications or
deliveries required or permitted to be provided hereunder shall be in writing
and shall be deemed given and effective on the earliest of (i) the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section prior to 6:30 p.m. (New
York City time) on a Business Day, (ii) the Business Day after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in the Purchase Agreement later than 6:30
p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the Business Day following the date of mailing, if
sent by nationally recognized overnight courier service, or (iv) upon actual
receipt by the party to whom such notice is required to be given. The address
for such notices and communications shall be as follows:
If to the Company: Fidelity Holdings, Inc.
80-02 Kew Gardens Road, Suite 5000
Kew Gardens, New York 11415
Facsimile No.: (718) 793-2455
Attn: Doron Cohen, President
With copies to: Littman Krooks Roth & Ball P.C.
655 Third Avenue
New York, New York 10017-5617
Attn: Mitchell C. Littman, Esq. and
James J. Quinlan, Esq.
Facsimile No.: (212) 490-2990
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<PAGE>
If to a Purchaser: To the address set forth under such Purchaser's
name on the signature pages hereto.
(i) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and permitted assigns of each of
the parties and shall inure to the benefit of each Holder. The Company may not
assign its rights or obligations hereunder without the prior written consent of
Holders of a majority of Registrable Securities then outstanding. Each Holder
may assign their respective rights hereunder in the manner and to the Persons as
permitted under this Agreement and the Purchase Agreement.
(j) Counterparts. This Agreement may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original
and, all of which taken together shall constitute one and the same Agreement. In
the event that any signature is delivered by facsimile transmission, such
signature shall create a valid binding obligation of the party executing (or on
whose behalf such signature is executed) the same with the same force and effect
as if such facsimile signature were the original thereof.
(k) Governing Law. This Agreement shall be governed by and construed
and enforced in accordance with the internal laws of the State of New York
without regard to the principles of conflicts of law thereof. Each party hereby
irrevocably submits to the exclusive jurisdiction of the state and federal
courts sitting in the City of New York, borough of Manhattan, for the
adjudication of any dispute hereunder or in connection herewith or with any
transaction contemplated hereby or discussed herein and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is improper. Each party hereby irrevocably
waives personal service of process and consents to process being served in any
such suit, action or proceeding by mailing a copy thereof to such party at the
address in effect for notices to it under this Agreement and agrees that such
service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law.
(l) Cumulative Remedies. The remedies provided herein are cumulative
and not exclusive of any remedies provided by law.
(m) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their reasonable efforts to find and employ an alternative
means to achieve the same or substantially the same result as that contemplated
by such term, provision, covenant or restriction. It is hereby stipulated and
declared to be the intention of the parties that they would have executed the
remaining terms, provisions, covenants and restrictions without including any of
such that may be hereafter declared invalid, illegal, void or unenforceable.
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<PAGE>
(n) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(o) Shares Held by The Company and its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
its Affiliates (other than any Holder or transferees or successors or assigns
thereof if such Holder is deemed to be an Affiliate solely by reason of its
holdings of such Registrable Securities) shall not be counted in determining
whether such consent or approval was given by the Holders of such required
percentage.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE TO FOLLOW]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
FIDELITY HOLDINGS, INC.
By:_______________________________________
Name:
Title:
<PAGE>
STRONG RIVER INVESTMENTS, INC.
By:________________________________________
Kenneth L. Henderson
Attorney-in-fact
Address for Notice:
Strong River Investments, Inc.
c/o Gonzalez-Ruiz & Aleman (BVI) Limited
Wickhams Cay I, Vanterpool Plaza
P.O. Box 873
Road Town, Tortolla. BVI
With copies to:
Robinson Silverman Pearce Aronsohn &
Berman LLP
1290 Avenue of the Americas
New York, NY 10104
Facsimile No.: (212) 541-4630
Attn: Eric L. Cohen, Esq.
<PAGE>
Annex A
Plan of Distribution
The Selling Stockholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The Selling Stockholders may use any one or more of the
following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;
o purchases by a broker-dealer as principal and resale by the broker-dealer
for its account;
o an exchange distribution in accordance with the rules of the applicable
exchange;
o privately negotiated transactions;
o short sales;
o broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
The Selling Stockholders may also engage in short sales against the box,
puts and calls and other transactions in securities of the Company or
derivatives of Company securities and may sell or deliver shares in connection
with these trades. The Selling Stockholders may pledge their shares to their
brokers under the margin provisions of customer agreements. If a Selling
Stockholder defaults on a margin loan, the broker may, from time to time, offer
and sell the pledged shares.
Broker-dealers engaged by the Selling Stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the Selling Stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The Selling Stockholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.
<PAGE>
The Selling Stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act.
The Company is required to pay all fees and expenses incident to the
registration of the shares, including fees and disbursements of counsel to the
Selling Stockholders. The Company has agreed to indemnify the Selling
Stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
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AGREEMENT OF LEASE
between
80-02 LEASEHOLD COMPANY, L.P.,
as Landlord
and
FIDELITY HOLDINGS, INC.
as Tenant
Dated:
December , 1999
Premises:
Entire Rentable Portion of Suite on the 7th floor at
80-02 Kew Gardens Road
Kew Gardens, New York, 11415
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TABLE OF CONTENTS
Page
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ARTICLE 1 BASIC LEASE INFORMATION AND DEFINITIONS.............................8
1.01 Basic Lease Information............................................8
ARTICLE 2 PREMISES; TERM......................................................9
2.01 Demise.............................................................9
2.02 Term...............................................................9
2.03 Delivery of Demised Premises.......................................9
ARTICLE 3 USE; CONDUCT OF BUSINESS...........................................10
3.01 Use...............................................................10
3.02 No Nuisance.......................................................10
3.03 Delivery Restrictions.............................................11
3.04 Permits...........................................................11
3.05 Environmental.....................................................11
ARTICLE 4 RENT...............................................................12
4.01 Gross Rent........................................................12
4.02 Base Rent.........................................................12
4.03 Manner of Payment.................................................12
4.04 Illegality........................................................12
4.05 Occupancy and Transfer Taxes......................................12
ARTICLE 5 ADDITIONAL CHARGES.................................................13
5.01 Definitions...................................................... 13
5.02 Tenant's Tax Payment..............................................13
5.03 Landlord's Statements.............................................14
5.04 Survival..........................................................14
ARTICLE 6 TENANT ELECTRICITY.................................................14
6.01 Supply of Electricity.............................................14
ARTICLE 7 SERVICES AND REPAIRS...............................................15
7.01 Standard of Operation; Landlord Services..........................15
7.02 Access............................................................16
7.03 Cleaning..........................................................16
7.04 Service Interruption..............................................16
ARTICLE 8 ALTERATIONS........................................................16
8.01 Initial Alterations...............................................16
8.02 Alterations.......................................................16
8.03 Tenant's Property.................................................18
8.04 Effect of Landlord's Approval.....................................18
8.05 Survival..........................................................19
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ARTICLE 9 REPAIRS........................................................... 19
9.01 Repairs by Landlord...............................................19
9.02 Repairs by Tenant.................................................19
9.03 Changes in Facilities.............................................19
9.04 Landlord Access...................................................20
ARTICLE 10 COMPLIANCE WITH LAWS..............................................20
10.01 Compliance with Laws by Tenant...................................20
ARTICLE 11 RIGHT TO PERFORM TENANT COVENANTS.................................20
11.01 Right to Perform Tenant Covenants................................20
ARTICLE 12 ASSIGNMENT, MORTGAGING AND SUBLETTING.............................20
12.01 Assignment; Etc..................................................20
12.02 Assignment and Subletting Procedures.............................21
12.03 Additional Subleasing Conditions.................................23
12.04 Mortgaging.......................................................23
ARTICLE 13 SUBORDINATION/ATTORNMENT..........................................24
13.01 Subordination....................................................24
13.02 Attornment.......................................................24
13.03 Right to Cure....................................................25
ARTICLE 14 BANKRUPTCY; CONDITIONS OF LIMITATION..............................26
14.01 Bankruptcy.......................................................26
14.02 Default..........................................................27
14.03 Intentional Default..............................................28
14.04 Reentry by Landlord..............................................28
14.05 Damages..........................................................28
14.06 Right to Injunction..............................................29
14.07 Other Remedies...................................................29
14.08 Certain Waivers..................................................29
14.09 No Waiver........................................................29
14.10 Attorneys' Fees..................................................29
14.11 Late Payments....................................................29
ARTICLE 15 QUIET ENJOYMENT...................................................30
15.01 Quiet Enjoyment..................................................30
ARTICLE 16 RULES OF THE BUILDING.............................................30
16.01 Building Rules...................................................30
16.02 Graphics.........................................................30
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ARTICLE 17 INSURANCE.........................................................30
17.01 Compliance with Insurance Standards..............................30
17.02 Landlord Insurance...............................................30
17.03 Tenant Insurance.................................................31
17.04 Waiver of Subrogation............................................31
17.05 Policy Requirements..............................................31
ARTICLE 18 NONLIABILITY AND INDEMNIFICATION..................................32
18.01 Exculpation......................................................32
18.02 Indemnity........................................................32
18.03 Limitation of Landlord's Personal Liability......................33
ARTICLE 19 CONDEMNATION......................................................33
19.01 Condemnation.....................................................33
ARTICLE 20 CASUALTY..........................................................34
20.01 Casualty.........................................................34
20.02 Landlord Right to Terminate......................................34
20.03 Disclaimer.......................................................35
20.04 RPLss.227........................................................35
20.05 Cooperation......................................................35
ARTICLE 21 SURRENDER.........................................................35
21.01 Surrender........................................................35
21.02 HoldingOver......................................................35
ARTICLE 22 ESTOPPEL CERTIFICATES.............................................36
22.01 Estoppel Certificates............................................36
ARTICLE 23 INTENTIONALLY DELETED.............................................36
ARTICLE 24 INTENTIONALLY DELETED ............................................36
ARTICLE 25 INTENTIONALLY DELETED.............................................37
ARTICLE 26 PARTIES BOUND.....................................................37
26.01 Successors and Assigns ..........................................37
26.02 Present Landlord ................................................37
26.03 No Offer ........................................................37
26.04 Inability to Perform ............................................37
26.05 Waiver of Counterclaims and Jury Trial ..........................38
26.06 Notices .........................................................38
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26.07 Severability ....................................................38
26.08 Amendments ......................................................39
26.09 No Joint Venture ................................................39
26.10 Brokers .........................................................39
26.11 Merger ..........................................................39
26.12 Applicable Law ..................................................39
26.13 Shoring: No Dedication..........................................39
26.14 Notice of Occurrences............................................39
26.15 Vaults...........................................................39
26.16 Window Cleaning..................................................40
26.17 Windows..........................................................40
26.18 Consents and Approvals ..........................................40
26.19 Development Rights ..............................................40
26.20 Business Hours...................................................41
26.21 Confidentiality..................................................41
26.22 Exhibits.........................................................42
26.23 No Recording of Lease............................................42
ARTICLE 27 SECURITY..........................................................42
27.01 Security.........................................................42
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EXHIBITS
A Plan of Demised Premises
B Initial Alterations
C Cleaning Specification
D Building Rules and Regulations
E Intentionally Deleted
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Addendum
INDEX OF DEFINED TERMS
Definition Where Defined
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Additional Charges..........................................Section 4.01
Alterations ................................................Section 8.02
Bankruptcy Code ............................................Section 14.01
Base Rent ..................................................Section 4.02
Brokers ....................................................Section 1.01
Building ...................................................Section 1.01
Building Systems ...........................................Section 8.02
Business Days ..............................................Section 26.20
Business Hours .............................................Section 26.20
Commencement Date ..........................................Section 1.01
Common Areas ...............................................Section 2.01
Consent ....................................................Section 26.18
Expiration Date ............................................Section 1.01
Force Majeure ..............................................Section 26.04
Gross Rent .................................................Section 4.01
Hazardous Materials ........................................Section 3.06
Holidays ...................................................Section 26.20
Land .......................................................Section 1.01
Landlord ...................................................Section 1.01
Landlord Services ..........................................Section 7.01
Landlord Statement .........................................Section 5.01
Landlord's Agents ..........................................Section 9.02
Landlord's Contribution ....................................Section 8.01
Landlord's Work ............................................Section 2.03
Lease Commencement..........................................Section 1.01
Legal Requirements .........................................Section 10.01
Payment Dates ..............................................Section 5.02
Premises ...................................................Section 1.01
Qualified Alteration .......................................Section 8.02
Real Estate Taxes ..........................................Section 5.01
Rent Commencement...........................................Section 4.02
Senior Interest Holder .....................................Section 13.02
Stipulated Rate ............................................Section 4.03
Subordinated Mortgage ......................................Section 13.01
Successor Landlord .........................................Section 13.02
Tenant .....................................................Section 1.01
Tenant's Agents ............................................Section 9.01
Tenant's Property ..........................................Section 8.03
Tenant's Tax Payment .......................................Section 5.02
Term .......................................................Section 1.01
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AGREEMENT OF LEASE
This AGREEMENT OF LEASE, dated as of December , 1999 (this "Lease"),
is entered into between Landlord and Tenant, identified and defined below.
The parties to this Lease hereby agree with each other as follows:
ARTICLE 1
BASIC LEASE INFORMATION AND DEFINITIONS
1.01 Basic Lease Information. The following sets forth the basic data with
respect to this Lease and constitute the definitions of the terms used
throughout this Lease:
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Defined Term: Basic Information and Definition:
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Landlord: 80-02 Leasehold Company, L.P.
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Landlord's Address 80-02 Kew Gardens Road
for Notices: Kew Gardens, New York 11415
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Tenant: Fidelity Holdings, Inc.
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Tenant's Address 80-02 Kew Gardens Road, Suite
for Notices: Kew Gardens, New York 11415
Attention:
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Building: The building having the street address of
80-02 Kew Gardens Road, Kew Gardens, New York 11415.
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Premises: Suite on the 7th floor (substantially as identified
on the floor plan annexed hereto as Exhibit "A").
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Term: Six (6) Years, Two (2) months from the Commencement
Dates
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Commencement Date: Upon substantial completion of the Initial
Alterations (see Section 2.03)
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Expiration Date: Six (6) years, Two (2) months from the Commencement
Date, unless sooner terminated in accordance with
the terms and conditions of this Lease, and subject
to the provisions of Section 2.02 and Article 26
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Base Rent: $ 111,051.00 For the 1st year of the term
$ 114,382.53 For the 2nd year of the term
$ 122,050.40 For the 3rd year of the term
$ 125,711.91 For the 4th year of the term
$ 129,483.27 For the 5th year of the term
$ 133,367.76 For the 6th year of the term
$ 137,368.80 For the 7th year of the term
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Rent Concession: Two (2) Months, 1st and 2nd months of installment of
Base Rent provided Tenant is not in default
hereunder.
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Electric: $11,310.75 per annum ($942.56 per month) [see
Section 6.02]
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Tenant's Tax Share: 1.33%
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Base Tax Year: July, 1 1999 to June 30, 2000
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Security Deposit: $49,559.50
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Broker(s): Brown Harris Stevens, David Sargoy
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ARTICLE 2
PREMISES; TERM
2.01 Demise. (a) Landlord hereby leases to Tenant and Tenant hereby hires
from Landlord, subject to the covenants and agreements contained in this Lease,
the Premises, to as shall be delivered to Tenant in accordance with Section
2.03(a).
(b) Tenant shall have, as an appurtenance to the Premises, the
nonexclusive right to use, and permit its employees and invitees to use, in
common with others the common areas of the Building, and if the portion of the
Premises on any floor includes less than the entire floor, the common toilets,
corridors and elevator lobby on such floor (collectively, the "Common Areas");
but such rights shall always be subject to (i) the rights of Landlord; and (ii)
such rules and regulations from time to time established by Landlord pursuant to
Section 16.01.
2.02 Term. (a) The term of this Lease shall commence on the Commencement
Date, and unless sooner terminated as herein provided, shall terminate on the
Expiration Date, unless sooner terminated as herein provided.
(b) If Landlord, for any reason whatsoever, is unable to deliver
possession of all or any portion of the Premises to Tenant on the Commencement
Date or on any other date, except as hereinafter provided, neither this Lease
nor any of the terms of this Lease shall be affected thereby nor shall the Term
be extended and Landlord shall have no liability to Tenant in respect thereof.
Tenant hereby waives any right to recover damages which may result from
Landlord's inability to deliver possession of the Premises on the Commencement
Date or on any other date.
2.03 Delivery of Premises; Commencement Date. (a) Tenant agrees that,
except as expressly provided herein, (i) it enters into this Lease without any
representations, warranties or promises by Landlord, its agents,
representatives, employees, servants or any other person in respect of the
Building or the Premises, (ii) no rights, easements or licenses are acquired by
Tenant by implication or otherwise and (iii) Tenant will accept the Premises on
the Commencement Date "AS IS" in the condition existing on that date, provided
Landlord has substantially completed the Initial Alterations as provided in
Exhibit "B" attached hereto, and the taking of occupancy of the whole or any
part of the Premises by Tenant shall be (A) conclusive evidence, as against
Tenant, that Tenant accepts possession of the same and that the Premises so
occupied and the Building equipment servicing the Premises, were in good and
satisfactory condition at the time such occupancy was so taken, and (B) deemed
to
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be a representation by Tenant that the Premises are in the condition agreed to
by Landlord and Tenant for commencement of the Term hereof. Thereafter, Landlord
shall have no obligation to do any further work in order to make the Premises
suitable and ready for occupancy and use by Tenant, excepting any minor Punch
List items. Any work to be performed by Tenant shall be subject to compliance
with the terms and conditions of this Lease. Landlord and Tenant shall
immediately upon substantial completion of the Initial Alteration by Landlord
both execute a writing acknowledging the Commencement Date (the "Commencement
Date Agreement". Notwithstanding anything to the contrary contained herein, the
term of the Lease shall commence on the Commencement Date as defined herein,
which date shall be acknowledged in the Commencement Date Agreement by Landlord
and Tenant.
(b) The parties hereto agree that this Article 2 constitutes an express
provision as to conditions under which Landlord shall deliver possession of the
Premises to Tenant, and Tenant hereby waives any rights to rescind this Lease
which Tenant might otherwise have pursuant to Section 223-a of the Real Property
Law of the State of New York, or pursuant to any other law of like import now or
hereafter in force.
ARTICLE 3
USE; CONDUCT OF BUSINESS
3.01 Use. (a) Subject to the remaining provisions of this Section 3.01,
Tenant shall use and occupy the Premises during the Term solely for executive
and administrative offices for Tenant's financial services business and for no
other purposes.
(b) Tenant covenants and agrees that at all times the business to be
conducted at, through and from the Premises and the kind and quality of services
to be offered in the conduct thereof will be first-class in every respect and
will be in conformity with the standards of practice consistent with first-class
office buildings in the Borough of Queens in the City of New York. In no event
may the Premises be used for any purposes in violation of the Certificate of
Occupancy for the Building or which are prohibited in the Rules and Regulations
or in any restrictive covenant at any time or from time to time affecting the
Building (at Tenant's request in connection with any request for consent in a
change in use, Landlord will supply Tenant with any applicable restrictive
covenants).
3.02 No Nuisance. (a) Tenant shall not allow, suffer or permit the
Premises or any other portion of the Building including but not limited to any
of the Common Areas or any use thereof to constitute a nuisance or interfere
with the safety, comfort or enjoyment of the Building by Landlord or any other
occupants of the Building or their customers, invitees or any others lawfully
in, upon or about the Building or its environs.
(b) Tenant and Tenant's agents, contractors, employees, licensees and/or
invitees shall not use the Building or its environs for the display or sale of
merchandise, for performances, for the installation of a platform, stage,
speakers, audio-visual equipment or equipment of any sort for promotion or
advertising or for any other purpose. Tenant and Tenant's agents, contractors,
employees, licensees and/or invitees shall neither create nor permit noxious or
objectionable odors, fumes, smoke and/or vapors, within or without the Premises
and the Building of which they form a part. Further, Tenant shall take all
measures needed to prevent objectionable odors, fumes, smoke and vapors, from
emanating from the Premises and permeating any part of the Building, whether
inside or outside the Premises.
(c) Tenant recognizes that Landlord has a great interest in securing the
Building and its environs outside the Premises from the sounds and/or visual
effects and/or from odors, fumes, smoke and vapors which may result from
Tenant's operation of its business in the Premises. Accordingly, the requirement
set forth in subsections (b) and (c) pertaining to restricting sounds and/or
visual effects and/or odors, fumes, smoke and vapors is of the essence in this
Lease and failure of the Tenant to comply shall constitute a material breach of
this Lease, entitling Landlord to exercise all remedies provided hereunder,
including without limitation the right to terminate this Lease in accordance
with and subject to the provisions of Article 14. In addition to and
notwithstanding any other rights
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and remedies of Landlord under this Lease, and without any grace periods,
Landlord shall have the right, in its sole discretion to require Tenant (i) to
cease and desist all activities in the Premises directly or indirectly resulting
in a violation of this Section 3.02 immediately upon notice of such violation
from Landlord, and (ii) to immediately cure such violation at Tenant's expense.
3.03 Delivery Restrictions. (a) Landlord reserves the right to regulate
the activities of Tenant in regard to deliveries and servicing of the Premises
including without limitation, activities associated with the freight entrance,
freight elevator, and size, type and location of delivery vehicles, and Tenant
agrees to abide by the Building Rules and Regulations set forth in Exhibit D
attached hereto. In addition, Tenant shall not use the building passenger
elevators or the pedestrian street entrances for deliveries into or out of the
Premises. Usage of the freight elevator shall be in accordance with Section
7.01(d) hereof.
(b) Tenant shall not use any elevators for loads in excess of the elevator
load capacities. Tenant shall obtain information regarding the capacities of
said elevators from Landlord. In the event Tenant uses any Building elevator to
transport a load in excess of that elevator's capacity, and such use results in
damage to the elevator, including without limitation the mechanical and
electrical systems serving the elevator, Landlord shall repair such elevator and
all Landlord's costs and expenses incurred in connection with such repair shall
be payable to Landlord by Tenant as Additional Charges.
3.04 Permits. If any governmental license or any permit shall be required
for the proper and lawful conduct of Tenant's business or that of any of its
subtenants in the Premises and if failure to secure such license or permit would
in any way adversely affect Landlord or the Building, then Tenant, at its
expense, shall duly procure and thereafter maintain such license or permit and
submit the same to Landlord for inspection. Tenant shall at all times comply
with the terms and conditions of each such license or permit. In no event shall
Tenant's failure to procure or maintain such license or permit relieve Tenant
from its obligations under this Lease.
3.05 Environmental. Throughout the Term, Tenant shall not undertake or
permit any Environmental Activity (as such term is hereinafter defined) to be
undertaken in the Premises or Building by Tenant's employees, agents,
contractors, invitees or guests other than (i) in compliance with all applicable
Legal Requirements (as such term is hereinafter defined) and (ii) in such a
manner as shall avoid any liability on the part of Landlord and shall keep the
Premises, Building and Land free from any lien imposed pursuant to any Legal
Requirement in respect of such Environmental Activity. Tenant shall take all
necessary steps to ensure that any Environmental Activity undertaken or
permitted at the Premises is undertaken in a manner as to provide prudent
safeguards against potential risks to human health or the environment. Tenant
shall notify Landlord within 24 hours of the release of any Hazardous Materials
(as such term is hereinafter defined) from or at the Premises which could form
the basis of any claim, demand or action by any party. Landlord shall have the
right from time to time to conduct an environmental audit of the Premises and
Tenant shall cooperate in the conduct of such environmental audit. If Tenant
shall breach the covenants provided in this Section, then, in addition to any
other rights and remedies which may be available to Landlord under this Lease or
otherwise at law, Landlord may require Tenant to take all actions, or to
reimburse Landlord for the costs of any and all actions taken by Landlord, as
are necessary or reasonably appropriate to cure such breach. For purposes of
this Section, "Environmental Activity" means any use, storage, installation,
existence, release, threatened release, discharge, generation, abatement,
removal, disposal, handling or transportation from, under, into or on the
Premises of (A) any "hazardous substance" as defined in ss. 101(14) of the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
ss. 9601(14), as amended; (B) any "hazardous waste" as defined in ss. 26-1301(1)
of the New York Environmental Conservation Law; (C) asbestos or asbestos
containing materials, or PCBs; (D) petroleum, crude oil or any fraction thereof,
natural gas or synthetic gas used for fuel; and (E) any additional substances or
materials which at such time are hazardous or toxic under the laws of the State
of New York or any other Legal Requirements (the materials described in clauses
(A) through (E) above are collectively referred to herein as "Hazardous
Materials"). The obligations of Tenant under this Section 3.05 shall survive the
expiration or sooner termination of this Lease.
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ARTICLE 4
RENT
4.01 Gross Rent. The "Gross Rent" shall consist of (a) Base Rent and (b)
additional charges ("Additional Charges") consisting of all other sums of money
that shall become due from and payable by Tenant to Landlord hereunder.
4.02 Base Rent. (a) The Base Rent shall be payable by Tenant in twelve
(12) equal monthly installments in advance on the first day of each calendar
month during the Term commencing on the "Rent Commencement" (appropriately
prorated in the case of the first installment if the Rent Commencement is not
the first day of the month) and on the first day of each calendar month
thereafter.
4.03 Manner of Payment. (a) Tenant may pay the Gross Rent by unendorsed
check, subject to collection, payable to Landlord and drawn on a New York City
branch of a bank or trust company located in New York City.
(b) Tenant covenants to pay all Gross Rent as the same shall become due
and payable under this Lease at the times and in the manner provided herein
without notice or demand and without set off, abatement, deduction or
counterclaim, except as expressly provided in this Lease. Landlord shall have
the same rights for default in the payment of Additional Charges as for default
in the payment of Base Rent hereunder. If Tenant shall fail to pay any
installment of Base Rent or Additional Charges when due, Tenant shall pay
interest thereon from the date when such Base Rent or Additional Charges became
due and payable to the date of Landlord's receipt thereof at a rate per annum
(the "Stipulated Rate") equal to the lesser of (i) five percentage points (5%)
above the rate from time to time announced by Citibank, N.A. (or its successors
or assigns) as its "base rate" to be in effect at its principal office in New
York, New York or (ii) the maximum rate permitted by applicable law.
4.04 Illegality. If any of the Gross Rent payable hereunder shall be or
become uncollectible, reduced or required to be refunded because of any Legal
Requirement, Tenant shall enter into such agreements and take such other actions
(without additional expense to Tenant) as Landlord may reasonably request and as
may be legally permissible to permit Landlord, during the continuance of such
Legal Requirement, to collect the maximum rents as may be legally collectible
(and not in excess of the amounts reserved therefor under this Lease). Upon the
termination of such Legal Requirement, (a) the Gross Rent shall become and
thereafter be payable in accordance with the amounts reserved herein and (b)
Tenant shall pay to Landlord upon demand, to the extent legally permissible, an
amount equal to (i) the Gross Rent which would have been paid pursuant to this
Lease but for such Legal Requirement less (ii) the rents and payments in lieu of
rent paid by Tenant during the period in which such Legal Requirement was in
effect.
4.05 Occupancy and Transfer Taxes. Tenant shall pay to Landlord upon
demand any occupancy or transfer tax or tax in lieu thereof related to Tenant's
occupancy of the Premises or the execution of this Lease if the same shall
become payable by Landlord in the first instance or is at any time required to
be paid by Landlord.
ARTICLE 5
ADDITIONAL CHARGES
5.01 Definitions. In addition to the definitions of terms set forth in
Section 1.01, as used in this Lease:
"Base Rate" shall mean Rate in effect during the calendar year in
which this Lease is executed.
"Landlord's Statement" means a statement furnished by Landlord to
Tenant containing a computation of any Additional Charges due
pursuant to the provisions of this Article 5 and shall
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include a bill or statement showing the amount of the Real Estate
Taxes for the Building, if Landlord has a copy thereof.
"Real Estate Taxes" means all real estate, ad valorem and personal
property taxes, assessments (special or otherwise), sewer and water
rents, rates and charges, transit taxes, county taxes and any other
governmental levies, impositions or charges of any nature, whether
general, special, ordinary, extraordinary, foreseen or unforeseen,
which may be or become payable by Landlord with respect to, or be
assessed, levied or imposed upon, all or any part of the Building,
and all expenses, including fees and disbursements of counsel,
experts and consultants, reasonably incurred by, or reimbursable by,
Landlord in connection with the assessment process or any
application for a reduction in the assessed valuation for the
Building or for a judicial review thereof. If due to a future change
in the method of taxation any franchise, income (other than an
income tax which is applicable to other parties in addition to
Landlords of real property), profit or other tax shall be levied
against Landlord in substitution in whole or in part for or in lieu
of, or in lieu of an increase in, any tax which would otherwise
constitute a Real Estate Tax, or a tax or excise shall be imposed
upon or measured by rents, such franchise, income, profit or other
tax, or tax or excise imposed upon or measured by rents, shall be
deemed to be a Real Estate Tax for the purposes hereof. If any
assessment is due and payable over time, Landlord shall elect to pay
the same in installments over the longest period permitted by law
without incurring a penalty, and each such installment and the
interest thereon, if applicable, shall be deemed to be a Real Estate
Tax for the purposes hereof.
"Base Taxes" means the Real Estate Taxes with respect to the
Building for the Tax Year (as hereinbelow defined) July 1, 1999 to
June 30, 2000.
"Tax Year" means each period of twelve (12) months commencing on
July 1st of each year, or such other period of twelve (12) months as
hereafter may be adopted as the fiscal year for real estate tax
purposes in the Borough of Manhattan, that includes any part of the
Term, with appropriate adjustment in the event of any change in such
fiscal year.
5.02 Tenant's Tax Payment. (a) If Real Estate Taxes for any Tax Year shall
exceed Base Taxes, Tenant shall pay as Additional Charges for each Tax Year a
sum ("Tenant's Tax Payment") equal to Tenant's Tax Share (as set forth in
Section 1.01 hereof) of such excess.
(b) When Real Estate Taxes for a Tax Year have been determined, Landlord
shall deliver to Tenant a Landlord's Statement, setting forth Tenant's Tax
Payment for such Tax Year. Tenant shall remit payment for any such Tenant's Tax
payment within ten (10) days after the date of Landlord's Statement.
(c) If there shall be any increase or decrease in Real Estate Taxes for
any Tax Year, whether during or after such Tax Year, Landlord shall furnish to
Tenant a revised Landlord's Statement for such Tax Year, and Tenant's Tax
Payment for such Tax Year shall be adjusted. The amount of any overpayment by
Tenant reflected in such Landlord's Statement shall be credited against
succeeding installments of Additional Charges and the balance, if any, against
the installment of Base Rent next due or, if neither Additional Charges nor Base
Rent is to thereafter become due, by payment to Tenant within thirty (30) days
after the rendering of such statement. The amount of any underpayment reflected
in such Landlord's Statement shall be paid by Tenant within thirty (30) days
after receipt of such Landlord's Statement.
(d) For purposes of this Lease, the amount of any decrease in Real Estate
Taxes for any Tax Year shall be reduced by the sum of (i) all costs and
expenses, including counsel fees, incurred by Landlord in connection with such
decrease (including, without limitation, costs and expenses related to any
application or proceeding brought by or on behalf of Landlord) and (ii) all such
costs and expenses incurred by Landlord in connection with efforts to reduce
Real Estate Taxes for any other Tax Years (whether or not any reduction was
actually obtained) not
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theretofore recovered through tax refunds for such other Tax Years or otherwise.
Nothing herein contained shall obligate Landlord to bring any application or
proceeding seeking a reduction in Real Estate Taxes or assessed valuation.
Tenant, for itself and its immediate and remote subtenants and successors in
interest hereunder, hereby waives, to the fullest extent permitted by applicable
law, any right Tenant may now or in the future have to protest or contest any
Real Estate Taxes or to bring any application or proceeding seeking a reduction
in Real Estate Taxes or assessed valuation or otherwise challenging the
determination thereof.
(e) The benefit of any discount for the early payment or prepayment of
Real Estate Taxes shall accrue solely to the benefit of Landlord and such
discount shall not be subtracted from Real Estate Taxes except to the extent
Tenant shall have provided prior to the date of such early payment or prepayment
the funds for Tenant's Tax Share thereof.
5.03 Landlord's Statements. Landlord's failure to render a Landlord's
Statement as provided in this Article 5 shall not prejudice Landlord's right to
thereafter render such a statement with respect to such calendar year or Tax
Year or any calendar year or Tax Year thereafter. Each Landlord's Statement so
delivered shall be conclusive and binding upon Tenant unless Tenant notifies
Landlord within ten (10) days after receipt thereof that it disputes the
correctness of such Landlord's Statement, specifying to the extent then
practical the particular respects in which the same is claimed to be incorrect,
and notwithstanding such claim shall pay the Additional Charges in accordance
with such Landlord's Statement, without prejudice to Tenant's position.
Thereafter if the claim is resolved in Tenant's favor, Tenant shall be entitled
to a credit for the decreased amount.
5.04 Survival. The obligations of Landlord and Tenant under this Article 5
shall survive the expiration or sooner termination of this Lease.
ARTICLE 6
TENANT ELECTRICITY
6.01 Supply of Electricity. (a) Landlord agrees to supply Tenant with such
electric current as Tenant shall reasonably require (consistent with the
existing electrical capacity contained in the Premises) for Tenant's wiring
facilities and equipment within the Premises as of the commencement of occupancy
thereof by Tenant, and in consideration thereof Tenant agrees that the Basic
Rent reserved in the within Lease shall be increased by the agreed upon sum of
$11,310.75 (the "Base Charge"), retroactive to the date of possession which Base
Charge increase to Basic Rent shall in no event be subject to reduction but
shall be subject to being increased as hereinafter provided. Landlord shall not
be liable in any way to Tenant for any failure or defect in the supply or
character of electric energy furnished to the Premises by reason of any
requirement, act or omission of the public utility serving the Building with
electricity or for any other reason. Tenant shall furnish and install all
lighting tubes, lamps, bulbs and ballasts required in the Premises, at Tenant's
expense, or shall pay Landlord's charges therefor on demand. Including in the
Base charge is the cost of electricity (or pay the cost of any other utility
separately) consumed by any air conditioning equipment located in the Premises
as well as any other air conditioning equipment in conjunction with the
operation of furnishing conditioned air to the Premises irrespective of whether
any such equipment is located in the Premises or in any other portion of the
Building. The term "equipment" as used herein shall be deemed to include,
without limitation, all components and auxiliary equipment used in connection
with air conditioning equipment servicing the Premises including Tenant's pro
rata share of the cost of the electricity (or other utility) for the operation
of the cooling tower(s) used in connection therewith if the air conditioning
equipment is water cooled. Landlord shall have the right from time to time at
Landlord's cost to replace lighting fixtures in the Premises with substitute
lighting fixtures reasonably equivalent in aggregate light level.
(b) After Tenant shall have entered into possession of the Premises, or
any portion thereof, Landlord, at any time and from time to time (but not more
than two times in any year) during the term of this Lease, shall have the right
to have surveys made by Landlord's electrical consultant of the electrical
consumption within the Premises
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and the determination of said electrical consultant shall determine whether the
Base Charge for electricity [as same may have been increased or decreased (but
not below the sum of $11,310.75) by previous surveys and determinations made by
Landlord's electrical consultant] is more or less than the then electrical
consumption charge determined by Landlord's electrical consultant to be properly
payable by Tenant as a result of the then current survey determination made by
said electrical consultant and if the Base Charge shall be less than such
electrical consumption charge so determined by Landlord's consultant to be
applicable to Tenant's consumption of electricity then, effective as of the date
of occupancy in the case of the first survey and effective as of the date of the
making of the second and subsequent surveys the Base Charge increase to Basic
Rent [as same may have been previously increased or decreased (but not below the
sum of $11,310.75) pursuant to the provisions hereof] shall be further increased
by an amount equal to the difference between: (i) the Base Charge increase (plus
any previous adjustments to the Base Charge increase in accordance with the
provisions hereof); and (ii) the then electrical consumption charge determined
to be applicable by Landlord's consultant. Anything to the contrary contained in
this Lease notwithstanding, in no event shall the Base Charge be reduced below
the sum of $11,310.75.
Surveys made by Landlord's electrical consultant shall be based upon the
use of such electric current between the hours of 8 A.M. to 6 P.M. on Mondays
through Fridays, and 8 A.M. to 1 P.M. on Saturdays and such other days and hours
when Tenant uses electricity for lighting and for the operation of the
machinery, appliances and equipment used by Tenant in the Premises. In addition,
if cleaning services are provided by Landlord, such survey shall include
Landlord's normal cleaning hours of up to two (2) hours per day for lighting
within the Premises and for electrical equipment normally used in such cleaning.
With respect to subsequent surveys, if Landlord's consultant shall
determine that there has been an increase in Tenant's use of electrical current
then, in addition to the other requirements and obligations imposed on Tenant in
this article, Tenant shall pay the fees of the electrical consultant making such
survey. The findings of such electrical consultant shall be binding and
conclusive on Landlord and Tenant unless Tenant, within thirty (30) days after
such survey, disputes the findings of Landlord's electrical consultant and has
Tenant's own electrical consultant perform a survey as provided herein, at
Tenants sole cost and expense. If Landlord's and Tenant's electrical consultants
cannot agree on the results of the surveys then such consultants shall choose a
third electrical consultant to perform a survey in accordance with Section 6.01
hereof the cost of which shall be shared equally by Landlord and Tenant. The
findings of such third electrical consultant shall be binding and conclusive on
Landlord and Tenant. Notwithstanding the foregoing provisions of this
subparagraph, Tenant, pending the resolution of any contest pursuant to the
terms hereof shall continue to pay the increase in Basic Rent as determined in
the first instance by Landlord's utility consultant and upon the resolution of
such contest, the increase to Basic Rent shall be adjusted in accordance
therewith with appropriate credit allowed to Tenant if required thereby.
(c) Tenant's use of electric energy in the Premises shall not at any time
exceed the capacity of any of the electrical conductors, machinery and equipment
in or otherwise serving the Premises. In order to insure that such capacity is
not exceeded and to avert possible adverse effects upon the Building electric
service, Tenant shall not, without Landlord's prior written consent in each
instance which consent shall not be unreasonably withheld or delayed, connect
any additional fixtures, machinery, appliances or equipment to the Building
electric distribution system within the Premises or make any alteration or
addition to Tenant's machinery, appliances or equipment, or the electric system
of the Premises existing on the commencement date of the term hereof. The
foregoing notwithstanding, Tenant may, subject to the first sentence of this
Section 6.01 (c), install and make substitutions and additions to "ordinary
office equipment" in the Premises without Landlord's consent. "Ordinary office
equipment" shall mean desk lamps, typewriters, adding machines, copy machines,
desk top computers and similar office equipment typically used in commercial
offices generally in Manhattan. In addition, Tenant shall not make or perform or
permit the making or performing of, any alterations or additions to the
Building's electric system or other electrical facilities or equipment outside
of the Premises without the prior consent of Landlord in each instance. Should
Landlord grant such consent, all additional risers or other equipment required
therefor shall be
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provided by Landlord and the cost thereof shall be paid by Tenant upon
Landlord's demand. As a condition to granting such consent, Landlord may require
Tenant to agree to an increase in the Basic Rent by an amount which will reflect
the value of the additional service to be furnished by Landlord, that is, the
potential additional electrical current to be made available to Tenant based
upon the estimated additional capacity of such additional risers or other
equipment.
(d) If the public utility rate schedule for the supply of electric current
to the Building or the utility company fuel adjustment charge or demand charge
shall be increased at any time after the date hereof, or if there shall be a
change in taxes or if additional taxes shall be imposed upon the sale or
furnishing of such electric current, or if there shall be a change in the space
constituting the Premises, or if Tenant's failure to maintain its machinery and
equipment in good order and repair causes greater consumption of electrical
current, or if Tenant uses electricity on days or hours other than those
specified in subparagraph (b) hereof, or if Tenant adds any machinery.
appliances or equipment, the Basic Rent herein reserved shall be equitably
adjusted to reflect any or all of the foregoing as may be applicable. If
Landlord and Tenant cannot agree thereon, the amounts of such adjustment(s)
shall be determined, based on standard practices, by any electrical engineer or
consultant to be selected by Landlord and paid by Tenant and the findings of
said electrical engineer or consultant shall he binding and conclusive upon the
parties unless Tenant, within thirty (30) days after such determination,
disputes the findings of Landlords electrical consultant and has Tenant's own
electrical consultant perform a survey as provided herein, at Tenants sole cost
and expense. If Landlord's and Tenant's electrical consultant cannot agree on
the results of the surveys then such consultants shall choose a third electrical
consultant to perform a survey in accordance with Section 6.01 hereof, the cost
of which shall be shared equally by Landlord and Tenant. The findings of such
third electrical consultant shall be binding and conclusive on Landlord and
Tenant. Notwithstanding the foregoing provisions of this subparagraph, Tenant,
pending the resolution of any contest pursuant to the terms hereof shall
continue to pay the increase in Basic Rent as determined in the first instance
by Landlord's utility consultant and upon the resolution of such contest, the
increase to Basic Rent shall be adjusted in accordance therewith with
appropriate credit allowed to Tenant if required thereby. When the amounts of
such adjustment are so determined, the parties shall execute an agreement
supplementary hereto to reflect such adjustment in the amount of the Basic Rent
stated in the Lease effective from the date of the increase or decrease of such
usage as determined by such electrical engineer, or consultant, or as the case
may be, from the effective date of such increase or decrease in the public
utility rate schedule; but such adjustments shall be effective from such date
whether or not such a supplementary agreement is executed and in no event shall
the Base Charge be reduced below the sum of $11,310.75.
(e) Landlord reserves the right to discontinue furnishing electric current
to Tenant in the Premises at any time upon not less than thirty (30) days'
notice to Tenant. If Landlord exercises such right of termination, this Lease
shall continue in full force and effect and shall be unaffected thereby, except
only that, from and after the effective date of such termination, Landlord shall
not be obligated to furnish electric energy to Tenant and the Basic Rent payable
under this Lease shall be reduced by the amount of any previous increases
thereto on account of electricity supplied pursuant to the provisions of this
Article; provided, however, that so long as Tenant is acting diligently, such
termination date shall be extended for such time as is reasonably necessary for
Tenant to make arrangements to obtain electric service directly from the public
utility servicing the building. Landlord, upon the expiration of the aforesaid
notice to Tenant, may discontinue furnishing the electric current; but, if, for
any reason, the supply of electric current by Landlord to the Tenant shall
thereafter continue for any period of time, this shall be without waiver of the
right of Landlord thereafter to terminate the same without further notice, and
the Tenant shall continue to pay the Basic Rent as increased pursuant to this
Article as herein provided until such time as the supply of current shall in
fact be discontinued. If Landlord so discontinues furnishing electric energy to
Tenant, Tenant shall arrange to obtain electric energy directly from the public
utility company furnishing electric service to the Building and all cost
incidental thereto shall be borne by Landlord, unless (i) such election is made
as a result of Tenant's failure to pay the Base Charge increase to Basic Rent in
accordance with the provisions of this Section 6.01 in which event Tenant shall
bear the entire cost and expense thereof, or (ii) the furnishing of electric
energy on a rent inclusion basis as provided in this Section 6.01, is prohibited
by law or by order or ruling of the Public
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Service Commission of the State of New York or by judicial decision, in which
event, Landlord and Tenant shall share equally the entire cost and expense
thereof. Tenant will without diminishing Landlord's existing or potential
electric capacity and in compliance with all laws and all applicable provisions
of this Lease including but not limited to Articles 7 and 8 hereof and having
first obtained Landlord's prior written consent, furnish and install all,
service wiring, switches, meter equipment and meters that may be necessary for
such installation. At Landlord's option, Landlord may elect to perform this
work.
In addition and notwithstanding anything to the contrary contained in this
article, Landlord at any time during the term of this Lease on not less than
thirty (30) days' prior written notice to Tenant may require Tenant to purchase
electricity from Landlord or from a meter company designated by Landlord upon
the terms of such submetering clause that may then be currently used by Landlord
in the Building of which the Premises form a part. If Landlord shall elect to
have Tenant purchase electricity directly from Landlord or Landlord's designated
meter company as aforesaid, then Landlord (but with Tenant's reasonable
cooperation) shall perform all wiring as may be necessary to have Tenant's
electrical consumption measured by submeters provided by Landlord and all cost
incidental thereto shall be borne by landlord, unless (i) such election is made
as a result of Tenant's failure to pay the Base Charge increase to Basic Rent in
accordance with the provisions of this Section 6.01 in which event Tenant shall
bear the entire cost and expense thereof, or (ii) the furnishing of electric
energy on a rent inclusion basis as provided in this Section 6.01 is prohibited
by law or by order or ruling of the Public Service Commission of the State of
New York or by judicial decision, in which event Landlord and Tenant shall share
equally the entire cost and expense thereof..
(f) If any tax is imposed upon Landlord with respect to electrical energy
furnished as a service to Tenant by any federal, state, municipal or other
authority, Tenant covenants and agrees that where permitted by law or applicable
regulations, Tenant's pro rata share of such taxes shall be reimbursed by Tenant
to Landlord within ten (10) days after being billed therefor.
ARTICLE 7
SERVICES AND REPAIRS
7.01 Landlord Services. Landlord shall operate and maintain the Building
in a manner consistent with industry practices for first-class office buildings
in the Borough of Queens in the City of New York, and, subject to curtailment as
required by Legal Requirements (as such term is hereinafter defined), shall
furnish to Tenant commencing on the date Tenant occupies the Premises for the
conduct of its business with the following services ("Landlord Services"):
(a) reasonably adequate supplies of (i) cold domestic water and (ii) hot
water to the core lavatories on the floor on which the Premises are located, in
either case, for ordinary lavatory, cleaning and drinking use (and consistent
with customary conservation practices);
(b) heat, ventilation and air conditioning on Business Days (as defined in
Section 26.20) during Business Hours (as defined in Section 26.20); and upon
written request by Tenant received by Landlord prior to 3:00 P.M. on the
Business Day immediately preceding the day for which such service is requested,
Landlord shall furnish air conditioning and heating at times other than the
times specified above, in which event Tenant shall pay to Landlord charges based
upon Landlord 's then established rates for furnishing such services within
thirty (30) days after demand therefor;
(c) Intentionally Deleted
(d) (i) nonexclusive passenger elevator service (for passenger use only)
to the Premises 24 hours per day and (ii) freight elevator service to the
Premises on a first come-first served basis during the hours of 8:00A.M.
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to 10:00 A.M., 10:30 A.M. to 12:00 P.M., 2:00 P.M. to 3:00 P.M., and from 3:30
P.M. to 4:45 P.M. on Business Days (as defined in Section 26.20) and, at times
prior to 8:00 A.M. or after 6:00 P.M. on Business Days or on days other than
Business Days, on a reserved basis provided that Tenant pay to Landlord charges
based on Landlord's then established rates therefor.
7.02 Access. Subject to the terms and conditions of this Lease, including
but not limited to the provisions of Paragraph 7.01 (d) hereof, Landlord shall
provide Tenant with reasonable access to the Premises on a 24-hour, 365/366-day
year basis. Notwithstanding the foregoing, the foregoing rights of access to the
Premises afforded to Tenant immediately above shall apply only to access by
persons (i.e. no freight of any type or nature whatsoever) (except as
specifically provided in Section 7.01 (d) hereof).
7.03 Cleaning Landlord shall be responsible for all cleaning and rubbish
removal. Tenant shall keep the Premises in a neat and orderly condition. Tenant
shall be responsible for all extermination in the Premises.
7.04 Service Interruption. (a) Subject to Section 26.04(b), Landlord shall
not be liable for damages to either person or property nor shall Landlord be
deemed to have evicted Tenant nor shall there be any abatement of Gross Rent nor
shall Tenant be relieved from performance of any covenant on its part to be
performed hereunder by reason of (i) failure by Landlord to furnish Landlord
Services due to Force Majeure, (ii) breakdown of equipment or machinery utilized
in supplying any Landlord Service or (iii) cessation of any Building Service due
to causes or circumstances beyond the boundaries of the Land. Landlord shall use
reasonable diligence, consistent with customary industry practice, to make such
repairs as may be required to machinery or equipment within the Building to
provide restoration of any Building Service and, where the cessation or
interruption of such Building Service has occurred due to circumstances or
conditions beyond the Land boundaries, to cause the same to be restored by
diligent application or request to the provider.
(b) In addition to any remedies which Landlord may have under this Lease,
if Tenant shall default in the payment of any Additional Charges payable
pursuant to this Article 7 in respect of additional or overtime services
provided by Landlord, then, for so long as such default remains uncured,
Landlord shall not be obligated to furnish Tenant any additional or overtime
services.
ARTICLE 8
ALTERATIONS
8.01 Initial Alterations. (a) Tenant shall deliver plans and
specifications relating to construction of Tenant's initial leasehold
improvements ("Initial Alterations") in the Premises in accordance with the
terms, provisions and time periods set forth in Exhibit B.
(b) Landlord shall cause all of the Initial Alterations to be constructed
in accordance with Exhibit B. All Initial Alterations as provided in Exhibit B
shall be constructed at Landlord's sole cost and expense, except as otherwise
specifically provided in Exhibit B for items which do not comply with the
building standards for the Initial Alterations.
8.02 Alterations. (a) Tenant shall not make or allow to be made any
alterations or physical additions, including, without limitation, fixtures, to
the Premises other than normal painting, carpeting, wall-coverings and office
decorations ("Alterations") or place safes, vaults, filing systems, libraries or
other heavy furniture or equipment within the Premises without first obtaining
the consent of Landlord, which consent shall not be unreasonably withheld in the
case of an Alteration which (i) has no adverse effect on the Building's
structure or
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systems, including, without limitation, the mechanical, electrical, plumbing,
HVAC, fire safety, fire protection or elevator systems of the Building
(collectively, "Building Systems"); (ii) is not visible from the exterior of the
Premises; (iii) does not result in a violation of, or require a change in, any
certificate of occupancy for the Building; (iv) does not affect any area of the
Building outside of the Premises; (v) does not adversely affect the curtain wall
of the Building; (vi) does not affect the gross area of the Premises other than
to a de minimis extent; and (vii) does not, in Landlord's sole judgment,
adversely affect the character or value of the Building.
(b) Landlord shall be entitled to retain independent consultants to review
the plans and specifications for and the progress of construction of Alterations
and to reimbursement from Tenant, within ten (10) days after request therefor,
for all of the fees of such consultants and other out-of-pocket costs incurred
by Landlord in connection with such proposed Alteration. Tenant shall, prior to
commencing any work in the Premises in connection with any Alteration, the
nature of which would under good construction industry practice or Legal
Requirements (as such term is hereinafter defined) involve the preparation of
plans and specifications, furnish Landlord with three (3) sets of complete plans
and specifications for such work. Landlord agrees to use reasonable efforts,
consistent with industry practice and the scope of such proposed Alteration, to
respond to Tenant's request for consent to its plans and specifications for
Alterations within (i) fifteen (15) Business Days after submission thereof to
Landlord in the case of the original submission and (ii) ten (10) Business Days
in the case of any resubmission of disapproved plans. Landlord reserves the
right to disapprove any plans and specifications in part, to reserve approval of
items shown thereon pending its review and approval of other plans and
specifications, and to condition its approval upon Tenant making revisions to
the plans and specifications or supplying additional information. Any
Alterations for which consent has been received shall be performed in accordance
with plans and specifications approved by Landlord, and no amendments or
additions thereto shall be made without the prior written consent of Landlord in
each instance, which consent shall be granted or withheld in accordance within
the same time frames in granting initial consent to the applicable Alterations.
(c) Tenant agrees that all Alterations shall at all times comply with all
Legal Requirements and any rules and regulations which Landlord may adopt from
time to time with respect to the making of Alterations. Tenant, at its expense,
shall (i) obtain all necessary municipal and other governmental permits,
authorizations, approvals and certificates for the commencement and prosecution
of such Alterations and for final approval thereof upon completion, (ii) deliver
the originals thereof to Landlord and (iii) cause all Alterations to be
performed in a good and first-class workmanlike manner, using new materials and
equipment at least equal in quality to a first-class office installation in a
first-class office building located in the Borough of Manhattan in the City of
New York.
(d) Landlord or its agent, at Tenant's expense and upon request of Tenant,
shall execute any applications for any permits, approvals or certificates
required to be obtained by Tenant (wherein such Landlord signature is required)
in connection with any permitted Alteration (provided that the provisions of the
applicable Legal Requirement require that Landlord execute such application) and
shall otherwise cooperate with Tenant in connection therewith, provided that if
Landlord shall incur any cost or liability in connection therewith, Tenant shall
reimburse Landlord for all such costs, expenses and liabilities within ten (10)
days after receipt of Landlord's invoice therefor.
(e) Tenant agrees that all Alterations shall be promptly commenced and
completed and shall be performed at other than during Business Hours of Business
Days and then only in a manner so as not to interfere with the occupancy of any
other tenant or delay Landlord in the construction, maintenance, cleaning,
repair, safety, management, security or operation of the Building or the space
of any other tenant in the Building, and if any additional expense shall be
incurred by Landlord as a result of Tenant's making of any Alterations, Tenant
shall pay such additional expense within ten (10) days after demand therefor.
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(f) No Alterations shall be constructed (i) except under the supervision
of a licensed architect or licensed professional engineer reasonably
satisfactory to Landlord and (ii) in the event of an Alteration in excess of
$50,000.00 prior to Tenant delivering to Landlord either (y) a performance bond
and a labor and materials payment bond (issued by a surety company reasonably
satisfactory to Landlord and licensed to do business in the State of New York)
each in an amount equal to one hundred twenty-five percent (125%) of such
estimated cost and otherwise in form satisfactory to Landlord or (z) such other
security as shall be satisfactory to Landlord.
(g) All contractors retained by Tenant shall be subject to the prior
written approval of Landlord. Tenant shall not permit the use of any
contractors, labor, material or equipment in the performance of any work if such
use, in Landlord's sole judgment, will disturb harmony with any trade engaged in
performing any other work in and about the Building or contribute to any labor
dispute. Landlord may require the use of designated Building Engineers or
Contractors for specified work which will or may affect any Building Systems.
(h) Tenant shall indemnify and hold Landlord harmless from and against all
costs (including, without limitation, attorneys' fees and disbursements),
losses, liabilities or causes of action arising out of or relating to any
Alteration, including, without limitation, any mechanics' or materialmen's liens
asserted in connection with such Alteration.
(i) Should any mechanics' or other liens be filed against the Building or
any portion of the Building by reason of Tenant's acts or omissions or because
of a claim against Tenant, Tenant shall cause the same to be canceled or
discharged of record by bond or otherwise within ten (10) Business Days after
notice from Landlord. Any such failure by Tenant to cancel or discharge said
lien or liens within said ten (10) Business Day period shall constitute a
material default under this Lease, whereupon Landlord may cancel or discharge
the same and upon Landlord's demand Tenant shall reimburse Landlord on demand
for all reasonable costs (including, without limitation, legal fees and
expenses) incurred in canceling or discharging such liens.
(j) Throughout the making of all Alterations, Tenant, at its expense,
shall carry or cause to be carried all such forms of insurance as set forth in
Exhibit D attached hereto, including but not limited to (i) worker's
compensation insurance in statutory limits covering all persons employed in
connection with such Alterations, (ii) builder's risk property insurance,
completed value form, covering all physical loss (including any loss of or
damage to supplies, machinery and equipment) in connection with the making of
such Alterations and (iii) commercial general liability insurance, with
completed operations endorsement, covering any occurrence in or about the
Building in connection with such Alterations, which comprehensive liability
insurance policy shall satisfy the requirements of Sections 17.03 and 17.05.
Tenant shall be obligated to furnish Landlord with evidence reasonably
satisfactory to Landlord that such insurance is in effect before the
commencement of such Alterations and, on request, at reasonable intervals
thereafter.
8.03 Tenant's Property. Subject to Section 21.01 hereof, all Alterations
shall be and remain part of the Premises and be deemed the property of Landlord
except such trade fixtures, furniture and equipment as are installed at the
expense of Tenant and which may be removed without material damage to the
Premises (collectively, "Tenant's Property"). Tenant may remove Tenant's
Property from the Premises during the Term and Tenant shall repair any and all
damage to the Premises or the Building occasioned by such removal. Any
structural repairs or repairs to Building Systems necessitated by the removal of
Tenant's Property shall be performed by Landlord and Tenant shall pay at its
sole cost and expense for the cost thereof within ten (10) days after demand by
Landlord.
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8.04 Effect of Landlord's Approval. Landlord's review and/or approval of
plans or specifications or consent to the making of Alterations in the Premises
shall not be deemed to be (i) an agreement by Landlord that the contemplated
Alterations comply with any Legal Requirements, or the certificate of occupancy
for the Building; (ii) an approval of the sufficiency, completeness or any other
aspect of the proposed Alteration; or (iii) a waiver by Landlord of compliance
by Tenant with any of the other terms of this Lease and any other agreements or
other documents relating thereto.
8.05 Survival. Tenant's obligations under this Article 8 shall survive the
expiration or sooner termination of this Lease.
ARTICLE 9
REPAIRS
9.01 Repairs by Landlord. Landlord shall make all repairs, interior or
exterior, structural or non- structural, ordinary or extraordinary, consistent
with industry standards, to keep the Building (including the Premises and the
Building systems) in reasonably good order and repair, excluding, however,
repairs which Tenant is obligated to make pursuant to Section 9.02 or the other
terms of this Lease. No liability of Landlord to Tenant shall accrue under this
Section 9.01 with respect to any repair within the Premises or to any Building
System servicing the Premises unless and until Tenant has given notice to
Landlord of the specific repair required to be made or of the failure properly
to furnish any Landlord's Services and Landlord's failure, subject to Force
Majeure, thereafter promptly to remedy the same.
9.02 Repairs by Tenant. Tenant, at its expense, shall take good care of
and maintain the Premises, including, without limitation, (a) the Initial
Alterations and any Alterations, (b) the package air conditioning unit(s) and
the internal air distribution system located in and serving the Premises, (c)
the internal electrical system servicing the Premises, (d) all plumbing fixtures
and lines in and serving the Premises to the point at which same join the
vertical risers for the Building, (e) the life safety and emergency power and/or
any other systems to the point at which same join the main vertical risers for
the Building and (f) Tenant's Property; provided, however, that Tenant shall
only be responsible for exterior or structural repairs if the need for same
arises out of (i) the making, installation, use, operation or existence of
Alterations by or on behalf of Tenant, (ii) the moving of Tenant's Property
and/or other materials, supplies, etc. in or out of the Building or the
Premises, (iii) the negligence or wilful misconduct of Tenant or any other
occupant of the Premises or any of Tenant's employees, contractors, agents,
licensees or invitees or their manner of use or occupancy of the Premises,
subject, however, in the case of fire or other insured casualty, to the waiver
set forth in Section 17.04, or (iv) Tenant's compliance or noncompliance with
Legal Requirements in accordance with Section 10.01. Any repairs to the Building
or Building Systems (including those elements of the Building Systems described
in clauses (a) through (e) above) shall be performed by Landlord at Tenant's
expense (including a supervisory charge, in addition to charges for general
conditions, equal to ten percent (10%) of the trade cost of such repairs and any
other costs incurred by Landlord), unless Landlord elects by notice to Tenant to
have Tenant perform such repairs at Tenant's sole cost and expense. Tenant shall
promptly notify Landlord of the need for structural repairs, repairs to the
exterior (including exterior glass) of the Building, and/or repairs to any
Building Systems which are the responsibility of Tenant. Landlord shall be
responsible to make repairs which are required as a result of Landlord or
Landlord's employees (collectively, "Landlord's Agents").
9.03 Changes in Facilities. Landlord reserves the right, at any time and
without any liability to Tenant, to make changes in or additions to the
Building, including, without limitation, any changes to the Common Areas, as it
may deem necessary or desirable provided that (a) any such change does not
deprive Tenant of any access to
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the Premises. Landlord may install and maintain pipes, fans, ducts, shafts,
wires and conduits within, adjacent and/or through (as the case may be) the
walls, floors or ceilings of the Premises. Landlord shall use reasonable efforts
to minimize interference with Tenant's use and occupancy thereof as a result of
such installation and maintenance.
9.04 Landlord Access. Except as provided for in Section 7.03, Landlord and
Landlord's Agents shall have the right (but shall not be obligated to) to enter
the Premises in any emergency at any time, and, at other reasonable times upon
notice to Tenant to examine same or to inspect, clean or perform such work as
Landlord may reasonably deem necessary or to exhibit the Premises to prospective
purchasers, mortgagees or tenants, or for any other purpose as Landlord may deem
necessary or desirable. Landlord shall use reasonable efforts to minimize the
adverse effect on Tenant of any entry by Landlord on the Premises for any
reason. Tenant shall not be entitled to any abatement or reduction of Gross Rent
by reason of such entry. For the purposes herein, such notice shall be given at
the premises to the person in charge of the Premises for Tenant.
ARTICLE 10
COMPLIANCE WITH LAWS
10.01 Compliance with Laws by Tenant. Tenant, at its expense, shall comply
with all (a) laws and ordinances and all rules, orders or regulations (present,
future, ordinary, extraordinary, foreseen or unforeseen) of any governmental
authority or of any insurer with respect to the Property, and (b) covenants,
conditions, restrictions, easements and encumbrance affecting the Property
(collectively, "Legal Requirements"), at any time duly issued and in force,
affecting or related to the Premises or any part thereof, and Tenant shall make
all improvements (subject to the terms and conditions of Article 8 hereof) which
(a) are necessitated by a condition which has been created by, or at the
instance of, Tenant (including, without being limited to, any Alterations), (b)
are attributable to the use, or manner of use of the Premises, (c) are
necessitated by reason of a breach of Tenant's obligations hereunder, or (d) are
occasioned, in whole or in part, by any act or omission of Tenant or Tenant's
Agents, or any person claiming by, through or under Tenant or Tenant's Agents.
ARTICLE 11
RIGHT TO PERFORM TENANT COVENANTS
11.01 Right to Perform Tenant Covenants. If Tenant shall fail to perform
any of its obligations under this Lease, Landlord may perform the same at the
expense of Tenant (a) immediately and without notice in the case of emergency or
in case such failure unreasonably interferes with the use of space by any other
tenant in the Building or with the provision of Landlord's Services or may
result in a violation of any Legal Requirement and (b) in any other case if such
failure continues after ten (10) days from the date of the giving by Landlord to
Tenant of notice of Landlord's intention so to perform the same. Tenant's
obligations under this Section shall survive the expiration or sooner
termination of this Lease.
ARTICLE 12
ASSIGNMENT, MORTGAGING AND SUBLETTING
12.01 Assignment: Etc. Subject to the terms and procedures set forth in
Section 12.02, neither this Lease nor the term and estate hereby granted, nor
any part hereof or thereof, shall be assigned or otherwise transferred, and
neither the Premises nor any part thereof shall be subleased or be encumbered in
any manner by reason of any act or omission on the part of Tenant without the
prior consent of Landlord, which consent shall not be unreasonably withheld or
delayed. Transfer of a controlling interest in the stock or other ownership
interests
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of Tenant shall be deemed to be a transfer of this Lease excepting only where
such transfers of stock are effected through the "over-the-counter" market or
through any recognized stock exchange or in connection with a public offering of
shares of Tenant. No consent of Landlord to any assignment or other transfer of
this Lease and the term and estate hereby granted, and no consent by Landlord to
any subletting of all or any portion of the Premises, shall be construed to
relieve Tenant of its liability hereunder or of the obligation to obtain such
consent to any further assignment, other transfer or subletting. Tenant may
permit any corporation or other business entity which controls, is controlled by
or is under common control (and which at all times so remains) with Tenant
including but not limited to a bonafide merger or other consolidation of
Tenant's business where the resulting entity is at least as strong financially
as Tenant (a "Related Corporation") to sublet all or part of the Premises upon
prior written notice to Landlord setting forth the name of such Related
Corporation and the providing of reasonably satisfactory evidence to Landlord
that such subtenant is a Related Corporation. Such subletting shall not vest in
any such Related Corporation any right or interest in this Lease nor shall it
discharge any of Tenant's obligations hereunder. For purposes hereof, "control"
means ownership and/or control of 50% or more of the equitable or beneficial
interest in such entity and/or control or participation in or management of such
entity.
12.02 Assignment and Subletting Procedures. (a) Provided Tenant is not
then or thereafter in default in the payment of Basic Rent and/or Additional
Charges or is otherwise not in default under this Lease, if Tenant intends to
assign this Lease or to sublet the Premises or any part thereof, Tenant shall
give Landlord notice of such intent. Tenant's notice shall be accompanied by (i)
a certified description of all material terms of the proposed agreement between
Tenant and the proposed assignee or subtenant, (ii) a statement setting forth in
reasonable detail the identity of the proposed assignee or sublessee, the nature
of its business and its proposed use of the Premises and (iii) current financial
information with respect to the proposed assignee or subtenant. Tenant shall
provide Landlord with any additional information or documents requested by
Landlord.
(b) Landlord shall then have the option, exercisable by notice to
Tenant within thirty (30) days after receipt of such additional information (or
the date of Tenant's original notice if Landlord does not timely request
additional information) to:
(i) sublease the applicable space on the terms and conditions set
forth in this Lease, to the extent applicable, or, in the case of a
proposed assignment or a proposed subletting for all or substantially all
of the Term, to accept an assignment of this Lease, in either case as of
the date so specified by Tenant (but in no event earlier than one hundred
fifty (150) days after the date of receipt by Landlord of such notice), or
(ii) permit Tenant to assign this Lease or sublet such space,
subject, however, to Landlord's prior approval of the proposed assignee or
sublessee, which approval shall not be withheld or delayed so long as:
(A) the use of the Premises by such proposed assignee or
sublessee would be permitted under Section 3.01;
(B) the proposed assignee or sublessee is of sound financial
condition as determined by Landlord given the obligations to be
assumed by such assignee or sublessee under this Lease;
(C) in the case of a subletting, such subletting shall be at
rent no less than (x) the rental rate then being accepted by
Landlord with respect to comparable available space in the Building
or (y) if there is no comparable available space in the Building at
such time, the fair rental value
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of the sublet space;
(D) the proposed sublessee or assignee is a reputable person
or entity of good character and Landlord has been furnished with
evidence thereof;
(E) neither the proposed subtenant or assignee nor any one
controlling, controlled by or under common control with such
proposed subtenant or assignee is then an occupant of any portion of
the Building or is a person with whom Landlord is then negotiating
to lease space in the Building;
(F) the form of the proposed sublease or assignment is
satisfactory to Landlord;
(G) there shall be no more than two (2) occupants within the
premises, including Tenant; and
(H) the proposed subtenant shall not be (1) entitled, directly
or indirectly, to diplomatic or sovereign immunity unless
effectively waived and shall be subject to the service of process
in, and the jurisdiction of the courts of the State of New York or
(2) a charitable, religious, union or other not-for-profit
organization or any tax exempt entity within the meaning of
Section168(j)(4)(A) of the Internal Revenue Code of 1986, as
amended, or any successor or substitute statute, or rule or
regulation applicable thereto (as the same may be amended).
(c) If the aggregate amount payable as base rent and additional rent by a
subtenant under a sublease of any part of the Premises shall be in excess of
Tenant's Basic Cost (as hereinafter defined) therefor at that time, then, within
ten (10) days after the collection thereof, Tenant shall pay to Landlord, as
Additional Rent, such excess. Tenant shall deliver to Landlord within thirty
(30) days after the end of each calendar year and within thirty (30) days after
the expiration or earlier termination of this Lease a statement specifying each
sublease in effect at any time during such calendar year or partial calendar
year, the number of square feet of rentable area demised thereby, the term
thereof and a computation in reasonable detail showing the calculation of the
amounts paid and payable by Tenant to Landlord with respect to such sublease for
the period covered by such statement. "Tenant's Basic Cost" for sublet space at
any time means the sum of (x) the portion of the Base Rent and Tenant's Tax
Payment which is attributable to the sublet space at such time, plus (y) the
amount of any costs reasonably incurred by Tenant in making changes in the
layout and finish of the sublet space for the subtenant amortized on a
straight-line basis over the term of the sublease plus (z) the amount of any
customary brokerage commissions and legal fees and disbursements paid by Tenant
in connection with the sublease amortized on a straight-line basis over the term
of the sublease.
(d) Upon any assignment of this Lease pursuant to the terms hereof, Tenant
shall pay to Landlord the Net Consideration (as hereinafter defined) received by
Tenant in respect of such assignment or otherwise from such assignee. For
purposes hereof, "Net Consideration" means all sums paid by the assignee in
consideration of such assignment minus all customary and reasonable closing
expenses (including, without limitation, customary and reasonable legal and
brokerage expenses) incurred in connection with such assignment. "Net
Consideration" shall include any sums paid for the purchase or rental of any of
Tenant's Property, less, in the case of a sale thereof, the then net,
unamortized or undepreciated cost thereof determined on the basis of Tenant's
Federal income tax returns.
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(e) No assignment made pursuant to this Section 12.02 shall be valid
unless, within ten (10) days after the execution thereof, Tenant shall deliver
to Landlord a duplicate original instrument of assignment and assumption, duly
executed by Tenant and by the assignee and in form and substance reasonably
satisfactory to Landlord, wherein such assignee shall assume performance of all
terms of this Lease on Tenant's part to be performed.
(f) Tenant shall, within ten (10) days after the commencement of the term
of a permitted sublease, give Landlord notice of such commencement, or, in the
case of permitted assignment, notice of the effectiveness of such assignment.
(g) If Landlord consents to a proposed sublease or assignment and the same
does not become effective within ninety (90) days after the giving of such
consent, then Tenant shall again comply with all of the provisions and
conditions of this Article 12 before assigning this Lease or subletting all or
any part of the Premises.
(h) If Landlord shall decline to consent to any proposed assignment or
sublease as permitted by this Lease, or if Landlord shall exercise its option
under this Section to terminate this Lease, Tenant hereby agrees to indemnify
Landlord against any and all liability arising from any claims that may be made
against Landlord by the proposed assignee or subtenant or by any broker, finder
or other person claiming a commission or other compensation in connection with
the proposed assignment or sublease.
12.03 Additional Subleasing Conditions. (a) If this Lease is assigned,
whether or not in violation of the terms of this Lease, Landlord may collect
rent from the assignee. If the Premises or any part thereof is sublet or used or
occupied by anybody other than Tenant, Landlord may, after default by Tenant,
collect rent from such subtenant or occupant. In either event, Landlord may
apply the net amount collected to the rents herein reserved. The consent by
Landlord to an assignment, transfer, mortgage, pledge, encumbering or subletting
pursuant to any provision of this Lease shall not relieve Tenant or any assignee
or subtenant from obtaining the express prior consent of Landlord to any other
or further assignment, transfer, mortgage, pledge, encumbering or subletting.
Tenant agrees to pay to Landlord reasonable attorneys' fees and disbursements
incurred by Landlord in connection with any proposed assignment or subletting.
Neither any assignment of this Lease nor any subletting, occupancy or use of the
Premises or any part thereof by any person other than Tenant, nor any collection
of rent by Landlord from any person other than Tenant, nor any application of
any such rent as provided in this Article, shall be deemed a waiver of any of
the provisions of this Article or relieve, impair, release or discharge Tenant
of its obligation fully to perform the terms of this Lease on Tenant's part to
be performed, and Tenant shall remain fully and primarily liable hereunder.
(b) No subletting shall be for a term ending later than the day prior to
the Expiration Date and any portion of a proposed term of any sublease or any
renewal or extension thereof which purports to extend beyond such date, or the
date of sooner termination of the Term, is hereby deemed to be a nullity.
(c) If Landlord shall recover or come into possession of the Premises
before the Expiration Date, Landlord shall have the right to take over any
sublease made by Tenant and to succeed to all rights of Tenant thereunder,
Tenant hereby assigning (effective as of the date of Landlord's succession to
Tenant's estate in the Premises) such subleases as Landlord may elect to take
over. Every subletting hereunder shall be subject to the condition that, from
and after the termination of this Lease or re-entry by Landlord hereunder or
other succession by Landlord to Tenant's estate in the Premises, the subtenant
shall waive any right to surrender possession or to terminate the sublease and,
at Landlord's election, shall be bound to Landlord for the balance of the term
thereof and shall attorn to and recognize Landlord, as its landlord, under all
of the then executory terms of such sublease, except that Landlord shall not (i)
be liable for any previous act, omission or negligence of Tenant, as
sublandlord, under such sublease, (ii) be subject to any counterclaim, defense
or offset theretofore accruing to such subtenant
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against Tenant, (iii) be bound by any previous modification or amendment of such
sublease made without Landlord's consent or by any previous prepayment of more
than one month's rent and additional rent unless paid as provided in the
sublease, or (iv) be obligated to perform any repairs or other work in the
subleased space or the Building beyond Landlord's obligations under this Lease.
Each subtenant shall promptly execute and deliver such instruments as Landlord
may reasonably request to evidence and confirm such attornment.
12.04 Mortgaging. Except as otherwise provided herein, Tenant, for itself,
its heirs, distributees, executors, administrators, legal representatives,
successors and assigns, expressly covenants that it shall not mortgage,
hypothecate, pledge or otherwise encumber this lease without the prior written
consent of Landlord in each instance.
ARTICLE 13
SUBORDINATION/ATTORNMENT
13.01 Subordination. (a) This Lease and Tenant's rights hereunder are
subject and subordinate to; (i) all present and future ground leases, operating
leases, superior leases, overriding leases and underlying leases and grants of
term of the Building or any portion thereof (collectively, including the
applicable items set forth in clause (iv) of this subsection (a), "Superior
Leases"); (ii) all mortgages and building loan agreements, including leasehold
mortgages and spreader and consolidation agreements, which may now or hereafter
affect all or any portion of the Building or any Superior Lease (collectively,
including the applicable items set forth in clauses (iii) and (iv) of this
subsection (a), "Superior Mortgages"), whether or not a Superior Mortgage shall
also cover other lands or buildings or leases, except that a mortgage on the
Land only shall not be a Superior Mortgage so long as there is in effect a
Superior Lease which is not subordinate to such mortgage; (iii) each advance
made under any Superior Mortgage; and (iv) all renewals, modifications,
replacements, substitutions and extensions of any Superior Lease or Superior
Mortgage. The provisions of this subsection shall be self-operative and no
further instrument of subordination shall be required.
(b) Tenant shall, within ten (10) days after request therefor, execute and
deliver, at its expense, any instrument, in recordable form if requested, that
Landlord, any holder of a Superior Mortgage (a "Superior Mortgagee") or any
lessor under a Superior Lease (a "Superior Lessor") may reasonably request, from
time to time, to evidence and confirm the subordination provided in subsection
(a) of this Section 13.01.
(c) Any Superior Mortgagee may elect that this Lease shall have priority
over the mortgage held by such Superior Mortgagee (such mortgage, upon such
election by the applicable Superior Mortgagee, is referred to herein as a
"Subordinated Mortgage") and, upon notification by such Superior Mortgagee to
Tenant, this Lease shall be deemed to have priority over such Subordinated
Mortgage, whether this Lease is dated prior to or subsequent to the date of such
Subordinated Mortgage and, to the extent that an election is made by a Superior
Mortgagee, the provisions of Section 13.01 (a) hereof shall not be applicable to
such Subordinated Mortgage (except as otherwise provided), but such Superior
Mortgagee shall remain a Superior Mortgagee for the purpose of all other
provisions of this Lease. Tenant and such Superior Mortgagee shall promptly,
upon the notification by such Superior Mortgagee, execute and deliver an
instrument in recordable form to evidence and confirm such priority.
(d) If, in connection with obtaining, continuing or renewing financing for
which the Building, the Land or the interest of the lessee under any Superior
Lease represents collateral, in whole or in part, the Superior Mortgagee or
proposed Superior Mortgagee (including any which may elect that this Lease shall
have priority over such Superior Mortgage) shall request reasonable
modifications of this Lease as a condition of such financing,
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Tenant shall not withhold its consent thereto, provided that such modifications
do not increase Tenant's obligation to pay Base Rent or Additional Charges,
shorten or lengthen the Term and do not materially increase any other
obligations or materially diminish any other rights of Tenant under this Lease.
(e) In the event that Tenant and the Existing Superior Holder shall
execute and deliver a subordination and attornment agreement with respect to
this Lease, the terms of such agreement shall supersede the terms of this
Article 13 to the extent applicable with respect to such Existing Superior
Holder.
13.02 Attornment. (a) If at any time any Superior Lessor, Superior
Mortgagee (each a "Senior Interest Holder") or any other person or the
successors or assigns of any of the foregoing (such Senior Interest Holder and
any such other person being herein collectively referred to as "Successor
Landlord") shall succeed to the rights of Landlord under this Lease, Tenant
agrees, at the election and upon the request of any such Successor Landlord,
from time to time, fully and completely to attorn to and recognize any such
Successor Landlord as Tenant's landlord under this Lease upon the then executory
terms of this Lease, provided such Successor Landlord shall agree in writing to
accept Tenant's attornment. The foregoing provisions of this Section 13.02 shall
inure to the benefit of any such Successor Landlord, shall apply notwithstanding
that, as a matter of law, this Lease may terminate upon the termination of the
Superior Lease and shall be self-operative upon any such request, and no further
instrument shall be required to give effect to said provisions. Upon the request
of any such Successor Landlord, Tenant shall execute and deliver, from time to
time, instruments reasonably satisfactory to any such Successor Landlord, in
recordable form if requested, to evidence and confirm the foregoing provisions
of this Section 13.02, acknowledging such attornment and setting forth the terms
and conditions of its tenancy.
(b) Upon such attornment, this Lease shall continue in full force and
effect as a direct lease between such Successor Landlord and Tenant upon all of
the then executory terms of this Lease except that such Successor Landlord shall
not be: (i) liable for any act or omission or negligence of any prior Landlord
(other than to cure any default of a continuing nature); (ii) subject to any
counterclaim, defense or offset which theretofore shall have accrued to Tenant
against any prior Landlord; (iii) bound by the payment of any Base Rent or
Additional Charges for more than one month in advance (unless actually received
by such Successor Landlord); (iv) bound by any modification or amendment of this
Lease unless (A) such modification or amendment shall have been approved in
writing by the Senior Interest Holder, of which Tenant has been given notice,
through or by reason of which the Successor Landlord shall have succeeded to the
rights of Landlord under this Lease or (B) the modification or amendment shall
have occurred prior to the creation of such Senior Interest; (v) obligated to
construct any improvements or to grant any credit toward the cost of any
improvements; (vi) in the event of damage to the Building by fire or other
casualty, obligated to repair the Premises or the Building or any part thereof
beyond such repair as may be reasonably accomplished from the net proceeds of
insurance actually made available to Landlord; or (vii) in the event of partial
condemnation, obligated to repair the Premises or the Building or any part
thereof beyond such repair as may be reasonably accomplished from the net
proceeds of any award actually made available to Landlord as consequential
damages allocable to the part of the Premises or the Building not taken. Nothing
contained in this Section 13.02 shall be construed to impair any right otherwise
exercisable by any such Successor Landlord.
13.03 Right to Cure. If any act or omission by Landlord shall give Tenant
the right, immediately or after the lapse of time, to cancel or terminate this
Lease in whole or in part or to claim such cancellation or termination on the
basis of a partial or total eviction, Tenant shall not exercise any such right
until (a) it shall have given written notice of such act or omission to each
Senior Interest Holder whose name and address shall have been previously
furnished to Tenant, and (b) a reasonable period for remedying such act or
omission shall have elapsed following such notice and following the time when
such Superior Mortgagee or Superior Lessor shall have become entitled
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under such Superior Mortgage, Subordinated Mortgage or Superior Lease, as the
case may be, to remedy the same (which reasonable period shall be not less than
sixty (60) days and, if such act or omission is of such a nature that it cannot
be completely remedied within such sixty (60) day period, such reasonable period
shall be such longer period as may be required provided such Senior Interest
Holder shall have within such sixty (60) day period given Tenant notice of its
intention to remedy such act or omission, and has commenced and thereafter
continues to act upon such intention). It is agreed, however, that if such
Senior Interest Holder requires possession of the Premises in order to effect a
remedy, then such Senior Interest Holder shall have such further period of time
as is necessary to obtain possession in addition to the reasonable period
referred to in the preceding sentence, provided such Senior Interest Holder
shall give Tenant notice of its intention to obtain possession and remedy such
act or omission and shall promptly commence and continue to pursue, through
appointment of a receiver or foreclosure, summary proceedings or other
procedures, steps necessary to obtain possession. It is expressly agreed however
that Tenant's obligations under this Lease and its rights to cancel or Terminate
this Lease are subject to such remedy by Landlord or such Senior Interest
holder, Tenant cannot be obligated to take possession of the Premises if
possession has been taken by such Senior Interest Holder or Landlord for such
remedy, unless such remedy has been completed as provided herein. For the
purposes of this Section 13.03, if there shall be more than one Senior Interest
Holder, the provisions of this Section 13.03 shall be applicable only to the
holder of the Superior Mortgage or the Subordinated Mortgage which constitutes
the first mortgage lien on the Building.
ARTICLE 14
BANKRUPTCY; CONDITIONS OF LIMITATION
14.01 Bankruptcy. (a) In the event a petition is filed by or against
Tenant under the United States Bankruptcy Code, 11 U.S.C. ss.ss. 101-1330, as
amended, or any successor thereto (the "Bankruptcy Code"), Tenant, as debtor and
debtor-in-possession, and any trustee who may be appointed, agree to adequately
protect Landlord as follows: (i) to pay monthly in advance on the first day of
each month as reasonable compensation for use and occupancy of the Premises an
amount equal to all Base Rent and Additional Charges due pursuant to this Lease;
(ii) to perform each and every obligation of Tenant under this Lease until such
time as this Lease is either rejected or assumed by order of a court of
competent jurisdiction; (iii) to determine within sixty (60) days after the
filing of such petition whether to assume or to reject this Lease; (iv) to give
Landlord at least thirty (30) days' prior written notice, unless a shorter
notice period is agreed to in writing by the parties, of any proceeding relating
to any assumption of this Lease; (v) to give at least thirty (30) days' prior
written notice of any vacation or abandonment of the Premises, any such vacation
or abandonment to be deemed a rejection of this Lease; and (vi) to do all other
things of benefit to Landlord otherwise required under the Bankruptcy Code.
Tenant shall be deemed to have rejected this Lease in the event of the failure
to comply with any of the above.
(b) If Tenant or a trustee elects to reject this Lease subsequent to the
filing of a petition under the Bankruptcy Code, or if this Lease is otherwise
rejected, Tenant shall immediately vacate and surrender possession of the
Premises in accordance with Article 21 hereof.
(c) If Tenant or a trustee elects to assume this Lease subsequent to the
filing of a petition under the Bankruptcy Code, Tenant, as debtor and as
debtor-in-possession, and any trustee who may be appointed agree as follows: (i)
to cure each and every existing breach by Tenant within not more than ninety
(90) days after assumption of this Lease; (ii) within ninety (90) days of this
Lease to compensate Landlord for any actual pecuniary loss resulting from any
existing breach, including, without limitation, Landlord's costs, expenses and
attorneys' fees incurred as a result of such breach, as determined by a court of
competent jurisdiction; (iii) in the event of an existing breach, to provide
adequate assurance of Tenant's future performance, including, without
limitation, (A) the deposit of a sum equal to three (3) months' installments of
Base Rent to be held to secure Tenant's obligations
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under the Lease, (B) the production to Landlord of written documentation
establishing that Tenant has sufficient present and anticipated financial
ability to perform each and every obligation of Tenant under this Lease, and (C)
such additional assurances, in form acceptable to Landlord, as may be required
under any applicable provision of the Bankruptcy Code; (iv) the assumption will
not breach any provision of this Lease; (v) the assumption will be subject to
all of the provisions of this Lease unless the prior written consent of Landlord
is obtained; and (vi) the prior written consent of any Senior Interest Holder to
which this Lease has been assigned as collateral security to the assumption is
obtained.
(d) If Tenant assumes this Lease and proposes to assign the same pursuant
to the provisions of the Bankruptcy Code to any person or entity who shall have
made a bona fide offer to accept an assignment of this Lease on terms acceptable
to Tenant, then notices of such proposed assignment, setting forth (i) the name
and address of such person, (ii) all the terms and conditions of such offer, and
(iii) the adequate assurances to be provided Landlord to assure such person's
future performance under the Lease, shall be given to Landlord by Tenant no
later than twenty (20) days after receipt by Tenant, but in any event no later
than ten (10) days prior to the date that Tenant shall make application to a
court of competent jurisdiction for authority and approval to enter into such
assignment and assumption, and Landlord shall thereupon have the prior right and
option, to be exercised by notice to Tenant given at any time prior to the
effective date of such proposed assignment, to accept an assignment of this
Lease upon the same terms and conditions for the same consideration, if any, as
the bona fide offer made by such person, less any brokerage commissions which
may be payable out of the consideration to be paid by such person for the
assignment of this Lease. The adequate assurance to be provided Landlord to
assure the assignee's future performance under the Lease shall include without
limitation: (A) the deposit of a sum equal to three (3) months installments of
Base Rent to be held to secure Tenant's obligations under this Lease, (B) a
written demonstration that the assignee meets all reasonable financial and other
criteria of Landlord as did Tenant and its business at the time of execution of
this Lease, including the production of the most recent audited financial
statement of the assignee prepared by an independent certified public
accountant, (C) use of the Premises in compliance with the terms of Section 3.01
of this Lease, and (D) such additional assurances, m form reasonably acceptable
to Landlord, as to all matters identified in any applicable provision of the
Bankruptcy Code.
(e) Neither Tenant nor any trustee who may be appointed in the event of
the filing of a petition under the Bankruptcy Code shall conduct or permit the
conduct of any "fire," "bankruptcy," "going out of business" or auction sale in
or from the Premises.
14.02 Default. This Lease and the term and estate hereby granted are
subject to the limitation that:
(a) if Tenant shall default in the payment of (i) Base Rent and such
default shall continue for a period of five (5) days thereafter , or (ii)
Additional Charges on any date upon which the same becomes due and any such
default shall continue for ten (10) days thereafter, or
(b) if any policy of insurance carried by or on behalf of Landlord with
respect to the Building shall be canceled or rendered void or voidable by reason
of the use of the Premises in violation of the restrictions provided in Article
3 or the Rules and Regulations and if Tenant shall fail to cease such use within
twenty-four (24) hours after Landlord shall have given Tenant a notice
specifying such default, or
(c) if Tenant shall default in the keeping, observance or performance of
any covenant or agreement (other than a default of the character referred to in
Sections 14.02(a) and/or 14.02(b), and if such default shall continue and shall
not be cured within thirty (30) days after Landlord shall have given to Tenant a
notice specifying the same, or, in the case of a default which for causes beyond
Tenant's reasonable control, cannot with due diligence
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be cured within such period of thirty (30) days, if Tenant (i) shall not,
promptly upon the giving of such notice, advise Landlord of Tenant's intention
duly to institute all steps necessary to cure such default or (ii) shall not
duly institute and thereafter diligently prosecute to completion all steps
necessary to cure the same and, in any event, cure such default within ninety
(90) days of receipt of Landlord's notice of such default by Tenant, or
(d) if any event shall occur or any contingency shall arise whereby this
Lease or the estate hereby granted or the unexpired balance of the Term would,
by operation of law or otherwise, devolve upon or pass to any person other than
Tenant except as is expressly permitted under Article 12 or Article 13, or
(e) if the Premises or any substantial portion thereof shall be abandoned
or become vacant for a period of twenty (20) consecutive Business Days, or
(f) if Tenant shall make an assignment for the benefit of creditors or
shall seek or consent to or acquiesce in the appointment of any trustee,
receiver or liquidator of Tenant or of all or any part of Tenant's Property, or
(g) if, within ninety (90) days after the appointment of any trustee,
receiver or liquidator of Tenant or of all or any part of Tenant's Property,
without the consent of Tenant, such appointment shall not have been vacated or
otherwise discharged, or if any execution or attachment shall be issued against
Tenant or any of Tenant's Property pursuant to which the Premises shall be taken
or occupied or attempted to be taken or occupied,
then, in any of such cases, Landlord shall, in addition to any other remedies
available to it at law or in equity, be entitled to give to Tenant a notice of
intention to end the Term at the expiration of three (3) days from the date of
the giving of such notice, and, in the event such notice is given, this Lease
and the Term and estate hereby granted shall terminate upon the expiration of
such three (3) days with the same effect as if the last of such three (3) days
were the Expiration Date, but Tenant shall remain liable for damages as provided
herein or pursuant to law.
14.03 Intentional Default. Tenant expressly recognizes that Tenant's due
and punctual performance of all of its obligations under this Lease throughout
the Term is of importance to Landlord, and, without limiting the foregoing
provisions of Section 14.02, Tenant agrees that, if Tenant shall default (i) in
the timely payment of Base Rent or Additional Charges, and such default shall
continue or be repeated for two (2) consecutive months or for a total of three
(3) months in any period of twelve (12) months or (ii) in the performance of any
other term of this Lease to be performed by Tenant, and such default shall occur
more than three (3) times in any period of twelve (12) months, then,
notwithstanding that such defaults shall have each been cured within the
applicable period, if any, as above provided, any further similar default shall
be deemed to be deliberate and Landlord thereafter may serve the termination
notice described in Section 14.02 hereof upon Tenant without affording to Tenant
an opportunity to cure such further default.
14.04 Re-entry by Landlord. If this Lease shall terminate as provided in
Section 14.02, Landlord or Landlord's agents and servants may immediately or at
any time thereafter re-enter into or upon the Premises, or any part thereof in
the name of the whole, either by summary dispossess proceedings or by any
suitable action or proceeding at law, without being liable to indictment,
prosecution or damages therefor, and may repossess the same, and may remove any
persons therefrom, to the end that Landlord may have, hold and enjoy the
Premises again as and of its first estate and interest therein. The words
"re-enter" and "re-entering" as used in this Lease are not restricted to their
technical legal meanings.
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14.05 Damages. In the event of a termination of this Lease, Tenant shall
pay to Landlord as damages, at the election of Landlord, either:
(a) a sum which, at the time of such termination, represents the then
present value (employing a discount rate equal to the then current rate of
United States Treasury Bills or Notes, as applicable, maturing on the Expiration
Date or the next maturity date for such bills or notes occurring after the
Expiration Date) of the excess, if any of (i) the aggregate of the Base Rent and
Additional Charges which would have been payable hereunder by Tenant, had this
Lease not terminated, for the period commencing with the day following the date
of such termination and ending with the Expiration Date over (ii) the aggregate
fair rental value of the Premises for the same period (for the purposes of this
subsection (a), the amount of Additional Charges which would have been payable
by Tenant under Article 5 shall, for each calendar year ending after such
termination, be deemed to be an amount equal to the amount of Tenant's Tax
Payment payable by Tenant for the calendar year and Tax Year, immediately
preceding the calendar year in which such termination shall occur), or
(b) sums equal to the aggregate Gross Rent which would have been payable
by Tenant had this Lease not terminated, payable upon the due dates therefor
specified herein until the Expiration Date; provided, however, that if Landlord
shall relet all or any part of the Premises for all or any part of the period
commencing on the day following the date of such termination and ending on the
Expiration Date, Landlord shall credit Tenant with the net rents received by
Landlord from such reletting, such net rents to be determined by first deducting
from the gross rents as and when received by Landlord from such reletting the
expenses incurred or paid by Landlord in terminating this Lease and re-entering
the Premises and securing possession thereof, as well as the expenses of
reletting, including altering and preparing the Premises for new tenants,
brokers' commissions, and all other expenses properly chargeable against the
Premises and the rental therefrom in connection with such reletting, it being
understood that any such reletting may be for a period equal to or shorter or
longer than said period and that Landlord shall have no obligation to so relet
the Premises; provided further that (i) in no event shall Tenant be entitled to
receive any excess of such net rents over the sums payable by Tenant to Landlord
hereunder, (ii) in no event shall Tenant be entitled, in any suit for the
collection of damages pursuant to this subsection (b), to a credit in respect of
any net rents from a reletting except to the extent that such net rents are
actually received by Landlord, and (iii) if the Premises or any part thereof
should be relet in combination with other space, then proper apportionment on a
square foot rentable area basis shall be made of the rent received from such
reletting and of the expenses of reletting.
Suit or suits for the recovery of any damages payable hereunder by Tenant, or
any installments thereof, may be brought by Landlord from time to time at its
election, and nothing contained herein shall require Landlord to postpone suit
until the date when the Term would have expired but for such termination. In
addition to all remedies set forth in this Article 14 and anywhere else in this
Lease, if Tenant shall be in default under this Lease beyond any applicable cure
period, then Tenant shall be obligated to repay to Landlord the Base Rent for
which Tenant was excused from paying pursuant to Section 4.02 hereof.
14.06 Right to Injunction. In the event of a breach or threatened breach
on part of Tenant with respect to any of the covenants or agreements on the part
of or on behalf of Tenant to be kept, observed or performed, Landlord shall also
have the right to seek an injunction.
14.07 Other Remedies. Nothing herein contained shall be construed as
limiting or preventing the recovery by Landlord against Tenant of any sums or
damages to which, in addition to the damages particularly provided above,
Landlord may lawfully be entitled by reason of any default hereunder on the part
of Tenant. The specified remedies to which Landlord may resort hereunder are
cumulative and are not intended to be exclusive of any other remedies or means
of redress to which Landlord may lawfully be entitled at any time, and Landlord
may invoke any remedy allowed at law or in equity as if specific remedies were
not herein provided.
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14.08 Certain Waivers. Tenant waives and surrenders all right and
privilege which it might have under or by reason of any present or future law to
redeem the Premises or to have a continuance of this Lease for the Term after
Tenant is dispossessed or ejected therefrom by process of law.
14.09 No Waiver. Failure of Landlord to declare any default immediately
upon its occurrence or delay in taking any action in connection with such
default shall not waive such default but Landlord shall have the right to
declare any such default at any time thereafter. Any amounts paid by Tenant to
Landlord may be applied by Landlord, in its sole discretion, to any items then
owing by Tenant to Landlord under this Lease and receipt of a partial payment
shall not be deemed to be an accord and satisfaction or waiver of the failure to
make full payment.
14.10 Attorneys' Fees. In the event (i) Landlord places the enforcement of
this Lease, or any part thereof, or the collection of any rent due, or to become
due, hereunder, or recovery of the possession of the Premises in the hands of an
attorney, or files suit upon the same, or (ii) a court of competent jurisdiction
finds or declares that Tenant has defaulted in the performance of the terms of
this Lease, or is obligated to perform the terms of this Lease in the manner
directed by Landlord, Tenant shall reimburse Landlord within ten (10) days after
demand therefor for its reasonable attorneys' fees and disbursements and court
costs incurred in such proceedings.
14.11 Late Payments. (a) All sums paid by Landlord and all costs and
expenses incurred by Landlord, including attorneys' fees, in connection with the
performance of any act that is required to be performed by Tenant, together with
interest thereon at an annual rate (the "Lease Interest Rate") equal to five (5)
percentage points above the prime commercial lending rate of Citibank, N.A. (or
its successors or assigns) charged to its customers of highest credit standing
for ninety (90) day unsecured loans, in effect from time to time, from the date
of such payment or incurrence by Landlord of such cost and expense, shall
constitute additional rent payable by Tenant under this Lease and shall be paid
by Tenant to Landlord on demand.
(b) In the event Tenant shall fail to pay to Landlord Base Rent or and
Additional Charges on the first day the same shall be required to be paid to
Landlord hereunder (it being agreed that for purposes of this Article 14, the
first day that an amount is required to be paid to Landlord hereunder means the
first day that such amount is due notwithstanding that a grace period, with or
without notice, has been granted; for example, since Base Rent is due on the
first day of each month, even though a grace period until the fifth (5th) day of
each month has been agreed to prior to the occurrence of a default hereunder,
the first day that Base Rent is required to be paid to Landlord hereunder is the
first day of each month and said Base Rent is deemed to be due on the first day
of each month and overdue from and after the first day of each month if it is
not paid to Landlord by the end of the first day of each month), then:
(i) Tenant shall pay to Landlord interest on such overdue amount of Base
Rent or and Additional Charges at the Lease Interest Rate from the fifth
(5th) day such overdue amount shall be due, to the date of payment
thereof; and
(ii) In the event that Tenant shall fail to pay any portion of Gross Rent
by the date that is ten (10) days after the first day that such amount
shall become due and payable, then Tenant shall pay to Landlord an
administrative charge equal five percent (5%) of the overdue amount.
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ARTICLE 15
QUIET ENJOYMENT
15.01 Quiet Enjoyment. Landlord covenants that, so long as Tenant is not
in default in the payment or performance of any of its obligations under this
Lease beyond any applicable grace period, Tenant shall and may peaceably and
quietly have, hold and enjoy the Premises. This covenant and any and all other
covenants of Landlord contained in this Lease shall be binding upon Landlord and
its successors and assigns only with respect to breaches which occur during its
and their respective ownership of Landlord's interest.
ARTICLE 16
RULES OF THE BUILDING
16.01 Building Rules. Tenant shall comply with, and Tenant shall cause its
licensees, employees, contractors, agents and invitees to comply with the rules
of the Building (the "Rules and Regulations") reasonably adopted and amended by
Landlord from time to time for the safety, care and cleanliness of the Premises
and the Building and for preservation of good order therein, all of which shall
be communicated by Landlord to Tenant and shall be thereafter carried out and
observed by Tenant, its agents, contractors, employees, invitees and licensees.
Landlord shall not enforce the rules of the Building in a manner which
discriminates against Tenant. The initial rules of the Building (the "Building
Rules and Regulations") are set forth in Exhibit D". If any rule of the Building
shall conflict with any provision of this Lease, such provision shall govern.
16.02 Graphics. No signs, numerals, letters or other graphics shall be
used or permitted on the exterior of, or which may be visible from outside, the
Premises, unless in accordance with Landlord's established building standard
building signage and approved by Landlord in writing prior to any such of
installation. Tenant shall submit such request in writing to Landlord at least
thirty (30) days prior to such proposed installation. Landlord shall have ten
(10) days to accept or reject Tenant's proposal. If rejected, Tenant shall have
the option to resubmit its proposal
ARTICLE 17
INSURANCE
17.01 Compliance with Insurance Standards. Tenant shall not occupy or use
the Premises, or permit any portion of the Premises to be occupied or used, for
any business or purpose which is unlawful, disreputable or deemed to be
hazardous on account of fire or other hazards, or permit anything to be done
which would in any way increase the risk of fire or other hazards, or permit
anything to be done which would in any way increase the rate of fire or
liability or any other insurance coverage on the Building or Building and/or its
contents. Landlord shall not be liable for the acts or omissions of other
tenants or parties which are in violation of the provisions of this Section.
17.02 Landlord Insurance. (a) Landlord shall obtain and keep in full force
and effect insurance against loss or damage by fire and other casualty to the
Building as may be insurable under then available standard forms of "all-risk"
insurance policies, in an amount at least equal to eighty percent (80%) of the
replacement value thereof with such commercially reasonable deductible(s) as may
be determined by Landlord in its reasonable discretion. Tenant shall notify
Landlord of the completion of any such Alterations and of the cost thereof, and
shall maintain adequate records with respect to such Alterations to facilitate
the adjustment of any insurance claims with respect thereto. Tenant shall
cooperate with Landlord and Landlord's insurance companies in the adjustment of
any claims for any damage to the Building or such Alterations.
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(b) Landlord shall have the right to satisfy its obligations under
subsection (a) of this Section 17.02 by means of any so-called blanket policy or
policies of insurance covering the Building and other properties of Landlord or
its affiliates.
17.03 Tenant Insurance. (a) Tenant, at Tenant's sole cost and expense,
shall obtain and keep in full force and effect insurance against loss or damage
by fire and other casualty to Tenant's Property and to all Alterations to the
Premises under then available standard forms of "all-risk" insurance policies,
in an amount equal to one hundred percent (100%) of the replacement value
thereof, with such commercially reasonable deductible(s) as may be determined by
Tenant in its reasonable discretion.
(b) Tenant, at Tenant's sole cost and expense, shall obtain and maintain
in full force and effect throughout the Term a commercial general liability
insurance policy (ISO form or equivalent) insuring Tenant and naming Landlord
and, at Landlord's request, any Senior Interest Holder and any managing agent(s)
of Landlord as additional insured(s), against any liability for bodily injury,
death or property damage occurring on or about the Premises, with limits of
liability of not less than $1,000,000 with respect to bodily injury and property
damage arising from any one occurrence and $1,000,000 from the aggregate of all
occurrences within each policy year. Such policy shall include a provision that
such aggregate limit shall apply separately at the Premises. In addition, Tenant
shall carry umbrella limits not less than $2,000,000 per occurrence for a total
liability limit of $3,000,000.
(c) Tenant may carry any insurance coverage required of it hereunder
pursuant to blanket policies of insurance so long as the coverage afforded
Landlord and the other named insureds thereunder shall not be less than the
coverage which would be provided by direct policies.
17.04 Waiver of Subrogation. The parties hereto (a) shall use all
reasonable efforts to procure an appropriate clause in, or endorsement on, any
all-risk insurance covering the Premises, the Building and personal property,
fixtures and equipment located thereon or therein, pursuant to which the
insurance companies issuing same waive subrogation or consent to a waiver of
right of recovery, and (b) subject to obtaining such clause or endorsement of
waiver of subrogation or consent to a waiver of right of recovery, hereby agree
not to make any claim against or seek to recover from the other for any loss or
damage to its property or the property of others resulting from fire or other
hazards covered by such fire and extended coverage insurance; provided, however,
that the release, discharge, exoneration and covenant not to sue herein
contained shall be limited by and coextensive with the terms and provisions of
the waiver of subrogation clause or endorsement or clause or endorsement
consenting to a waiver of right of recovery. If either party shall be unable to
obtain the inclusion of such waiver of subrogation or consent to waiver clause
even with the payment of an additional premium, then such party shall attempt to
name the other party as an additional insured but not a loss payee) under the
policy. Tenant acknowledges that Landlord shall not carry insurance on, and
shall not be responsible for damage to, Tenant's Property, that Landlord may not
carry insurance on, and shall not be responsible for damage to, any Alterations,
and that Landlord shall not carry insurance against, or be responsible for any
loss suffered by Tenant due to, interruption of Tenant's business.
17.05 Policy Requirements. (a) The insurance required to be obtained by
Tenant under this Article: (i) shall be issued by an insurance company of
recognized reputability, and (ii) shall be primary and not be concurrent in form
or contributing with any other coverage which Tenant or Landlord may carry.
(b) Neither the issuance of any insurance policy required under this
Lease, nor the minimum limits specified herein with respect to Tenant's
insurance coverage, shall be deemed to limit or restrict in any way Tenant's
liability arising under this Lease. The dollar amounts set forth in this Article
shall be subject to review by Landlord
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from time to time during the term and may be increased by Landlord in accordance
with the requirements imposed by landlords from time to time with respect to
first-class office buildings located in the Borough of Manhattan in the City of
New York.
(c) With respect to each insurance policy required to be obtained by
Tenant under this Article, on or before the Commencement Date, Tenant shall
deliver to Landlord satisfactory evidence that such insurance is in effect and
satisfies the requirements of this Article, by no later than ten (10) days prior
to the expiration of any required policy Tenant shall provide to Landlord
reasonably satisfactory evidence of renewal or replacement of such insurance
policy. Each insurance policy required to be carried hereunder by or on behalf
of Tenant shall provide (and any certificate evidencing the existence of each
such insurance policy shall certify) that such insurance policy shall not be
canceled or modified unless Landlord shall have received at least thirty (30)
days' prior written notice of such cancellation or modification.
ARTICLE 18
NONLIABILITY AND INDEMNIFICATION
18.01 Exculpation. (a) Neither Landlord nor any Senior Interest Holder,
nor any of their agents, officers, directors, shareholders, partners or
principals (disclosed or undisclosed) shall, except as provided in subsection
(b) hereinafter, shall be liable to Tenant or Tenant's agents, employees,
contractors, invitees or licensees or any other occupant of the Premises in
connection with any injury to Tenant or to any other person or for any damage
to, or loss (by theft or otherwise) of, any of Tenant's Property or of the
property of Tenant or any other person arising from or in connection with the
use by Tenant or such other person of the Premises or the Building, irrespective
of the cause of such injury, damage or loss, it being understood that no
property, other than such as might normally be brought upon or kept in the
Premises as incidental to the reasonable use of the Premises for the purposes
herein permitted will be brought upon or be kept in the Premises. Any employee
to whom any property shall be entrusted by or on behalf of Tenant shall be
deemed to be acting as Tenant's agent with respect to such property and neither
Landlord nor any Senior Interest Holder nor their respective agents shall be
liable for any loss of or damage to any such property by theft or otherwise.
(b) Except for such liability as may be imposed by law for the negligence
of Landlord or Landlord's Agents or for the breach by Landlord of any term of
this Lease to be performed by Landlord, no (i) performance by Landlord, Tenant
or others of any repairs or Alterations in or to the Building or Premises, (ii)
failure of Landlord or others to make any such repairs or Alterations, (iii)
damage to the Building Systems or equipment, Premises or the property of Tenant,
(iv) injury to any persons caused by other tenants or persons in the Building or
by operations in the construction of any private, public or quasi-public work,
or by any other cause, (v) latent defect in the Building, Building Systems or
equipment or Premises, (vi) diminution or shutting off of light, air or view by
any structure which may be erected on lands in the vicinity of the Building or
(vii) inconvenience or annoyance to Tenant or injury to or interruption of
Tenant's business by reason of anything referred to in the foregoing subsections
(i) through (vi), shall impose any liability on Landlord to Tenant. No
representation, guaranty or warranty is made that the communications or security
systems, devices or procedures of the Building or Building will be effective to
prevent injury to Tenant or any other person or damage to, or loss (by theft or
otherwise) of, any of the property of Tenant or the property of any other
person, and Landlord reserves the right to discontinue or modify at any time
such communications or security systerns or procedures without liability to
Tenant.
18.02 Indemnity. To the fullest extent permitted by applicable law, Tenant
hereby agrees to indemnify and hold harmless Landlord, each Senior Interest
Holder and any managing agent of Landlord, and their respective agents,
officers, directors, shareholders, partners and principals, from and against any
and all claims,
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losses, actions, damages, liabilities and expenses (including, without
limitation, reasonable attorneys' fees and disbursements) that arise out of or
in connection with (a) the possession, use, occupancy, management, repair,
maintenance or control of the Premises, or any portion thereof, or the business
conducted by Tenant in the Premises, or (b) any Alteration to any portion of the
Premises or the Building made by or for Tenant or any occupants of the Premises,
or (c) any willful or negligent act or omission of Tenant or anyone for whom
Tenant is responsible, or (d) any default, breach, violation or nonperformance
of this Lease by Tenant or any subtenant of Tenant or any officer, employee,
agent or contractor of Tenant or any subtenant of Tenant, or (e) any
Environmental Activity by Tenant or anyone for whom Tenant is responsible at the
Building, or (f) any injury or death to individuals or damage to property
sustained on or about the Premises; provided, however, that nothing contained in
this Section shall obligate Tenant to indemnify Landlord from any claim, loss,
damage, liability or expense resulting solely from the gross negligence or
willful misconduct of Landlord or Landlord's Agents. Tenant shall, at its own
cost and expense, upon notice thereof from Landlord defend any and all actions,
suits and proceedings which may be brought against any one or more of the
aforesaid parties with respect to the foregoing or in which any one or more of
the aforesaid parties may be impleaded. Tenant shall pay, satisfy and discharge
any and all final money judgments which may be recovered against Landlord in
connection with the foregoing. The general liability insurance policy required
by Section 17.03(b) hereof shall also cover Tenant for liability assumed by
contract, specifically including clause (f) of this Section 18.02. The
obligations of Tenant under this Section 18.02 shall survive the expiration or
sooner termination of this Lease.
18.03 Limitation of Landlord's Personal Liability. Tenant shall look
solely to Landlord's interest in the Building for the recovery of any judgment
against Landlord, and if Landlord is a partnership, its partners, whether
general or limited, or if Landlord is a corporation, its directors, officers or
shareholders, shall never be personally liable for any such judgment. The
foregoing sentence is not intended to, and shall not, limit any right that
Tenant might otherwise have to obtain injunctive relief against Landlord or
Landlord's successors or assigns or to maintain any suit or action in connection
with enforcement or collection of amounts which may become owing or payable
under or on account of insurance maintained by Landlord. Any lien obtained to
enforce any such judgment and any levy of execution on such judgment shall be
subject and subordinate to any Superior Mortgage.
ARTICLE 19
CONDEMNATION
19.01 Condemnation. (a) If there shall be a total taking of the Premises
or a Constructive Total Taking (as defined in this Section 19.01) of the
Building in condemnation proceedings or by any right of eminent domain or by
conveyance in lieu thereof, this Lease and the Term and estate hereby granted
shall forthwith cease and terminate as of the date of taking of possession by
the condemning authority. In the event of a taking which is less than a
Constructive Total Taking, (i) the term and estate hereby granted with respect
to the taken part of the Premises shall forthwith cease and terminate as of the
date of taking of possession by the condemning authority and the Gross Rent,
Tenant's Tax Share and Base Real Estate Taxes shall be appropriately abated or
reduced, as the case may be, with respect to such portion of the Premises for
the period from such date to the date specified in this Lease for the expiration
of the Term and (ii) the Base Rent shall be appropriately abated for any portion
of the Premises rendered untenantable by such taking until such portion of the
Premises is made tenantable. "Constructive Total Taking" means a taking of such
scope that (A) the untaken part of the Building (whether or not the Premises are
affected by the taking) would in Landlord's judgment be uneconomic to operate
and (b) leases (including this Lease) of tenants occupying at least seventy-five
percent (75%) of the rentable area of the Building are terminated in connection
with such taking. Landlord shall give Tenant notice of a total taking or a
Constructive Total Taking within fifteen (15) days of receiving notice thereof.
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(b) In the event of any condemnation or taking of all or a part of the
Building, Landlord shall be entitled to receive the entire award in the
condemnation proceeding, including any award made for the value of the estate
vested by this Lease in Tenant, Tenant shall be entitled to receive no part of
such award and Tenant hereby assigns to Landlord any and all right, title and
interest of Tenant now or hereafter arising in or to any such award or any part
thereof; provided, however, that nothing shall preclude Tenant from intervening
in any such condemnation proceeding to claim or receive from the condemning
authority any compensation to which Tenant may otherwise lawfully be entitled in
such case for the expenses of moving to a new location, reimbursement for the
loss of Tenant's Property or for any other benefits available to a tenant in
such circumstances; provided further that the same (i) does not include any
value of the estate vested by this Lease in Tenant and (ii) shall not reduce the
award of Landlord in any respect.
(c) Notwithstanding the foregoing, if all or any portion of the Premises
shall be condemned or taken for governmental occupancy for a limited period,
this Lease shall continue in full force and effect (without any abatement of the
Gross Rent) and Tenant shall be entitled to receive the entire award therefor
(whether paid as damages, rent or otherwise) unless the period of governmental
occupancy extends beyond the Expiration Date, in which case Landlord shall be
entitled to such part of such award as shall be properly allocable to the cost
of restoration of the Premises, and the balance of such award shall be
apportioned between Landlord and Tenant as of the Expiration Date. If the
termination of such governmental occupancy occurs prior to expiration of this
Lease, Tenant shall, to the extent that an award has been made for such purpose,
after application for and diligent pursuit of such award by Tenant, restore the
Premises as nearly as possible to their condition prior to the condemnation or
taking.
ARTICLE 20
CASUALTY
20.01 Casualty. If (a) the Premises or any part thereof shall be damaged
or rendered untenantable by fire or other insured casualty, (b) Tenant gives
notice of such damage or destruction to Landlord and (c) this Lease is not to be
terminated pursuant to this Article 20, Landlord shall proceed with the repair
of such damage (but Landlord shall have no obligation to repair any damage to
any Alterations or Tenant's Property) with reasonable diligence after the
collection of the insurance proceeds attributable to such damage, but only to
the extent of available insurance proceeds. Except as provided in Section 20.06,
the rent shall be equitably abated to the extent that all or any part of the
Premises shall have been rendered untenantable, from the date of the damage to
the date that Landlord shall have completed the repairs required of Landlord
pursuant to the previous sentence; provided, however, that if Tenant reoccupies
a portion of the Premises during the period of repair, the rent allocable to
such reoccupied portion, based upon the proportion which the reoccupied portion
of the Premises bears to the total area of the Premises, shall be payable by
Tenant from the date of such occupancy.
20.02 Landlord Right to Terminate. If the Premises shall be totally
damaged or rendered wholly Untenantable by fire or other casualty or if the
Building shall be so damaged by fire or other casualty that substantial
alteration or reconstruction of the Building shall, in Landlord's sole opinion,
be required (whether or not the Premises shall have been damaged by such fire or
other casualty) or the insurance proceeds available to Landlord, in Landlord's
sole opinion, shall not be reasonably sufficient to repair the damage, then in
any such event Landlord may, at its option, terminate this Lease by giving
Tenant thirty (30) days' notice of such termination at any time within one
hundred eighty (180) days after the date of such fire or other casualty. If such
notice of termination shall be given, this Lease shall terminate as of the date
provided in such notice (whether or not the Term shall have commenced) with the
same effect as if that date were the Expiration Date. If, at any time prior to
the giving of the notice of termination or the commencement of repairs pursuant
to Section 20.01, there shall be a
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Successor Landlord (as hereinafter defined), such Successor Landlord shall have
a further period of ninety (90) days from the date of its taking possession or
from the expiration of the one hundred eighty (180) day period established
above, whichever is earlier, to terminate this Lease by thirty (30) days' notice
to Tenant, in which event this Lease shall terminate as of the date provided in
such notice (whether or not the Term shall have commenced) with the same effect
as if that date were the Expiration Date.
20.03 Disclaimer. Landlord shall not be liable for any inconvenience or
annoyance to Tenant or injury to the business of Tenant occasioned by damage by
fire or other casualty or the repair thereof. Landlord will not carry insurance
of any kind on Tenant's Property or the Improvements made by or on behalf of
Tenant in the Premises, and, notwithstanding anything to the contrary in this
Article 20, Landlord shall not be obligated to repair any damage to Tenant's
Property or to said Improvements or to replace the same.
20.04 RPL ss. 227. This Article shall be considered an express agreement
governing any case of damage to or destruction of the Building and the Premises
by fire or other casualty, and any law providing for such a contingency in the
absence of such an express agreement, including, without limitation, New York
Real Property Law ss. 226, shall have no application in such case.
20.05 Cooperation. Notwithstanding any of the foregoing provisions of this
Article 20, if, by reason of some action or inaction on the part of Tenant or
any of Tenant's Invitees, either (a) Landlord or the Senior Interest Holders
shall be unable to collect all of the insurance proceeds (including rent
insurance proceeds) applicable to damage or destruction of the Premises or the
Building by fire or other casualty or (b) the Premises or the Building shall be
damaged or destroyed or rendered completely or partially Untenantable on account
of fire or other casualty then, without prejudice to any other remedy which may
be available against Tenant, the abatement of rent provided for in this Article
shall not be effective (i) in the case of subsection (a) above, to the extent of
the uncollected insurance proceeds, and (ii) in the case of subsection (b)
above, to the extent of the excess of the cost of repair over the amount of the
collected insurance proceeds.
ARTICLE 21
SURRENDER
21.01 Surrender. (a) On the Expiration Date or upon the sooner termination
of this Lease or upon any re-entry by Landlord, Tenant shall, at its expense,
quit, surrender, vacate and deliver the Premises to Landlord "broom clean" and
in good order, condition and repair, ordinary wear, tear and damage by fire or
other insured casualty excepted, together with all Tenant Improvements and
Alterations (except as otherwise provided for in this Lease). Tenant shall, at
its expense, except to the extent Landlord shall notify Tenant in writing not
later than thirty (30) days prior to the Expiration Date, remove from the
Building all of Tenant's Property and restore the Premises to their condition
prior to the making of such improvements. Any Tenant's Property or other
personal property which shall remain in the Premises (A) after the Expiration
Date or (b) for thirty (30) days after the termination of this Lease shall be
deemed to have been abandoned and either may be retained by Landlord as its
property or may be disposed of as Landlord may see fit. If such property not so
removed shall be sold, Landlord may receive and retain the proceeds of such sale
and apply the same, at its option, against the expenses of the sale, moving and
storage, arrears of rent and any damages to which Landlord may be entitled. Any
excess proceeds shall be the property of Landlord. Any expense incurred by
Landlord in removing or disposing of any item that Tenant is required to remove
and/or dispose of pursuant to this Section 21.01, shall be reimbursed to
Landlord by Tenant as Additional Charges on demand. The obligations of Tenant
under this Section 21.01(a) shall survive the expiration or sooner termination
of the Lease.
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(b) Tenant expressly waives, for itself and for any person claiming
through or under Tenant, any rights which Tenant or such person may have under
the provisions of Section 2201 of the New York Civil Practice Law and Rules and
any similar successor law of same import then in force in connection with any
holdover proceedings which Landlord may institute to enforce the provisions of
this Article.
21.02 Holding-Over. In the event of any holding-over by Tenant after
expiration or termination of this Lease without the consent of Landlord, Tenant
shall:
(a) pay as holdover rental for each month of the holdover tenancy an
amount equal to the greater of (i) the fair market rental value of the Premises
for such month (as reasonably determined by Landlord) or (ii) two hundred fifty
percent (250%) of the Gross Rent which Tenant was obligated to pay for the month
immediately preceding the end of the Term; and
(b) be liable to Landlord for any payment or rent concession which
Landlord may be required to make to any tenant obtained by Landlord for all or
any part of the Premises (a "New Tenant") in order to induce such New Tenant not
to terminate its lease by reason of the holding-over by Tenant (including,
without being limited to, any holdover expenses, rent or damages that a New
Tenant shall be responsible for), and (ii) the loss of the benefit of the
bargain if any New Tenant shall terminate its lease by reason of the
holding-over by Tenant.
No holding-over by Tenant after the Term shall operate to extend the Term. In
the event of any unauthorized holding-over, Tenant shall indemnify and hold
harmless Landlord against all claims for damages by any other tenant to whom
Landlord may have leased all or any part of the Premises effective upon the
termination of this Lease. Anything in this Article to the contrary
notwithstanding, the acceptance of any rent paid by Tenant pursuant to this
Section 21.02 shall not preclude Landlord from commencing and prosecuting a
holdover or summary eviction proceeding, and the preceding sentence shall be
deemed to be an "agreement expressly providing otherwise" within the meaning of
Section 223-C of the Real Property Law of the State of New York and any
successor law of like import.
ARTICLE 22
ESTOPPEL CERTIFICATES
22.01 Estoppel Certificates. Tenant agrees at any time and from time to
time upon ten (10) days' prior notice from the Landlord to execute, acknowledge
and deliver to the Landlord and to such other persons and entities as Landlord
may reasonably designate, a statement certifying (a) that this Lease is
unmodified and in full force and effect, or if there have been modifications,
that the Lease is in full force and effect as modified and stating the
modifications, (b) the date to which the Base Rent has been paid and the current
amount of Base Rent, (c) whether all Additional Charges that are due and payable
on or before such date have been paid in full, (d) that, to the best of the
certifying party's knowledge, the Landlord is not in default in observing,
performing or complying with any term, covenant or condition contained in this
Lease on such party's part to be observed, performed or complied with or, if the
certifying party has knowledge of any such default, specifying each such
default, (e) that, to the best of the certifying party's knowledge, the
certifying party has not made and does not have any claim against the Landlord
under this Lease or, if so, the nature and the dollar amount, if any, of such
claim, (f) that, to the best of the certifying party's knowledge, there do not
exist any offsets, defenses or counterclaims against enforcement of any of the
terms, covenants or conditions of this Lease to be observed, performed or
complied with on the part of the Landlord, or, if such do exist, specifying the
same and the dollar amount thereof, and (g) such further information with
respect to this Lease or the Premises as Landlord may reasonably request, it
being intended that any such statement delivered pursuant to this Section 22.01
shall be binding on the certifying party and may be relied upon by the
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requesting party and any designee of the requesting party, including, without
limitation, any prospective purchaser of the Premises, any mortgagee or
prospective mortgagee of the Premises, or any lessor or prospective lessor under
any underlying lease of the Premises or any assignee or prospective assignee of
any such mortgagee or lessor.
ARTICLE 23
INTENTIONALLY DELETED
ARTICLE 24
INTENTIONALLY DELETED
ARTICLE 25
INTENTIONALLY DELETED
ARTICLE 26
PARTIES BOUND
26.01 Successors and Assigns. The terms of this Lease shall bind and
benefit the successors and assigns of the parties with the same effect as if
mentioned in each instance where a party is named or referred to, except that no
violation of the provisions of Article 12 shall operate to vest any right in any
successor or assignee of Tenant and that the provisions of this Article shall
not be construed as modifying the conditions of limitation contained in Article
13 or Article 14.
26.02 Present Landlord. The term "Landlord" shall mean only the owner at
the time in question of the present landlord's interest in the Building and, in
the event of a sale or transfer of the Building (by operation of law or
otherwise), or in the event of the making of a lease for all or substantially
all of the Building, or in the event of a sale or transfer (by operation of law
or otherwise) of the leasehold estate under any such lease, the grantor,
transferor or lessor, as the case may be, shall be and hereby is (to the extent
of the interest or portion of the Building or leasehold estate sold, transferred
or leased) automatically and entirely released and discharged, from and after
the date of such sale, transfer or leasing, of all liability in respect of the
performance of any of the terms of this Lease on the part of Landlord thereafter
to be performed; provided that the purchaser, transferee or lessee
(collectively, "Transferee") shall have assumed and agreed to perform, subject
to the limitations of this Article and, in the case of a Successor Landlord, the
provisions of Section 13.02 and only during and in respect of the Transferee's
period of ownership of Landlord's interest under this Lease, all of the terms of
this Lease on the part of Landlord to be performed during such period of
ownership. The terms of this Lease shall be deemed to be "covenants running with
the land", it being intended that Landlord's obligations hereunder shall, as
limited by this Article, be binding on Landlord, its successors and assigns,
only during and in respect of their respective successive periods of ownership.
26.03 No Offer. The submission of this Lease to Tenant shall not
constitute an offer and shall not bind the parties hereto in any manner
whatsoever until (a) Tenant has duly executed and delivered duplicate
counterparts to Landlord, and (b) Landlord has executed and delivered one fully
executed counterpart to Tenant.
26.04 Inability to Perform. (a) This Lease and the obligations of Tenant
to pay Gross Rent and perform all of the other terms of this Lease on the part
of Tenant to be performed shall in no way be affected because Landlord is unable
or delayed in fulfilling any of its obligations under this Lease by reason of
Force Majeure. Landlord shall in each instance exercise reasonable diligence to
effect performance when and as soon
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as possible; provided, however, that Landlord shall be under no obligation to
employ overtime or premium labor.
(b) For purposes of this Lease, "Force Majeure" shall mean any and all
causes beyond the reasonable control of Landlord or Tenant, as the case may be,
including delays caused by the other party hereto or other tenants, Legal
Requirements and other forms of governmental restrictions, regulations or
controls (including energy and water conservation measures), labor disputes,
accidents, mechanical breakdowns, shortages or inability to obtain labor, fuel,
steam, water, electricity or materials through ordinary sources, acts of God,
war, sabotage, embargo, enemy action, civil commotion, fire or other casualty,
but shall not include lack of funds or financial inability to perform.
26.05 Waiver of Counterclaims and Jury Trial. In the event Landlord
commences any summary proceeding or action for non-payment of rent, Tenant
covenants and agrees not to interpose, by consolidation of actions or otherwise,
any counterclaim in any such proceeding (provided that the claim to be asserted
in any such counterclaim would not be waived by Tenant's failure to raise such
claim), it being agreed that nothing contained herein shall be deemed to prevent
Tenant from bringing a separate proceeding with respect to such counterclaim or
be deemed a waiver thereof. To the extent permitted by applicable law, Landlord
and Tenant hereby waive trial by jury in any matter arising out of or in any way
connected with this Lease. The provisions of this Section 26.05 shall survive
the termination of this Lease.
26.06 Notices. Except as otherwise expressly provided in this Lease or
pursuant to any Legal Requirement, any bills, statements, notices, demands,
requests, consents or other communications given or required to be given under
or in connection with this Lease or pursuant to any Legal Requirement shall be
effective only if in writing and
(a) if to Tenant, then, at the option of Landlord,
(i) sent by registered or certified mail, return receipt requested,
postage prepaid, addressed to Tenant's address Attention: Chief
Financial Officer, as set forth in this Lease or to such other
address as Tenant may designate for such purpose by like notice, or
(ii) delivered by hand to Tenant Attention: Chief Financial Officer
at the Premises or at the address to which a mailed notice would be
sent pursuant to clause (i) above;
(b) if to Landlord, sent by registered or certified mail, return receipt
requested, postage prepaid, addressed to Landlord's address as set forth in this
Lease, or to such other address as Landlord may designate for such purpose by
like notice; and
(c) if to any other person, sent by registered or certified mail, return
receipt requested and postage prepaid, addressed to such person's last known
principal address or to such other address as such person may designate to
Landlord and Tenant as its address for such purpose by like notice.
Any such bill, statement, notice, demand, request, consent or other
communication shall be deemed to have been rendered or given (A) on the date
delivered, if delivered to Tenant by hand, or (B) on the earlier of (x) the date
actually received or (y) the third (3rd) Business Day after mailing.
26.07 Severability. If any term or provision of this Lease, or the
application thereof to any person or
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circumstances, shall to any extent be invalid or unenforceable, the remainder of
this Lease, or the application of such provision to persons or circumstances
other than those as to which it is invalid or unenforceable, shall not be
affected, and each provision of this Lease shall be valid and shall be
enforceable to the extent permitted by law.
26.08 Amendments. This Lease may not be altered, changed or amended except
by an instrument in writing signed by the party to be charged.
26.09 No Joint Venture. This Lease shall not be deemed or construed to
create or establish any relationship of partnership or joint venture or similar
relationship or arrangement between Landlord and Tenant.
26.10 Brokers. Each party represents to the other that it has dealt with
no broker in connection with this Lease other than the Broker (as defined in
Section 1.01). Each shall indemnify and hold harmless the other from and against
all loss, cost, liability and expense (including, without limitation, reasonable
attorneys fees and disbursements) arising out of any claim for a commission or
other compensation by any broker (other than the Broker) who has dealt with
Tenant in connection with this Lease (Landlord not to make any settlement with
any such broker without Tenant's consent). Landlord shall indemnify and hold
harmless Tenant from and against all loss, liability and expense (including,
without limitation, reasonable attorneys' fees and disbursements) arising out of
any claim for a commission or other compensation by the Broker or any other
broker who has dealt with Landlord in connection with this Lease (Tenant may not
make any settlement with any such broker without Landlord's consent). Landlord
shall pay the Brokers a commission (the "Commission") in accordance with a
separate agreement. The obligations of Landlord and Tenant under this Section
26.10 shall survive the expiration or sooner termination of this Lease.
26.11 Merger. This Lease embodies the entire understanding between the
parties with respect to the subject matter hereof, and all prior agreements,
understandings and statements, oral or written, with respect thereto are merged
in this Lease.
26.12 Applicable Law. This Lease shall be construed and enforced according
to the laws of the State of New York.
26.13 Shoring: No Dedication. (a) If an excavation or other substructure
work shall be undertaken or authorized upon land adjacent to the Building or in
the vaults beneath the Building or in subsurface space adjacent to said vaults,
Tenant shall afford Landlord or the person causing such excavation or other
substructure work license to enter upon the Premises for the purpose of doing
such work as Landlord or such person shall reasonably deem necessary to protect
any of the walls or structures of the Building or surrounding land from injury
or damage and to support the same by proper foundations, pinning and/or
underpinning, and, except in case of emergency, Landlord shall endeavor to have
such entry accomplished during reasonable hours in the presence of a
representative of Tenant, who shall be designated by Tenant promptly upon
Landlord's request. Such license to enter shall be without liability of Landlord
to Tenant.
(b) Landlord shall have the right to erect any gate, chain or other
obstruction or to close off any portion of the Common Areas to the public at any
time to the extent necessary to prevent a dedication thereof for public use.
Landlord shall use reasonable efforts to minimize any resulting interference
with access to the Premises.
26.14 Notice of Occurrences. Tenant shall give notice to Landlord,
promptly after Tenant learns thereof, of any accident, emergency, occurrence for
which Landlord might be liable, fire or other casualty and all damages to or
defects in the Premises or the Building for the repair of which Landlord might
be responsible or
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which constitutes Landlord's property. Such notice shall be given by telegram,
facsimile or personal delivery to the address of Landlord then in effect for
notices.
26.15 Vaults. No vaults, vault space or other space not within the
property line of the Building shall be leased hereunder notwithstanding anything
contained in or indicated on any sketch, blueprint or plan, or elsewhere in this
Lease to the contrary. Landlord makes no representation as to the location of
the property line of the Building. All vaults and vault space and all other
space not within the property line of the Building, which Tenant may be
permitted to use or occupy, are to be used or occupied under a license revocable
by Landlord on ten (10) days' notice to Tenant, and should any such license be
revoked by Landlord, or should the amount of any such vaults, vault space or
other space be diminished or required by any federal, state or municipal
authority or public utility, Landlord shall be without liability to Tenant. Any
fee, tax or charge imposed by any governmental authority for any such vault,
vault space or other space shall be paid by Tenant.
26.16 Window Cleaning. Tenant shall not authorize the cleaning of any
window in the Premises from the outside (within the meaning of Section 202 of
the New York Labor Law or any successor statute).
26.17 Windows. If at any time any windows of the Premises are temporarily
closed, darkened or bricked-up by reason of repairs, maintenance, alterations or
improvements to the Building, or any of such windows are permanently closed,
darkened or bricked-up due to any Legal Requirement, Landlord shall not be
liable for any damage Tenant may sustain thereby and Tenant shall not be
entitled to any compensation therefor nor abatement of Base Rent or Additional
Charges nor shall the same release Tenant from its obligations hereunder nor
constitute an eviction.
26.18 Consents and Approvals. (a) Wherever it is specifically provided in
this Lease that a party's consent or approval shall not be unreasonably
withheld, a response to a request for such consent or approval shall also not be
delayed. If either Landlord or Tenant considers that the other has withheld or
delayed a consent or approval, it shall so notify the other party within ten
(10) days after receipt of notice of denial of the requested consent or approval
or, in case notice of denial is not received, within fifteen (15) days after
making its request for the consent or approval. "Consent" shall mean the prior
written approval or consent of the applicable party.
(b) Tenant hereby waives any claim against Landlord which it may have
based upon any assertion that Landlord has unreasonably withheld or unreasonably
delayed any consent or approval that, pursuant to the terms of this Lease, is
not to be unreasonably withheld and Tenant agrees that its sole remedy shall be
an action or proceeding to enforce any such provision or for specific
performance, injunction or declaratory judgment that the requested consent or
approval shall be deemed to have been granted.
26.19 Development Rights. (a) Tenant acknowledges that it has no rights to
any development rights, "air rights" or comparable rights appurtenant to the
Building, and consents, without further consideration, to any utilization of
such rights by Landlord and agrees to promptly execute and deliver any
instruments which may be requested by Landlord, including instruments merging
zoning lots, evidencing such acknowledgment and consent. The provisions of this
Section shall be deemed to be and shall be construed as an express waiver by
Tenant of any interest Tenant may have as a "party in interest" (as such quoted
term is defined in Section 12-10 Zoning Lot of the Zoning Resolution of the City
of New York) in the Building.
(b) Landlord shall have the right, at any time, to convert the Building to
condominium ownership and, upon such conversion, (i) this Lease and the estate
granted hereby shall be subject and subordinate to the applicable condominium
declaration and related documents and (ii) the owner of the unit or units of
which the Premises form a part shall be deemed to be the Landlord hereunder.
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(c) (1) Anything to the contrary contained in this Lease notwithstanding,
Landlord, upon not less than thirty (30) days prior written notice to Tenant,
shall have the right and shall use all reasonable efforts to substitute, as of a
date specified in said notice (the "Effective Date"), other space (the
"Substitute Space") in the Building of which the Premises forms a part as the
demised premises hereunder in lieu of the space (the "Prior Space") then
constituting the demised premises hereunder immediately prior to the giving of
such notice.
(2) Prior to the Effective Date, Landlord, at Landlord's expense and
with Tenant's reasonable cooperation (but at no cost to Tenant), shall furnish
necessary moving labor to move Tenant and Tenant's equipment and personal
property to the Substitute Space, which Substitute Space shall be substantially
equivalent in area to the Prior Space and, further, Landlord shall reimburse
Tenant for the cost of transferring its telephone service to the Substitute
Space.
(3) Automatically on the Effective Date, the Substitute Space shall
constitute the demised premises hereunder and all of the terms of this Lease
shall apply thereto (except that Landlord shall not be required to perform any
work or furnish any materials with respect to Tenant's installation in the
Substitute Space, other than as hereinabove specifically provided), and the
Prior Space shall automatically be deleted from the coverage of this Lease and
the term of this Lease insofar as the Prior Space only is concerned shall be
deemed to have ceased and expired with the same force and effect as if the
Effective Date were originally provided in this Lease as the expiration date
hereof but this Lease shall continue in full force and effect for the full term
hereof with respect to the Substitute Space.
(4) Tenant covenants and agrees to quit and surrender vacant full
possession of the Prior Space to Landlord on the Effective Date free and clear
of any leases, tenancies and rights of occupancy of anyone claiming by or
through Tenant. If Tenant shall fail or refuse to surrender such vacant full
possession of the Prior Space to Landlord on or before the Effective Date (for
any reason other than failure to furnish moving labor to Tenant), then and in
such event Tenant shall pay to Landlord for each day or fraction thereof that
Tenant shall fail to surrender such vacant full possession of the Prior Space to
Landlord (in additional to all Base Rent and Additional Charges provided to be
paid under this Lease which is applicable from and after the Effective Date to
the Substitute Space) an agreed-upon sum equal to three (3) times the quotient
obtained by diving (i) the sum of the monthly installment of Base Rent then
payable under this Lease plus one-twelfth (1/12) of all Additional Charges then
payable under this Lease by (ii) thirty (30) (the "Daily Rate for the Prior
Space"). Such Daily Rate for the Prior Space is in the nature of liquidated
damages to Landlord for Tenant's failure to surrender such vacant full
possession of the Prior Space to Landlord on or before the Effective Date. The
foregoing provision for payment by Tenant of the Daily Rate for the Prior Space
shall be without prejudice to Landlord's instituting summary or such other
proceedings as Landlord may desire in order to obtain as promptly as possible
vacant full possession of the Prior Space. The foregoing provision for payment
by Tenant of the Daily Rate for the Prior Space relates solely to Landlord and
Tenant's mutual agreement to the daily value of the Prior Space to each of
Landlord and Tenant taking into consideration Tenant's agreement to comply with
the terms of this Article and to surrender vacant full possession of the Prior
Space to Landlord on or before the Effective Date, time being deemed of the
essence; therefore, in addition to Tenant's agreement to make payment of the
Daily Rate for the Prior Space for each subject day, Tenant agrees to pay
Landlord the total amount of any loss, damage, cost or injury (including
attorneys' fees and disbursements) suffered by Landlord with regard to any
existing or potential transaction which is adversely affected by Tenant's
failure or refusal to timely surrender the Prior Space.
(d) If Landlord shall at any time during the term of this Lease decide to
demolish or substantially renovate the Building, including but not limited to a
change of use of the Building and/or that portion of the Building in which the
Premises are a part, then Landlord shall have the right to terminate this Lease
as of the last day of any month thereafter upon not less than one (1) year prior
written notice by Landlord to Tenant. In the event that Landlord shall give such
notice, then upon the date specified in such notice for the termination of this
Lease, this Lease and the term and estate hereby granted shall terminate as
though such date were the date originally set forth in this Lease for the
expiration of the term hereof, and Tenant shall, on or before such date, vacate
and remove from the Demised Premises in accordance with the provisions of this
Lease.
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26.20 Business Hours. As used in this Lease, "Business Days" means any
days which are not Saturdays, Sundays or holidays designated by Landlord
("Holidays") and "Business Hours" means the hours between 8:00 A.M. and 6:00
P.M. on Business Days.
26.21 Confidentiality. Tenant shall use reasonable efforts to keep the
provisions of this Lease confidential, and shall instruct its agents, employees,
attorneys and consultants to keep such provisions confidential.
26.22 Exhibits. The terms and provisions of Exhibits "A" through "E",
inclusive, attached to this Lease are made a part of this Lease for all
purposes.
26.23 No Recording of Lease. Neither this Lease nor any memorandum in
respect of this Lease shall be recorded.
ARTICLE 27
SECURITY
27.01 Security. (a) Tenant has deposited with Landlord or an irrovable
letter of credit from a New York Bank in the sum of $49,559.50 as security for
the faithful performance and observance by Tenant of the terms, provisions and
conditions of this Lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this Lease, including,
but not limited to, the payment of Basic Rent and Additional Charges, Landlord
may use, apply or retain the whole or any part of the security so deposited to
the extent required for the payment of any Basic Rent and/or Additional Charges
and/or any other sum as to which Tenant is in default or for any sum which
Landlord may expend or may be required to expend by reason of Tenant's default
in respect to any of the terms, covenants and conditions of this Lease,
including but not limited to, any damages or deficiency in the reletting of the
Premises, whether such damages or deficiency accrued before or after summary
proceedings or other re-entry by Landlord. In the event that Tenant shall fully
and faithfully comply with all of the terms, provisions, covenants and
conditions of this Lease, the security shall be returned to Tenant after the
date fixed as the end of the Lease and after delivery of entire possession of
the Premises to Landlord. In the event of a sale of the land and building, or
leasing of the Building, of which the Premises forms a part, Landlord shall have
the right to transfer the security to the vendee or lessee and Landlord shall
thereupon be released by Tenant from all liability for the return of such
security and Tenant agrees to look to the new Landlord solely for the return of
such security; and it is agreed that the provisions hereof shall apply to every
transfer or assignment made of the security to a new Landlord. Tenant further
covenants that it will not assign or encumber or attempt to assign or encumber
the monies deposited herein as security and that neither Landlord nor its
successors or assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance.
(b) The security deposited pursuant to the provisions of this Article
shall be placed in an interest bearing account in a New York State banking
institution having a New York City branch selected by Landlord, subject to
Landlord's sole right to change the depository at any time to any banking
organization having a place of business in the City of New York, interest earned
to become additional security. It is also understood and agreed that interest at
1.0% per annum of the security funds shall be retained by Landlord as an
administrative fee.
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IN WITNESS WHEREOF, Landlord and Tenant have duly executed this
Lease as of the day and year first above written.
LANDLORD:
80-02 LEASEHOLD COMPANY, L.P.
By:_________________________________
Managing Manager
TENANT:
FIDELITY HOLDINGS, INC.
By: _________________________________
Name: ______________________
Title: _____________________
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Exhibit "A"
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Exhibit "B"
Landlord shall perform the following work as and for the Initial Alterations as
provided herein and as indicated on Tenant's Plan attached as Exhibit B-1:
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Exhibit "D"
Building Rules and Regulations
1. The sidewalks, driveways, entrances, passages, courts, lobbies,
esplanade areas, elevators, stairways, vestibules, corridors, halls and other
public portions of the Building ("Public Areas") shall not be obstructed or
encumbered or used for any purpose other than ingress and egress to and from a
tenant's premises, and no tenant shall permit any of its agents, employees,
contractors, licensees or invitees (collectively, "Invitees") to congregate or
loiter in any of the Public Areas or any other part of the Building used in
common by other tenants of the Building. No tenant shall invite to, or permit to
visit, its premises persons in such numbers or under such conditions as may
interfere with the use and enjoyment by others of the Public Areas. Fire exits
and stairways are for emergency use only, and shall not be used for any other
purposes by any tenant, or the Invitees of any tenant. Landlord reserves the
right to control and operate, and to restrict and regulate the use of, the
Public Areas and the public facilities, as well as facilities furnished for the
common use of the tenants, in such manner as it reasonably deems best for the
benefit of the tenants generally, including the right to allocate certain
elevators for delivery service, and the right to designate which Building
entrances shall be used by persons making deliveries in the Building. No doormat
of any kind whatsoever shall be placed or left in any public hall or outside any
entry door of a tenant's premises.
2. No awnings or other projections shall be attached to the outside
walls (or inside atrium walls) or windows of the Building. No curtains, blinds,
shades or screens shall be attached or hung in, or used in connection with, any
window or door of a tenant's premises, without the consent of Landlord. Such
curtains, blinds, shades or screens must be of a quality, type, design and
color, and attached in the manner, reasonably approved by Landlord. No tenant
shall have the right to remove or change curtains, shades, blinds or other
window coverings within its premises without Landlord's consent. In order that
the Building can and will maintain a uniform appearance to those persons outside
of the Building, each tenant occupying the perimeter areas of the Building shall
(a) use only building standard lighting in areas where lighting is visible from
the outside of the Building and (b) use only building standard blinds in window
areas which are visible from the outside of the Building.
3. No sign, insignia, advertisement, lettering, notice or other
object shall be exhibited, inscribed, painted or affixed by any tenant on any
part of the outside or inside of its premises or the Building or on corridor
walls without the prior consent of Landlord. Signs on or outside each entrance
door of a tenant's premises shall conform to building standard signs. Such signs
shall, at the expense of the applicable tenant, be inscribed, painted or affixed
by sign makers and in a location approved by Landlord. In the event of the
violation of the foregoing by any tenant, Landlord may remove the same without
any liability, and may charge the expense incurred in such removal to the tenant
or tenants violating this Rule. Interior signs, elevator cab designations, if
any, and lettering on doors and the Building directory shall, if and when
approved by Landlord, be inscribed, painted or affixed for each tenant by
Landlord, at the expense of such tenant, and shall be of a size, color and style
reasonably acceptable to Landlord.
4. Neither the sashes, sash doors, skylights or windows that reflect
or admit light and air into the Public Areas in the Building nor the HVAC vents
and doors shall be covered or obstructed by any tenant, nor shall any bottles,
parcels or other articles be placed on the window sills or on the peripheral
heating enclosures. Whenever the HVAC systems are in operation, such tenant
shall cause the shades, blinds or other window coverings to be drawn, as
required because of the position of the sun.
5. No showcases or other articles or property shall be put by any
tenant in front of or affixed to any part of the exterior of the Building, nor
placed in the Public Areas.
6. No acids, vapors or other harmful materials shall be discharged,
or permitted to be discharged, into the waste lines, vents or flues of the
Building. The water and wash closets and other plumbing
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fixtures shall not be used for any purposes other than those for which they were
designed and constructed, and no sweepings, rubbish, rags, acids or other
foreign substances shall be thrown or deposited therein. Nothing shall be swept
or thrown into the Public Areas or other areas of the Building, or into or upon
any HVAC vents or registers or plumbing apparatus in the Building, or upon
adjoining buildings or land or the street. The cost of repairing any damage
resulting from any misuse of such fixtures, vents, registers and apparatus and
the cost of repairing any damage to the Building, or to any facilities of the
Building, or to any adjoining building or property, caused by any tenant, or the
Invitees of such tenant, shall be paid by such tenant. Any cuspidors or similar
containers or receptacles shall be emptied, cared for and cleaned by and at the
expense of the tenant.
7. Except for the making of customary office decorations in its
premises in accordance with its lease, no tenant shall mark, paint, drill into
or in any way deface any part of its premises or the Building. No boring,
cutting or stringing of wires shall be permitted, except with the prior written
consent of, and as directed by, Landlord. No telephone, telegraph or other wires
or instruments shall be introduced into the Building by any tenant except in a
manner approved by Landlord. No tenant shall lay linoleum, or other similar
floor covering, so that the same shall come in direct contact with the floor of
its premises, and, if linoleum or other similar floor covering is desired to be
used, an interlining of builder's deadening felt shall be first affixed to the
floor, by a paste or other material, soluble in water, the use of cement or
other similar adhesive material being expressly prohibited.
8. No bicycles, vehicles, animals (except seeing eye dogs as legally
required), fish or birds of any kind shall be brought into, or kept in or about,
a tenant's premises.
9. No noise, including, but not limited to, music, the playing of
musical instruments, recordings, radio or television, which, in the judgment of
Landlord, might disturb other tenants, shall be made or permitted by any tenant.
Nothing shall be done or permitted by any tenant which would unreasonably or
materially adversely impair or interfere with the use or enjoyment by any other
tenant of any other space in the Building.
10. Nothing shall be done or permitted in a tenant's premises, and
nothing shall be brought into, or kept in or about a tenant's premises, which
would unreasonably or materially adversely affect, impair or interfere with any
of the Building Equipment or the proper and economical rendition of Landlord's
Services in the Building or to a tenant's premises, or which would cause
discomfort, annoyance or inconvenience to Landlord or any other tenant, nor
shall there be installed by any tenant any HVAC, electrical or other equipment
of any kind which, in the reasonable judgment of Landlord, might cause any such
impairment or interference. No tenant, nor the Invitees of any tenant, shall at
any time bring or keep upon its premises any inflammable, combustible, noxious
or explosive fluid, chemical or substance.
11. No additional locks or bolts of any kind shall be placed upon
any of the doors or windows by any tenant, nor shall any changes be made in
locks or the mechanism thereof, unless Landlord is furnished with keys therefor
or other means of access thereto. Duplicate keys for a tenant's premises and
toilet rooms shall be procured only from Landlord and Landlord may charge Tenant
therefor. Each tenant shall, upon the expiration or sooner termination of its
lease, turn over to Landlord all keys to stores, offices, storage areas and
toilet rooms, either furnished to, or otherwise procured by, such tenant, and in
the event of the loss of any keys furnished by Landlord, such tenant shall pay
to Landlord the cost of replacement locks. Notwithstanding the foregoing, Tenant
may install a security system in the Premises which uses master codes or cards
instead of keys provided that Tenant shall provide Landlord with the master code
or card for such system.
12. All removals, the carrying in or out of the Building and the
movement from floor to floor within the Building of any safes, freight,
furniture, packages, boxes, crates or any other object or matter of any
description, shall take place only during such hours, in such elevators and
under such restrictions as Landlord may from time to time determine, which may
involve overtime work for Landlord's employees. Tenant shall reimburse Landlord
for extra costs incurred by Landlord in connection therewith. No such materials
or objects shall be transported in passenger elevators without Landlord's prior
written consent in each instance.
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13. Landlord reserves the right to inspect all packages, objects and
matter to be brought into the Building and to exclude from the Building anything
which violates any of these Rules and Regulations or the applicable tenant's
lease. Landlord may require any person leaving the Building with any package or
other object or matter to submit a pass, listing such package, object or matter
and the tenant from whose premises the package, object or matter is being
removed, but the establishment and enforcement of such requirement shall not
impose any responsibility on Landlord for the protection of any tenant against
the removal of property from the premises of such tenant. Landlord shall not be
liable to any tenant for damages or loss arising from the admission, exclusion
or ejection of any person to or from its premises or the Building under the
provisions of this Rule 13 or of Rule 16 hereof.
14. No tenant shall use or occupy, or permit any portion of its
premises to be used or occupied, for any of the following purposes: (a) sale of
wine, ale, beer or other alcoholic beverages in the Premises; (b) sale at
wholesale or retail by vending machines (except to Tenant's employees and
business guests) or otherwise, or demonstrations to the public, or as a
restaurant or bar, of candy, food, cigarettes, cigars, tobacco, newspapers,
magazines, beverages or similar items, or for the preparation, dispensing or
consumption of food or beverages in any manner whatsoever (except by Tenant's
employees and business guests); (c) manufacturing, printing or electronic data
processing, except for the operation of normal business office equipment and
machines for Tenant's own requirements, as distinguished from operation for
commercial hire or for the sale of the products or services to others; (d)
rendition of medical, dental or other diagnostic or therapeutic services, except
that Tenant shall have the right to employ a resident nurse for Tenant's
employees normally working at the Premises; (e) conduct or maintenance of any
gambling or gaming activities or any political activities or any club
activities, whether private or public; (f) the offices or business of a
governmental or quasi-governmental bureau, department or agency, foreign or
domestic, including an autonomous governmental corporation or diplomatic or
trade mission, or any other person or entity entitled to diplomatic or sovereign
immunity; (g) a retail banking, trust company, depository, guarantee or safe
deposit business; (h) a retail savings bank, savings and loan association or
loan company; (i) sale to the public of travelers checks, money orders, drafts,
foreign exchange or letters of credit or the receipt of money for transmission;
(j) a stockbroker's or dealer's office or the underwriting or sale of securities
or for a public finance (personal loan) business; (k) an employment agency,
executive search firm or similar enterprise; (1) a labor union, school or
vocational training center (except for the training of employees of Tenant
intended to be employed at the Premises); (m) a barber shop or beauty salon; (n)
a travel agency; (o) as an office for a public stenographer or public typist;
(p) for the possession, storage, manufacture or sale of narcotics or; (q)
telephone or telegraph agency, telephone or secretarial service, or messenger
service; or (r) a company engaged in the business of renting office or desk
space. No tenant shall engage or pay any employee on its premises, except those
actually working for such tenant on its premises, or advertise for laborers
giving an address at the Building.
15. Landlord shall have the right to prohibit any advertising or
identifying sign by any tenant which, in the judgment of Landlord, tends to
impair the appearance or reputation of the Building or the desirability of the
Building as a building for offices, and upon written notice from Landlord, such
tenant shall refrain from and/or discontinue such advertising or identifying
sign; provided, however, that the foregoing shall not prohibit the exhibition of
a tenant's logo or trademark (from time to time) in its premises.
16. At all times, Landlord reserves the right to require all persons
entering the Building to sign a register, and/or to be announced to the tenant
such person is visiting, and to be accepted as a visitor by such tenant or to be
otherwise properly identified (and, if not so accepted or identified, reserves
the right to exclude such persons from the Building) and to require persons
leaving the Building to sign a register. Each tenant shall be responsible for
all persons whom such tenant so accepts, and such tenant shall be liable to
Landlord for all acts or omissions of such persons. Any person whose presence in
the Building at any time shall, in the judgment of the Landlord, be prejudicial
to the safety, character, security, reputation or interests of the Building or
the tenants thereof may be denied access to the Building or may be removed from
the Building. In the event of invasion, riot, public excitement or other
commotion, Landlord may prevent all access to the Building during the
continuance of the same by closing the doors or otherwise, for the safety of
tenants and the protection of property in the Building.
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17. Each tenant, before closing and leaving its premises at any
time, shall see that all lights are turned off. All entrance doors to a tenant's
premises shall be kept locked when such premises are not in use. Entrance doors
shall not be left open at any time unless a tenant occupies a full floor and
then only during business hours.
18. Each tenant shall, at the expense of such tenant, provide light,
power and water for the employees of Landlord, and the agents, contractors and
employees of Landlord, while doing janitorial service or other cleaning in such
tenant's premises and while making repairs in such tenant's premises.
19. No premises shall be used for lodging or sleeping or for any
immoral or illegal purpose.
20. The requirements of tenants will be attended to only upon
request to the office of the Building made during normal Building Business Days
and hours. Employees of Landlord shall not perform any work or do anything
outside of their regular duties unless under special instructions from Landlord.
21. Canvassing, soliciting and peddling in the Building are
prohibited and each tenant shall cooperate to prevent the same.
22. There shall not be used in any space, or in the Public Areas,
either by any tenant or by others, in the moving or delivery or receipt of
safes, freight, furniture, packages, boxes, crates, paper, office material or
any other matter or thing, any hand trucks except those equipped with rubber
tires, side guards and such other safeguards as Landlord shall require. No hand
trucks shall be used in passenger elevators.
23. No tenant shall emit or discharge objectionable noise, fumes,
vapors or odors into the Building or Building Equipment or cause or permit any
odors of cooking, warming or other processes, or any unusual or objectionable
odors, to emanate from its premises which would annoy other tenants or create a
public or private nuisance. No cooking or warming (by microwave or otherwise)
shall be done in a tenant's premises except as is expressly permitted in its
lease.
24. All paneling, doors, trim or other wood products not considered
furniture shall be of fire- retardant materials. Before installation of any such
materials, certification of the materials' fire-retardant characteristics shall
be submitted to and approved by Landlord, and installed in a manner reasonably
approved by Landlord.
25. No tenant shall, without the consent of Landlord, place or cause
or permit to be placed, any radio or television antenna or other signal sending
or receiving device on the roof or on any other part of the outside of the
Building or any device, electrical or otherwise, in such tenant's premises which
may emanate electrical interference or radio waves which may impair radio or
television broadcasting or reception or the normal use of computers or other
electronic devices from or in the Building or elsewhere.
26. Each tenant shall comply, and cause its Invitees to comply, with
all rules and regulations from time to time established by Landlord.
27. Any persons employed by a tenant to perform any repair,
maintenance or janitorial work within such tenant's premises shall, while in the
Building and outside of such tenant's premises, be subject to the Landlord (but
not as an agent, servant or employee of Landlord), and such tenant shall be
responsible for all acts of such persons.
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Alteration Rules and Regulations
A. General
1. Tenant shall, prior to the commencement of any work, submit for
Landlord's written approval, a complete plan of the Premises, or of the portion
of the Premises in on which the Alterations are to be performed. Drawings are to
be complete with full details and specifications for all of the Alterations.
2. The proposed Alterations must comply with the Administrative Code
of The City of New York and the rules and regulations of the Building Code and
the Department of Buildings of The City of New York and any other agencies
having jurisdiction.
3. No work shall be permitted to commence without the Landlord being
furnished with a valid permit from the Department of Buildings and/or other
agencies having jurisdiction, if required for such work.
4. All (a) demolition or removals, or (b) other categories of work
if such work would disturb or interfere with other tenants of the Building or
disturb Building operations, or (c) carrying in or out of construction materials
to or from the Building, must be scheduled and performed before or after normal
working hours and Tenant shall provide the Landlord with at least seventy-two
(72) hours' notice prior to proceeding with such work, and shall pay for any
overtime labor, engineering and related other costs incurred by Landlord in
connection therewith.
5. All inquiries, submissions, approvals and all other matters shall
be processed through Landlord.
B. Prior to Commencement of Work
1. Tenant shall submit to the Landlord a request to perform the
work. The request shall include the following enclosures:
(a) A list of Tenant's contractors and/or subcontractors for
Landlord's approval, unless the names of same shall then be on the
Approved List.
(b) Four complete sets of plans and specifications properly
stamped by a registered architect or professional engineer if required by
Article 8 of the lease.
(c) A properly executed Building Notice application form or
Alteration form if required for the work; Engineer's Statement if HVAC
work is to be performed; Plumbing Specification sheet if any plumbing
change is to be performed.
(d) Four executed copies of the Insurance Requirements for
Alterations agreement, in the form attached to these Rules and
Regulations, from Tenant's contractor and if requested by Landlord from
the contractor's subcontractors.
(e) Contractor's and subcontractor's insurance certificates
including a "hold harmless" in accordance with the Insurance Requirements
for Alterations agreement.
2. Landlord will return the following to Tenant:
(a) Plans approved or returned with comments (such approval or
comments shall not constitute (i) a waiver of Department of Buildings
approval, (ii) approval of other jurisdictional agencies or Landlord's
approval of the Scope of Work proposed by or on behalf of Tenant).
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(b) Signed application forms referred to in 8.02 (c), above,
providing proper submissions have been made.
(c) Covering transmittal letter.
3. Tenant, with Landlord's cooperation, if reasonably required,
shall obtain Department of Buildings approval of plans and a permit from the
Department of Buildings where required by law for the work. Tenant shall be
responsible for keeping current all permits. Tenant shall submit copies of all
approved plans and permits to Landlord and shall post the original permit on the
Premises prior to the commencement of any work. All work, if performed by a
contractor or subcontractor, shall be subject to reasonable supervision and
inspection by Landlord's representative. Such supervision and inspection shall
be at Tenant's sole expense and Tenant shall pay Landlord's reasonable charges
for such supervision and inspection.
C. Requirements and Procedures
1. All structural and floor loading requirements shall be subject to
the prior approval of Landlord's structural engineer.
2. All mechanical (HVAC, plumbing and sprinkler) and electrical
requirements shall be subject to the approval of Landlord's mechanical and
electrical engineers. When necessary, Landlord will require engineering and shop
drawings, which drawings must be approved by Landlord before work is started.
Drawings are to be prepared by Tenant and all approvals shall be obtained by
Tenant.
3. All demolition shall be monitored by Landlord's representative at
Tenant's expense.
4. Landlord shall charge Tenant for elevator service for
construction work in accordance with Landlord's then Building standard rates
therefor. Tenant shall make arrangements for each such elevator use with
Landlord at least seventy-two (72) hours in advance. No material or equipment
shall be carried under or on top of elevators. If an engineer is required, such
engineer shall be paid for by Tenant promptly after receipt of a bill therefor.
5. If shutdown of risers and mains for electrical, HVAC, sprinkler
and plumbing work is required, such work shall be monitored by Landlord's
representative at Tenant's expense. No work will be performed in building
mechanical equipment rooms without Landlord's approval and shall be monitored by
Landlord at Tenant's expense.
6. Tenant's contractor shall:
(a) have a Superintendent or Foreman on the Premises at all
times when work is being performed and at reasonable times before and
after as appropriate;
(b) police the job at all times, continually keeping the
Premises broom-clean and orderly;
(c) maintain cleanliness and protection of all areas,
including elevators and lobbies;
(d) protect the front and top of all peripheral HVAC units and
thoroughly clean them at the completion of work;
(e) block off supply and return grills, diffusers and ducts to
keep dust from entering into the Building and/or Premises air conditioning
system(s); and
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(f) avoid the disturbance of other tenants.
(g) comply with all life, health and safety codes, rules and
regulations and requirements and/or recommendations made by any insurance
carrier.
7. If Tenant's contractor is negligent in any of its
responsibilities, Tenant shall be charged for the cost of corrective work done
by Building personnel or others as Landlord shall designate in addition thereto
and/or in substitution therefor.
8. All equipment and installations must be equal to the standards of
the Building. Any deviation from Building standards will be permitted only if
indicated or specified on the plans and specifications, samples provided, if
requested, at no cost to Landlord and approved in advance by Landlord.
9. A properly executed air balancing report signed by a qualified
professional engineer shall be submitted to Landlord upon the completion of all
HVAC work.
10. Upon completion of the Alterations, Tenant shall submit to
Landlord properly executed documents indicating total compliance and final
approval by the Department of Buildings of the Building Notice or Alteration
accompanied by an amended certificate of occupancy for the Building, in form
satisfactory to Landlord.
11. Tenant shall submit to Landlord a final "as-built" set of
drawings showing all items of the Alterations in full detail.
12. Additional, differing or inconsistent provisions in the lease,
if any, will be applicable and will take precedence.
D. Special Requirements Regarding Local Law #5/73 (As Amended)
1. Tenant acknowledges being advised that the Building has an active
Modified Class E Fire System ("Class E System"). Tenant shall notify its
contractors and subcontractors, as well as all persons and entities who shall
perform or supervise any alteration or demolition within the Premises, of such
facts prior to the commencement of any work.
2. Demolition by Tenant of all or any portions of the Premises shall
be carried out in such manner as to protect equipment and wiring of Landlord's
Class E System.
3. Landlord, after receipt of Tenant's notice of demolition, and at
Tenant's expense, shall secure and protect and/or require Tenant to secure and
protect Building equipment connected to the Class E System in the Premises to be
demolished.
4. Landlord, at Tenant's expense, shall and /or require Tenant to
make such additions and alterations within the requirements of Local Law #5/73
(as amended) to the existing Class E System as may be necessary by reason of
alterations made within the Premises either by or on behalf of Tenant or by
Landlord, as part of the initial installation, and work, if any, that Landlord
is required to perform pursuant to the provisions of this lease or any work
letter or leasehold improvements agreement entered into by Landlord and Tenant.
5. Landlord's contract fire alarm service personnel or such other
contractor approved by Landlord shall be the only personnel permitted to adjust,
test, alter, relocate, add to, or remove equipment connected to the Class E
System. All of the foregoing shall be performed at the Tenant's sole cost and
expense.
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6. Landlord, at Tenant's expense, shall repair or cause Tenant to
have repaired, any and all defects, deficiencies or malfunctions of the Class E
System caused by Tenant's alterations or demolition of the Premises. Such
expense may include expenses of engineering, supervision and standby fire watch
personnel that Landlord deems necessary to protect the Building during the time
such defects, deficiencies and malfunctions are being corrected.
7. During such times that Tenant's alterations or demolition of the
Premises require that fire protection afforded by the Class E System be
disabled, Tenant, at Tenant's expense, shall maintain fire watch service deemed
suitable to Landlord.
8. Tenant and Tenant's architect shall familiarize themselves with
and be aware of Local Law #5/73 and all amendments thereto with regard to smoke
control, compartmentation, and areas of safe refuge. Tenant shall fully comply
with these requirements. Landlord, at Landlord's option, may withhold approval
of Tenant's alterations or demolition if such requirements are not met to
Landlord's satisfaction.
9. Should Tenant desire to install its own internal fire alarm
system, Tenant shall , using only Landlord's fire alarm contractor or such other
contractor approved by Landlord, request Landlord to connect such system to the
Class E System at Tenant's expense in such manner as prescribed by the Landlord.
Tenant shall, at Tenant's expense, have such internal fire alarm system approved
by governing agencies having jurisdiction, and shall submit to the Landlord an
approved copy of plans of such system, before initiating any installation of
such system.
10. In the event Tenant shall install its own internal fire alarm
system within the Premises and in such event (as required by law) connects same
to the Class E System at Tenant's sole cost and expense, Tenant shall also
reimburse Landlord for costs of contracting for the maintenance and supervision
of Tenant's internal fire alarm system with the company providing such services
for the Class E System.
[See next page for Insurance Requirements for Alterations]
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Insurance Requirements for Alterations
Each contractor or subcontractor (hereinafter called "Contractor")
shall provide and maintain at its own expense, until completion of the Work, the
following insurance:
(a) Workers' Compensation and Employers' Liability Insurance
covering each and every workman employed in, about or upon the Work, as
provided for in each and every statute applicable to Workers' Compensation
and Employers' Liability Insurance.
(b) Comprehensive General Liability Insurance Including Coverage for
Completed Operations, Broad Form Property Damage "XCU" exclusion if any
deleted, and Contractual Liability (to specifically include coverage for
the indemnification clause of this Agreement) for not less than the
following limits:
Total Combined Single Limit (primary and/or umbrella):
$5,000,000 (written on a per occurrence basis)
(c) Comprehensive Automobile Liability Insurance (covering all
owned, non-owned and/or hired motor vehicles to be used in connection with
the Work) for not less than the following limits:
Total Combined Single Limit (primary and/or umbrella).
$5,000,000 (written on a per occurrence basis)
Contractor shall furnish a certificate from its insurance carrier or
carriers to Landlord before commencing the Work, naming Landlord and its
managing agent, as additional insureds and showing that it has complied with the
above requirements regarding insurance, and providing that the insurer will give
Landlord thirty (30) days' prior written notice of the cancellation of any of
the foregoing policies.
3. Contractor shall require all of its subcontractors engaged in the
Work to provide the above limits of insurance:
Upon the request of Landlord, Contractor shall require all of its
subcontractors engaged in the Work to execute an Insurance Requirements
agreement in the same form as this Agreement.
Agreed to and Accepted:
Tenant:
_______________________________________
By: ___________________________________
Title
Tenant's Contractor:
_______________________________________
By: ___________________________________
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Exhibit "E"
This Exhibit Intentionally Deleted
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AGREEMENT
This Agreement, made as of this 30th day of November, 1999 by and between
Computer Business Sciences, Inc. ("CBS"), a New York corporation having its
principal address at 80-02 Kew Gardens Road, Kew Gardens, NY 11415
And
Nissko Telecom L.P., a New York Limited Partnership having its principal
address at 80-02 Kew Gardens Road, Kew Gardens, New York, 11415 ("Nissko").
And
Nissko Telecom, Ltd., a New York Corporation having its principal address
at 80-02 Kew Gardens Road, Kew Gardens, New York 11415 ("Ltd").
Joseph Koren, an individual residing at 123 Audley Street, Kew Gardens,
New York 11418 ("Koren").
And
Chamuel Livian, an individual residing at 65 Tennis Place, Forest Hills,
New York 11375 ("Livian").
And
Avraham Nissanian, an individual residing at 138-34 78th Drive, Flushing,
New York 10036 ("Nissanian").
And
Robert Rimberg, Esq., an individual residing at 7 Baker Lane, Suffern, New
York 10901 ("Rimberg")
And
Nissko Telecom Associates, 80-02 Kew Gardens Road, Kew Gardens, New York
11415 ("Associates")
WHEREAS, Associates, Nissko, Ltd., Koren, Livian, Nissanian and Rimberg
(Koren, Livian, Nissanian and Rimberg are hereinafter, collectively and
individually, the "Nissko Group") entered into an agreement dated March 25, 1995
with CBS creating Associates, a Joint Venture ("Joint Venture"), for the purpose
of engaging in the business of providing computer telephony services to all
countries, to and from the United States" (collectively "Countries") and being
designated as a Master Agent to those countries.
WHEREAS, the Nissko Group is desirous of divesting itself of its rights in
the Joint Venture and all participation in providing telephony services to the
Countries.
WHEREAS, the Nissko Group is desirous of selling all of their rights in
the Joint Venture and all participation in providing telephony services to the
Countries.
<PAGE>
WHEREAS, based on discussions held among CBS, Nissko, Ltd.,
Associates and the Nissko Group, CBS wishes to purchase 100% of Nissko's, Ltd.'s
and the Nissko Group's interest in the Joint Venture which is a Master Agent to
provide long distance telephone service, internet service, data and any and all
other telephony service (the "Telephony Business") to the Countries, any and all
customer lists in the possession of Associates, Nissko, Ltd. and the Nissko
Group, any and all licenses obtained by Associates, Nissko, Ltd. and the Nissko
Group, any and all interest Nissko, Ltd. and the Nissko Group have in Talkie
Globe(R) and other equipment related to such service, etc. (the "Telephony
Assets"), any and all liabilities of Associates, Nissko, Ltd. and the Nissko
Group relating to taxes which any individual may become liable and telephone
bills related to services provided, , and to secure from Nissko, Ltd. and the
Nissko Group their cooperation and assistance in purchasing the related rights
and equipment from their Master Agent joint venture partners (Schedule "A").
NOW, THEREFORE, in consideration of the mutual obligations and promises
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
A. Purchase.
1. CBS hereby agrees to purchase 100% of Nissko's, Ltd.'s and the
Nissko Group's interest in the Joint Venture which is a Master Agent
to provide long distance telephone service, internet service, data
and any and all other telephony service (the "Telephony Business")
to the Countries, any and all customer lists in the possession of
Associates, Nissko, Ltd. and the Nissko Group, any and all licenses
obtained by Associates, Nissko, Ltd. and the Nissko Group, any and
all interest Nissko, Ltd. and the Nissko Group have in Talkie
Globe(R) and other equipment related to such service, etc. (the
"Telephony Assets"), any and all liabilities of Associates, Nissko,
Ltd. and the Nissko Group relating to taxes which any individual may
become liable and telephone bills related to services provided, and
to secure from Nissko, Ltd. and the Nissko Group their cooperation
and assistance in purchasing the related rights and equipment from
their Master Agent joint venture partners.
2. The Purchase Price for the Transaction shall be paid with 670,000
duly authorized and validly issued shares of the common stock of CBS
("Purchase Shares"), which are being delivered to the Nissko Group
members simultaneously with the execution of this Agreement. Rimberg
will receive 8% of the Purchase Shares; the other members of the
Nissko Group will divide the remainder equally; provided, however,
that it is acknowledged that Livian has represented the interests of
both himself and his brother, Gabriel Livian ("Gabriel") in Ltd.,
and, accordingly 25% of the shares allocated to Livian shall be
issued to Gabriel who shall be deemed a member of the Nissko Group
for all purposes hereunder.
3. CBS plans to take action to cause its common stock to be publicly
traded in the United States within the next 18 months (the "Event").
However, no assurance can be given that the Event will occur. In
furtherance hereof, each Investor will enter into an Investment
Letter in the form attached hereto as Exhibit A. Upon the occurrence
of the Event, all Purchase Shares holders shall have such rights of
<PAGE>
registration that shall be no less than the rights of registration
granted to any other holder of unregistered shares of CBS, which
shall be subject to the same restrictions and requirements of the
underwriter of the initial public offering of shares of CBS.
4. CBS is depositing 588,000 restricted shares of common stock of
Fidelity Holdings Inc., all of which are duly authorized and validly
issued to CBS, together with stock powers, duly executed in blank in
escrow ("Escrow Shares 1") with Rimberg & Associates. P.C. (the
"Escrow Agent"), simultaneous with the execution of this Agreement.
In the event that
(i) the Event does not occur within eighteen (18) months of
the date hereof, the Escrow Agent, within 10 days thereof,
shall issue to the Nissko Group, in the proportions set forth
below such number of Escrow Shares 1 as shall be valued at
$2,500,000 if sold to a purchaser or financier of restricted
securities (i.e., valued at the average closing price for the
30 trading days prior to the 18th month anniversary of this
Agreement, discounted at 35%, in the event such shares are
restricted) on the 18 month anniversary of this Agreement, and
such Escrow Shares 1 shall become Purchase Shares and the
remaining Escrow Shares 1 shall remain in escrow until the 24
month anniversary of this Agreement as provided below; or
(ii) if the Event has occurred prior to the 18 month
anniversary of this Agreement and (A) the net proceeds of the
sale of the Purchase Shares received by the Nissko Group
members if and when sold during any period prior to the 24
month anniversary of this Agreement do not equal at least each
member's proportionate share of a total of $2,500,000, or, (B)
if such Purchase Shares have not been sold by the 24 month
anniversary of this Agreement, and the value of such shares as
measured at the average closing price for the thirty (30)
trading days prior to the 24 month anniversary (discounted at
35 %, in the event such shares are restricted, to take into
account that they are restricted securities), does not equal
at least $2,500,000,
then the Escrow Shares 1 shall become Purchase Shares to cover any
shortfall in value to the extent that members of the Nissko Group
would receive on the 24 month anniversary of this Agreement (or if
the Purchase Shares were sold prior to the 24 month anniversary of
this Agreement, have actually received) their proportionate share of
a total value of $2,500,000 upon the sale of the Purchase Shares,
valued as provided above, to a purchaser or financer of restricted
securities (i.e., discounted at 35 %, in the event such shares are
restricted). On the 24 month anniversary of the Agreement the Escrow
Agent shall immediately release such number of the Escrow Shares 1
to accomplish the foregoing to the members of the Nissko Group in
the same proportions set forth in Paragraph A(1) hereof regarding
the CBS shares, i.e., Rimberg will receive 8% of the Purchase
Shares; the other members of the Nissko Group will divide the
remainder equally, except that 25% of the shares allocated to Livian
shall be issued to Gabriel.
<PAGE>
In the event that at any time prior to the 24 month anniversary of
this Agreement, CBS secures a bona fide third party purchaser of any
Purchase Shares for a cash purchase price of $2,500,000, or such
amount proportional to a share of the Purchase Shares, and any
member of the Nissko Group rejects such offer, then no additional
Escrow 1 Shares are to be issued to such member on the 24 month
anniversary of the Agreement.
All issuances, dividends, stock splits, conversions or other
consideration with respect to the shares under this section
occurring after January 10, 2000 shall become a part of "Escrow
Shares 1."
5. An additional 200,000 restricted shares of common stock of
Fidelity Holdings, Inc. will be validly issued and placed in escrow,
together with stock powers validly executed in blank ("Escrow Shares
2") with Rimberg & Associates P.C., simultaneous with the execution
of this Agreement. In the event that the Event does not occur within
eighteen (18) months of the date hereof, then the Escrow Agent shall
release from escrow and deliver to the Nissko Group, and the Nissko
Group shall have the right to receive, in addition to the Purchase
Shares (including any "Escrow Shares 1" under Section 3, above), the
"Escrow Shares 2." Rimberg will receive 8% of the "Escrow Shares 2;"
the other members of the Nissko Group will divide the remainder
equally, except that 25% of the shares allocated to Livian shall be
issued to Gabriel.
All issuances, dividends, stock splits, conversions or other
consideration with respect to the shares under this section
occurring after the date hereof shall become a part of "Escrow
Shares 2."
6. To cover personal guarantees of Nissko Jewelry of MCI, Sprint or
any other creditor with respect to liabilities of CBS or related to
the purchased liabilities, as described above, CBS is hereby
depositing 200,000 duly authorized and validly issued to CBS
restricted shares of Fidelity Holdings Inc. common stock (the
"Guarantee Shares") in escrow with Rimberg & Associates. P.C.,
simultaneous with the execution of this Agreement, together with
stock powers, validly issued in blank. In the event any member of
the Nissko Group or Nissko Jewelry is required to pay to MCI or
Sprint or any other creditor with respect to liabilities of CBS or
related to the purchased liabilities, as described above, such
member shall notify Business,CBS, in writing, of such obligation.
CBS shall have the right to defend against the payment demand to its
full extent; provided that CBS posts any required bond or makes any
payment required to proceed with any appeal. Where CBS has exhausted
all avenues and payment is still outstanding, then the Escrow Agent
shall release such shares from escrow and cause such shares, as
promptly as possible, to be sold, with the proceeds thereof to be
utilized towards the payment of any such obligations.
All issuances, dividends, stock splits, conversions or other
consideration with respect to the shares under this section
occurring after January 10, 2000 shall
<PAGE>
become a part of these personal guarantee shares.
7. The parties acknowledge and agree that the Escrow Agent shall
have no discretion concerning the release of the Escrow Shares 1,
the Escrow Shares 2 and the Guarantee Shares and that no party shall
have any right to object to the release of any of such shares from
escrow at the times and upon the occurrences specified in Paragraph
A(3) through (6), above, and any such rights are hereby deemed
waived and of no further force or effect. At such times that any
shares held in escrow are to be released in accordance with this
Agreement, the Escrow Agent shall send a written notice, by first
class, certified mail, return receipt requested, the parties at the
addresses specified in this Agreement (or such other address as a
party may specify to the Escrow Agent in writing), with a copy of
such notice to Cohen & Tauber, LLP, 1350 Avenue of the Americas,
26th Floor, New York, New York 10019 (or such other address
specified by such party in writing to the Escrow Agent) of its
intention to release such shares to the designated parties within
ten (10) days of such notice. Unless the Escrow Agent is enjoined by
a New York Court of competent jurisdiction (i.e., the federal
district court or New York Supreme Court) from releasing such
shares, the Escrow Agent shall have no discretion but to release
such shares to such parties.
B. Authorization of Agreement, Etc.
1. This Agreement has been or will be duly executed and delivered by
each member of the Nissko Group and the execution, delivery and
performance by each member of the Nissko Group of this Agreement has
been duly authorized by all requisite corporate or partnership
action by each member of the Nissko Group, as applicable; and each
constitutes, or will constitute, the legal, valid and binding
obligation of each member of the Nissko Group, enforceable in
accordance with its terms, except as enforceability may be limited
by bankruptcy, insolvency, reorganization, usury or other similar
laws affecting the enforcement of creditors' rights generally. The
execution, delivery and performance of this Agreement and the
issuance, sale and delivery of the Securities will not (i) violate
any provision of law or statute or any order of any court or other
agency of government binding on any member of the Nissko Group; or
(ii) to the best of the Nissko Group's knowledge, conflict with or
result in any breach of any of the terms, conditions or provisions
of, or constitute (with due notice or lapse of time or both) a
default under, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets
of any member of the Nissko Group under their respective
organizational documents, to the extent applicable, or any
indenture, mortgage, lease agreement or other agreement or
instrument to which any member of the Nissko Group is a party or by
which it or any of its property is bound or affected.
2. The execution and delivery of this Agreement by CBS and the
performance by CBS of its obligations hereunder have been duly and
validly authorized by all requisite corporate action. The
obligations of CBS hereunder and valid and binding and enforceable
against CBS in accordance with their respective terms. CBS
represents and warrants that the Purchase Shares, the Escrow Shares
1, the
<PAGE>
Escrow Shares 2 and the Guarantee Shares are duly and validly issued
and non-assessable, and are free and clear and any liens, claims,
encumbrances or rights of third parties whatsoever, except as
required under the Securities Laws, including, but not limited to,
Rule 144 of the Securities Act of 1933. During the term hereof, any
dividends, whether in cash or in kind, including without limitation,
stock dividends, or stock splits or other consideration issued in
connection with any of the Escrow Shares 1, the Escrow Shares 2 and
the Guarantee Shares shall be delivered by CBS or Fidelity, as the
case may, to the Escrow Agent and shall be deemed part of such
shares and subject to the escrow provisions contained hereunder.
C. Title to Properties; Encumbrances. Except for claims by Major Fleet and
Leasing, to the best of their knowledge, the Nissko Group and/or Associates has
good, valid and marketable title to all of the Telephony Assets free and clear
of all encumbrances, liens, claims, charges or other restrictions of whatever
kind or character , except for liens for current taxes, assessments or
governmental charges or levies on property not yet due and delinquent
D. Non-Defaults; Non-Contravention. To the best of their knowledge, none
of the Nissko Group is in default in the performance or observance of any
obligation (i) under its respective organizational documents, as applicable, or
any indenture, mortgage, contract, purchase order or other agreement or
instrument to which a member of the Nissko Group is a party or by which it or
any of its property is bound or affected; or (ii) with respect to any order,
writ, injunction or decree of any court of any federal, state, municipal or
other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign and there exists no condition, event or act
which constitutes, nor which after notice, the lapse of time or both, would
constitute, a default under any of the foregoing. Notwithstanding the foregoing,
the parties make no representations regarding MCI or Sprint.
E. Discharge and Release. Except for their obligations hereunder or any
obligations related to the Telephony Business or the liabilities assumed by CBS
hereunder, upon execution of this Agreement any obligations between the parties
from the Agreement between Fidelity, Computer Business Sciences and the Nissko
Group dated March 25, 1995 are hereby discharged and any escrows being held
pursuant to the March 25, 1995 Agreement shall be immediately released. In
addition, the Nissko Group agrees to execute a general release in favor of
Fidelity and CBS with respect to such matters (Exhibit "B").
F. Binding Upon Successors. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
assigns as provided herein.
G. Choice of Laws. This Agreement shall be construed in accordance with
the laws of the state of New York and county of New York and any action
hereunder shall be commenced in the courts of the State of New York County of
New York.
H. Non-Compete. The Nissko Group agrees that for five years following the
execution of this Agreement it shall not compete, be involved or be working in
the Telephony Business in the Countries.
I. Additional Documents. The parties agree to execute and deliver any
additional
<PAGE>
documents, which may be reasonably required to accomplish any of the purposes
set forth in this Agreement.
J. Integrated Agreement. This Agreement constitutes the entire Agreement
between the parties. This Agreement supersedes any prior agreement or
understanding between the parties and no modifications or revisions thereof
shall be of any force or effect unless the same are in writing and executed by
the parties hereto. The Nissko Group, Nissko and Ltd. acknowledge that it is
entering into this Agreement as a result of its own independent investigation
and not as a result of any promises, declarations and/or representations, oral
or written, of CBS, Fidelity Holdings, Inc., its agents, officers or employees
or any other entity, not contained in this Agreement.
K. Ambiguity. This contract is to be deemed to have been prepared jointly
by the parties hereto, and any uncertainty and ambiguity existing herein shall
not be interpreted against either party but according to the application of
rules of interpretation of contracts if such an uncertainty or ambiguity exists.
REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
L. Applicable Law. The parties agree that this Agreement shall be governed
by and interpreted pursuant to the Laws of the State of New York.
M. Third Party Beneficiary. No provision of this Agreement is intended to
be for the benefit of or enforceable by any third party.
N. Counterparts; Facsimile. This Agreement, and any amendments hereto may
be executed in counterparts all of which taken together shall constitute one
agreement. A facsimile copy or copies may serve as original.
O. Separability of Provisions. Any provision of this Agreement, which
shall be determined to be invalid, Shall be ineffective, but such invalidity
shall not affect the remaining provisions hereof. The titles to the paragraphs
hereof are for convenience only and have no substantive effect.
IN WITNESS THEREOF, the parties hereto, intending to be legally bound, the
parties have signed this agreement as of the day and year written above.
Computer Business Sciences, Inc.
______________________________________
By: Doron Cohen, President
______________________________________
By: Joseph Koren
______________________________________
By: Chamuel Livian
______________________________________
By: Avi Nissanian
______________________________________
By: Robert Rimberg
<PAGE>
Nissko Telecom Associates
______________________________________
By: Nissko Telecom L.P.
Nissko Telecom Ltd.
______________________________________
By: Avi Nissanian, President
AGREED TO WITH RESPECT TO
PARAGRAPH B(2) ONLY:
______________________________________
Doron Cohen
______________________________________
Bruce Bendel
Fidelity Holdings, Inc.
By:___________________________________
Exhibit 11
Statement re: Computation of Earnings (Loss) Per Share
FIDELITY HOLDINGS, INC.
COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(Adjusted for two 3-for-2 stock splits in June 1999 and January 2000)
Number of shares outstanding at January 1, 1999 18,082,156
Common stock issued during the year:
Weighted
Date Days Number of Average
Issued Outstanding Shares No. of Shares
------ ----------- ------ -------------
January 4, 1999 362 320,114 317,483
January 11, 1999 355 191,401 186,157
January 13, 1999 353 33,750 32,640
January 14, 1999 352 2,383 2,298
January 18, 1999 348 383,063 365,222
February 3, 1999 332 459,000 417,501
February 4, 1999 331 18,029 16,350
February 11, 1999 324 22,500 19,973
March 10, 1999 297 26,910 21,897
June 18, 1999 197 1,477,833 797,625
June 24, 1999 191 428,571 224,266
June 28, 1999 187 241,458 123,706
July 9, 1999 176 60,150 29,004
July 15, 1999 170 4,500 2,096
August 13, 1999 141 13,500 5,215
September 10, 1999 113 53,615 16,599
October 20, 1999 73 1,800,000 360,000
November 2, 1999 60 9,762 1,605
November 5, 1999 57 1,500 234
November 19, 1999 43 97,290 11,462
November 30, 1999 32 37,500 3,288
December 8, 1999 24 264,708 17,405
Weighted average number of shares issued during 1999 2,972,026
---------
Number of shares used in computing basic earnings per share 21,054,18(A)
=========
No common stock equivalents were computed inasmuch as they would be anti
dilutive
Earnings (loss):
Income (loss) before extraordinary item $(2,807,241)(B)
Extraordinary item (733,125)(C)
---------
Net income (loss) (3,540,366)(D)
==========
Earnings (Loss)
Per share
Basic and Diluted
-----------------
Earnings (Loss) Per Share:
Income (loss) before extraordinary item (B)/(A) $(0.13)
Extra ordinary item (C)/(A) (0.04)
------
Net income (loss) (D)/(A) $(0.17)
======
SUBSIDIARIES
FIDELITY HOLDINGS, INC.
o Major Acquisition Corp.
o Major Automotive Group, Inc.
o Major Chevrolet, Inc.
o Major Chrysler Plymouth Jeep Eagle, Inc.
o Major Dodge, Inc.
o Major Subaru, Inc.
o Major Kia, Inc.
o Major Automotive Realty Corp.
o Major Automotive of New Jersey, Inc.
o Compass Lincoln-Mercury, Inc.
o Computer Business Sciences, Inc.
o IG2, Inc. (FL) [originally incorporated as Reynard Service
Bureau, Inc.]
o C.B.S. Computer Business Sciences Ltd. (Israel)
o 786710 Ontario Ltd (Info Systems)
o CarsTV.com, Inc.
o IG2, Inc. (VA)
o Mid-Atlantic Telecommunications, Inc.
o Premo-Plast, Inc.
o Maxflo, Inc. 80% (20% OWNED BY PDC, LLC)
o Energy Plus, Inc.
o Cryogenix, Inc.
o Ever Safe, Inc.
o Slack 2000, Inc.
o Major Fleet & Leasing Corp.
<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
ENDED DECEMBER 31, 1999 and 1998 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-31-1999 DEC-31-1998
<PERIOD-END> DEC-30-1999 DEC-31-1998
<CASH> 6,985,878 977,334
<SECURITIES> 0 0
<RECEIVABLES> 6,855,547 7,118,717
<ALLOWANCES> 0 0
<INVENTORY> 24,612,800 19,061,666
<CURRENT-ASSETS> 40,946,331 30,837,014
<PP&E> 8,323,736 5,457,036
<DEPRECIATION> (2,600,146) (104,630)
<TOTAL-ASSETS> 68,574,650 50,548,423
<CURRENT-LIABILITIES> 31,906,325 25,836,983
<BONDS> 8,194,899 9,423,091
0 0
5,000 11,500
<COMMON> 160,198 80,365
<OTHER-SE> 28,350,583 16,361,651
<TOTAL-LIABILITY-AND-EQUITY> 68,574,650 50,548,423
<SALES> 210,814,104 99,667,822
<TOTAL-REVENUES> 210,814,104 99,667,822
<CGS> 177,606,003 84,828,470
<TOTAL-COSTS> 34,218,923 12,953,857
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,991,295 843,355
<INCOME-PRETAX> (2,999,291) 1,042,140
<INCOME-TAX> (192,000) 514,000
<INCOME-CONTINUING> (2,807,241) 528,140
<DISCONTINUED> 0 0
<EXTRAORDINARY> (733,125) 0
<CHANGES> 0 0
<NET-INCOME> (3,540,366) 528,140
<EPS-BASIC> (.17) .03
<EPS-DILUTED> (.17) .03
</TABLE>
