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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2000 or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______________ to ____________________
Commission File Number: 0-29182
FIDELITY HOLDINGS, INC.
-----------------------
(Exact name of small business issuer as specified in its charter)
Nevada 11-3292094
--------------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
80-02 Kew Gardens Road, Suite 5000
Kew Gardens, New York 11415
---------------------------
(Address of principal executive offices)
(718) 520-6500
--------------
Issuer's telephone number
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: The number of shares of the
registrant's common stock outstanding as of November 28, 2000 was 26,148,699
shares.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIDELITY HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,879,015 $ 6,625,454
Net investment in direct financing leases, current 344,163 368,347
Accounts receivable, net 12,378,313 7,910,398
Inventories 44,318,010 24,552,804
Other current assets 740,017 1,054,386
Assets held for sale 2,000,000 8,366,908
------------ ------------
Total current assets 61,659,518 48,878,297
Net investment in direct financing leases,
net of current portion 143,224 508,084
Property and equipment, net 8,282,310 5,163,363
Deferred income taxes 3,859,378 914,002
Excess of costs over net assets acquired, net 14,175,626 7,758,718
Notes receivable - officer 350,608 517,783
Other assets 1,669,518 3,677,636
------------ ------------
Total assets $ 90,140,182 $ 67,417,883
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Notes payable - floor plan $ 41,412,036 $ 21,661,654
Notes payable - other 4,240,405 --
Accounts payable 6,301,320 6,655,560
Accrued expenses 3,628,257 1,571,112
Current maturities of long-term debt 285,729 466,067
Customer deposits 1,211,677 622,861
------------ ------------
Total current liabilities 57,079,424 30,977,254
Long-term debt, less current maturities 8,615,262 7,672,719
</TABLE>
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<TABLE>
<S> <C> <C>
Obligations under capital leases 2,748,177 --
Due to employees 410,500 --
Minority interest 194,017 193,686
Other
-- 58,443
------------ ------------
Total liabilities 69,047,380 38,902,102
------------ ------------
Commitments
Stockholders' equity
Preferred stock, $.01 par value- 2,000,000 shares
authorized; 500,000 shares issued and outstanding 5,000 5,000
Common stock, $.01 par value- 50,000,000 shares
authorized; 26,148,698 and 24,029,694 issued and
outstanding in 2000 and 1999 respectively 261,489 240,298
Unearned stock based compensation (1,425,093) --
Additional paid in capital 40,109,938 30,513,805
Cumulative translation adjustment (3,814) (6,204)
Accumulated deficit (16,959,748) (1,973,538)
Treasury stock, at cost; 162,417 and 31,470 shares
in 2000 and 1999, respectively (894,970) (263,580)
------------ ------------
Total stockholders' equity 21,092,802 28,515,781
------------ ------------
Total liabilities and stockholders' equity $ 90,140,182 $ 67,417,883
============ ============
</TABLE>
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FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Sales $244,641,929 $151,287,991 $ 91,067,546 $ 51,014,918
Cost of sales 206,531,567 127,860,092 77,422,086 42,693,826
------------ ------------ ------------ ------------
Gross profit 38,110,362 23,427,899 13,645,460 8,321,092
Operating expenses 34,073,068 19,410,329 13,150,418 7,047,100
Interest expense 1,745,430 1,284,591 585,105 406,703
------------ ------------ ------------ ------------
Operating income (loss) from continuing
operations before income tax expense 2,291,864 2,732,979 (90,063) 867,289
Income tax expense 906,746 507,000 906,746 145,000
------------ ------------ ------------ ------------
Income (loss) from continuing operations 1,385,118 2,225,979 (996,809) 722,289
Loss from discontinued operations, net of tax (16,371,328) (2,039,740) (14,472,020) (696,151)
------------ ------------ ------------ ------------
Net income (loss) $(14,986,210) $ 186,239 $(15,468,829) $ 26,138
============ ============ ============ ============
Per common share:
Income (loss) from continuing operations:
Basic $0.06 $0.11 ($0.04) $0.03
Diluted $0.05 $0.09 ($0.04) $0.03
Loss from discontinued operations:
Basic $(0.65) ($0.10) ($0.56) ($0.03)
Diluted $(0.59) ($0.08) ($0.56) ($0.03)
Net income (loss):
Basic $(0.59) $0.01 ($0.60) $0.00
Diluted $(0.54) $0.01 ($0.60) $0.00
Average number of shares used in computation
Basic 25,346,234 20,162,231 25,750,156 21,659,063
Diluted 27,718,674 25,334,457 25,750,156 26,831,289
</TABLE>
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FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($ 14,986,210) $ 186,239
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of intangible assets 542,353 291,881
Depreciation 112,552 310,784
Stock-based compensation 394,403 475,534
Issuance of common stock in exchange for services 209,494 --
(Increase) decrease in assets:
Net investment in direct financing leases 389,044 267,629
Accounts receivable (4,467,915) (4,825,919)
Inventories (16,062,553) (3,724,385)
Customer deposits 388,816 380,209
Assets held for sale 6,366,908 --
Other assets 2,973,359 (1,722,919)
Increase (decrease) in liabilities:
Accounts payable (340,591) 4,728,825
Accrued expenses 1,945,556 211,933
Floor plan notes payable 16,573,004 3,967,254
Other liabilities 352,388 --
------------ ------------
Net cash provided by (used in) operating activities (5,609,392) 547,065
------------ ------------
Cash flows from investing activities:
Additions to property and equipment (295,860) (476,827)
Business combinations (1,308,411) --
------------ ------------
Net cash used in investing activities (1,604,271) (476,827)
------------ ------------
Cash flows from financing activities:
Line of credit -- (450,000)
Proceeds from issuance of short-term debt 726,756 --
Redemptions of warrants (2,500,000) --
Proceeds from issuance of common stock and exercise of
warrants, net of expenses 5,440,088 5,765,999
Payment of convertible debentures -- (2,337,500)
Payments of long-term debt (737,795) (757,990)
Proceeds from convertible debentures -- 2,750,000
Purchase of treasury stock (631,390) (196,787)
</TABLE>
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<TABLE>
<S> <C> <C>
Decrease in notes receivable - officer 167,175 --
------------ ------------
Net cash provided by financing activities 2,464,834 4,773,722
------------ ------------
Effect of exchange rates on cash 2,390 653
------------ ------------
Net increase (decrease) in cash and cash equivalents (4,746,439) 4,844,613
Cash and cash equivalent, beginning of period 6,625,454 820,832
------------ ------------
Cash and cash equivalent, end of period $ 1,879,015 $ 5,665,445
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 1,745,430 $ 1,284,591
Income taxes -- 851,037
Non cash financing activities:
Notes issued for redemption of warrants 3,500,000 --
Common stock issued as stock compensation 2,045,255 --
Common stock issued for services and deposits 209,494 --
Capital lease obligations 2,748,000 --
</TABLE>
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FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY
For the Nine Months Ended September 30, 2000
<TABLE>
<CAPTION>
Preferred Stock Common Stock
($.01 par value) ($.01 par value) Additional Accumulated
---------------- ----------------
Shares Amount Shares Amount Paid in Capital Deficit
------ ------ ------ ------ --------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 2000 500,000 $5,000 24,029,694 $240,298 $ 30,513,805 $ (1,973,538)
Net loss (14,986,210)
Currency translation adjustment
Issuance of common stock for:
Services 21,770 218 209,276
Business combinations 678,102 6,781 8,106,466
Stock-based compensation,
net of deferred amounts 134,230 1,342 1,849,233
Issuance of common stock in connection
with private placements and exercise of warrants 891,315 8,914 5,431,174
Redemption of warrants in connection
with private placements 393,587 3,936 (6,000,016)
Purchase of treasury stock
------- ------ ---------- -------- ------------ ------------
Balance, September 30, 2000 (unaudited) 500,000 $5,000 26,148,698 $261,489 $ 40,109,938 $(16,959,748)
======= ====== ========== ======== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Currency Unearned Treasury Stock,
Translation Stock-Based at Cost
---------------
Adjustment Compensation Shares Amount Total
---------- ------------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 2000 $ (6,204) $ -- 31,470 $(263,580) $ 28,515,781
Net loss (14,986,210)
Currency translation adjustment 2,390 2,390
Issuance of common stock for:
Services 209,494
Business combinations 8,113,247
Stock-based compensation,
net of deferred amounts (1,425,093) 425,482
Issuance of common stock in connection
with private placements and exercise of warrants 5,440,088
Redemption of warrants in connection
with private placements (5,996,080)
Purchase of treasury stock 130,947 (631,390) (631,390)
-------- ----------- ------- --------- ------------
Balance, September 30, 2000 (unaudited) $ (3,814) $(1,425,093) 162,417 $(894,970) $ 21,092,802
======== =========== ======= ========= ============
</TABLE>
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FIDELITY HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
September 30, 2000
1. Basis of Presentation
In the opinion of the Company, the accompanying consolidated condensed
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to fairly present the Company's financial
position and its results of operations and cash flows as of the dates and for
the periods indicated.
Certain information and footnote disclosure normally contained in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. These condensed consolidated financial statements
should be read in conjunction with the audited December 31, 1999 consolidated
financial statements and related notes included in the Company's Form 10-KSB for
the year ended December 31, 1999. The results of operations for the nine-month
and three-month periods are not necessarily indicative of the operating results
for the full year.
Amounts for the nine months and three months ended September 30, 1999
have been reclassified to conform with the September 30, 2000 presentation.
2. Earnings per Share
Per-share data and number of shares for 1999 have been adjusted to
reflect a 3-for-2 stock split in January 2000.
3. Discontinued Operations
On November 3, 2000, the Board of Directors determined to sell the Company's
non-automotive operations within the next twelve months. Accordingly, all
non-automotive operations have been classified collectively as "Discontinued
Operations." Continuing operations are represented by the Company's automotive
dealership activities, including its automotive leasing subsidiary, Major Fleet
and Leasing, Inc. ("Major Fleet").
The loss from discontinued operations is comprised of the following:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Loss from discontinued operations
(net of income tax benefit of $2,399,378
and $0 in 2000 and 1999, respectively) $ (4,384,068) $ (2,039,740) $ (2,484,740) $ (696,151)
Estimated loss from disposition of discon-
tinued operations (net of income tax benefit
of $1,300,000) (11,747,260) -- (11,747,260) --
Provision for estimated operating losses during
period of disposition (net of income tax
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
benefit of $160,000) (240,000) -- (240,000) --
------------ ------------ ------------ ------------
Total $(16,371,328) $ (2,039,740) $(14,472,000) $ (696,151)
============ ============ ============ ============
</TABLE>
Assets Held for Sale included on the Company's balance sheet at
September 30, 2000 represents the estimated net value of the Company's
discontinued operations to be realized upon their sale.
4. Separation Agreement With Former Executive
On August 8, 2000, Doron Cohen, former President, CEO and a Director of
the Company, signed a Separation and Release Agreement (the "Agreement").
Assuming compliance with its provisions, the Agreement provides for periodic
payments to and a forgiveness of indebtedness from Mr. Cohen in an aggregate
amount of $1,710,067. The total amount of the payments is $662,000 and the
potential forgiveness of Mr. Cohen's indebtedness to the Company aggregates
$1,048,067. Based on the report of an independent appraiser, the Company has
recorded a deferred charge of $840,000 as the value of the non-compete and other
provisions of the Agreement, which relates to continuing operations of the
Company. This amount is being amortized over twenty-four months starting August
2000. Accordingly, $70,000, representing two months of amortization, has been
charged in the period ended September 30, 2000.
Additionally, the Company has accrued the liability for the remaining
payments due to Mr. Cohen and has provided a valuation allowance for the
difference between the loan receivable from Mr. Cohen and the aggregate amount
of the deferred charge. Accordingly, the Company has expensed a total of
$870,067 ($250,000 of which was accrued in the second quarter of 2000),
representing the difference between the aggregate potential of payments and
forgiveness provided for in the Agreement and the valuation amount determined by
the independent appraiser. This expense is directly attributable to the value of
Mr. Cohen's non-compete provisions related to the Company's technology
operations. As such, it has been included in the Estimated Loss from
Discontinued Operations.
5. Stockholders' Equity
In connection with the private placements of the Company's common stock
in December 1999 and February 2000 and pursuant to the terms of the agreement,
the Company redeemed all outstanding adjustable warrants held by institutional
investors. The Company had the option of issuing shares of its common stock to
the investors for the aggregate amount due (as defined in the agreement) or of
issuing a minimum number of shares with the balance payable in cash. The Company
issued the minimum 393,587 shares and agreed to pay a total of $6 million in
cash. The Company paid $2,500,000 of this amount and issued notes payable for
the balance of $3,500,000, which are due in periodic installments of varying
amounts through June 20, 2001.
In connection with the acquisition of Mazda of Hempstead in the second
quarter of 2000 and pursuant to the terms of the purchase agreement, the Company
purchased 18,947 shares of common stock previously issued to the seller for an
aggregate amount of $359,993.
6. Business Combinations
On September 7, 2000, the Company acquired substantially all of the
assets of the Hempstead Nissan automobile dealership, a full-service retail new
and used vehicle dealership based on Long Island in New York, for approximately
$6.9 million, which included assumption of certain liabilities. The purchase
price was allocated to the assets acquired based on their estimated fair values
and $5.0 million was allocated to inventories and property and equipment. The
excess of purchase price over the fair market value of net assets acquired
(goodwill) was approximately $1.8 million and is being amortized
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over 15 years. The cash portion of the acquisition was financed through
available cash and borrowings from the Company's line of credit. During August
2000, the Company also acquired the assets of Compass Dodge, an automobile
dealership located in New Jersey for approximately $100,000 cash and 12,500
shares of the Company's common stock. The acquisitions were accounted for by the
purchase method of accounting for business combinations. Accordingly, the
accompanying consolidated condensed statement of operations does not include any
revenues or expenses related to these acquisitions prior to their closing dates.
The acquired companies' operations to date have not been significant and,
therefore, pro forma financial information has not been presented.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the operations, financial condition,
liquidity and capital resources of Fidelity Holdings, Inc. and its subsidiaries
("we" or "the Company") should be read in conjunction with our unaudited
Consolidated Financial Statements and related notes thereto included elsewhere
herein.
This discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results could differ significantly from the results discussed in the
forward-looking statements.
The Company
On May 14, 1998, Fidelity Holdings, Inc., a holding company involved in
the acquisition and development of synergistic technological and
telecommunications businesses and the regional consolidation of the retail
automotive industry, acquired, from a related party, the Major Automotive Group
of dealerships ("Major Auto") and related real property and leases. We have
historically operated in two divisions: Automotive and Technology.
On November 3, 2000, our Board of Directors determined to sell our
non-automotive operations, including our Technology division, by the most
appropriate economically viable means, in order to maximize shareholders' value
from those operations and to maintain the Company's focus on the regional
consolidation of retail automotive dealerships. Accordingly, all non-automotive
operations have been classified collectively as "Discontinued Operations."
Continuing operations are represented by our automotive dealerships activities,
including our Major Auto subsidiary and other dealerships, as well as our
automotive leasing subsidiary, Major Fleet and Leasing, Inc. ("Major Fleet").
RESULTS OF CONTINUING OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2000 AND NINE
MONTHS ENDED SEPTEMBER 30, 1999
Revenues. Revenues for the nine-month period ended September 30, 2000
increased to approximately $244.6 million, which is $93.4 million, or 61.7%,
more than the prior comparable period's revenues of $151.3 million. Such
increase was almost solely attributable to the revenues of our automotive
dealership operations, which were approximately $244.3 million for the 2000
first nine months, an increase of $93.6 million, or 62.1%, over the prior year's
comparable first-three quarter's revenue of $150.7 million. Of this increase,
approximately $33.8 million relates to revenues generated by four dealerships we
acquired between September 1999 and September 2000. The other primary reasons
for the significant growth in revenues were both increased unit sales and
increased average sales price per unit. New car unit sales increased by 1,416
units, or 50.2% in the first nine months of 2000 from the comparable period of
1999, while used car unit sales increased 2,644 units, or 41.5%, in the 2000
nine-month period over the same period in the prior year. On a same-store basis,
the increase in new vehicles sold was 631, or 22.4%, used vehicles sold
increased by 1,509 units or 23.7%. Management believes that the increase in unit
sales is primarily attributable to our automotive dealership operations'
successful efforts in selling used vehicles at its expansive facility in Long
Island City, New York and to a lesser extent the development of its used vehicle
operation in Northern New Jersey. An average of 1,000 used vehicles, retail and
wholesale, were sold during each of the months in the 2000 period, compared with
an average of 700 used vehicles per month during the prior comparable period.
Our automotive dealership operations' sales efforts included extensive Internet
promotions, local advertising in all media and the branding of its used car
operation as "Major World." Management believes that market acceptance of its
Major World brand was a strong contributor to the 2000 sales volume performance.
Additionally, the average sales price per vehicle, for new vehicles, increased
by approximately $1,100, per vehicle. The average sales price for used vehicles
increased by approximately $2,900 in the 2000 period compared with the 1999
period. Combined with the significant increase in used vehicle sales volume,
this generated
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a net increase in used vehicle sales revenue of 75.3%. This change in volume and
average selling price in used vehicles is reflective of our successful efforts
in obtaining non-recourse financing for prospective buyers who may have had
difficulties obtaining financing elsewhere and also selling higher priced luxury
quality used cars.
Cost of sales. The cost of sales increase of $78.7 million, or 61.5%,
to $206.5 million in the nine-month period of 2000 from $127.8 million for the
nine months ended September 30, 1999, is solely attributable to our automotive
dealership operations. The percentage increase is less than the increased sales
volume percentage and reflects an increase of almost $1,300 in the average cost
of new vehicles and an increase of more than $2,200 in the average unit cost of
used vehicles.
Gross profit. Our automotive dealership operations generated almost all
of the total gross profit of $38.1 million for the nine months ended September
30, 2000. The four dealerships we acquired between September 1999 and September
2000 generated approximately $5.2 million of this total. In the first nine
months of 1999, gross profit for our automotive dealership operations was
approximately $23.4 million. In addition to the gross profits generated by the
acquired dealerships, this increase of $14.7 million, or 62.7%, in our
automotive dealership operations' gross profit was primarily attributable to (i)
the increase in units sold and (ii) the change in revenue percentage mix.
Revenues went from 44.1% of total revenues generated by new vehicle sales and
51.0% generated by used vehicles sales in the first nine months of 1999 to 41.9%
of total revenues generated by new vehicle sales and 54.1% generated by used
vehicle sales in the 2000 comparable period.
Operating expenses. In the nine months ended September 30, 2000,
operating expenses increased approximately $14.7 million to approximately $34.1
million, from $19.4 million in the comparable 1999 period. This increase is
primarily attributable to the costs associated with increased sales efforts and
results, principally, advertising and compensation.
Interest expense. Interest expense had a net increase of approximately
$460,000 to more than $1.7 million in the first nine months of 2000 from
interest expense of $1.3 million incurred in the comparable prior period. This
is primarily related to the increase in floor plan interest based on the higher
levels of automotive dealership operation's inventories and higher interest
rates during the first three quarters of 2000 as compared with the same period
in 1999.
Income tax expense. Income tax expense of approximately $900,000 for
the nine months ended September 30, 2000 was calculated on pre-tax income from
continuing operations based on the Company's current effective tax rate of
approximately 40%. The taxes provided in the corresponding period in the prior
year of approximately $500,000, reflect the Company's effective tax rate at that
time. With the disaggregation of the Company's operations into its continuing
and discontinued components, the Company has provided in this quarter for tax
expense on the pre-tax income from its continuing operations for the nine-month
period and recorded a tax benefit of approximately $3.9 million in total, in
connection with its discontinued operations.
Discontinued operations. The non-automotive components of our business
that our Board of Directors has determined to divest have generated a
substantial loss. The aggregate amount of such loss from discontinued
operations, net of taxes, in the first three quarters of 2000 was approximately
$16.4 million, compared with a loss from discontinued operations of $2.0 million
in the comparable 1999 period. Such loss includes, net of taxes, the actual
operating costs of those operations of approximately $4.4 million, plus a
one-time, non-cash, charge of approximately $11.7 million to write-down the
assets associated with those operations to their estimated net realizable value
and a charge of $240,000 to accrue an estimate of operating and other costs to
be incurred until the divestiture has been completed.
RESULTS OF CONTINUING OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2000 AND
THREE MONTHS
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ENDED SEPTEMBER 30, 1999
Revenues. Revenues for the three-month period ended September 30, 2000
increased to approximately $91.0 million, which is $40.0 million, or 78.5%, more
than the prior comparable period's revenues of $51.0 million. Such increase was
solely attributable to the revenues of our automotive dealership operations. Of
this increase, approximately $19.4 million relates to revenues generated by four
dealerships we acquired between September 1999 and September 2000. The primary
reasons for the significant growth in revenues were both increased unit sales
and increased average sales price per unit. New vehicle sales increased by 947
units in the third quarter of 2000 from 858 units in the third quarter of 1999,
while used vehicle sales increased 480 units in the 2000 third quarter over
2,863 units, retail and wholesale, in the prior year's comparable quarter.
Management believes that the increase in new and used vehicle unit sales in this
quarter is significantly attributable sales by the acquired dealerships in New
Jersey and Hempstead, Long Island and to our successful efforts in selling used
vehicles at our expansive facility in Long Island City, New York. An average of
more than 1,100 used vehicles, retail and wholesale, were sold during each of
the months in the 2000 period. Major Auto's sales efforts included extensive
Internet promotions, local advertising in all media and the branding of its used
car operation as "Major World." Management believes that market acceptance of
its Major World brand was a strong contributor to the 2000 sales volume
performance.
Cost of sales. The cost of sales increase of $34.7 million, or 81.3%,
to $77.4 million in the third quarter of 2000 from $42.7 million for the three
months ended September 30, 1999 is solely attributable to our automotive
dealership operations. This increase is consistent with the increased sales
volume in terms of units and also with the respective increases and decreases in
the average selling prices of new and used vehicles.
Gross profit. Our automotive dealership operations generated the total
gross profit of $13.6 million for the three months ended September 30, 2000, an
increase of $5.3 million, or 64.0%, from gross profits of $8.3 in the prior
comparable quarter. The four dealerships we acquired between September 1999 and
September 2000 generated approximately $2.8 million of this increase. In
addition to the results of the acquired dealerships, the increase in gross
profit was primarily attributable to the increase in units sold.
Operating expenses. In the three months ended September 30, 2000,
operating expenses increased approximately $6.1 million to approximately $13.1
million, from $7.0 million. Almost all of this increase is attributable to our
automotive dealership operations. This increase is primarily attributable to the
costs associated with increased sales efforts and results, principally,
advertising and compensation.
Interest expense. Net interest expense had a net increase of
approximately $178,000 to $585,000 in the third quarter of 2000 from interest
expense of $407,000 incurred in the comparable prior period. This is primarily
related to the increase in floor plan interest based on the higher levels of our
automotive dealership operations' inventories and higher interest rates during
the third quarter of 2000.
Income tax expense. Income tax expense related to continuing operations
in the third quarter of 2000 of approximately $900,000 is disproportionately
large due to the discontinuance of operations in that quarter. No taxes were
accrued during the year 2000 prior to this quarter inasmuch as for the Company
as a whole net income was insignificant. With the disaggregation of operations
into its continuing and discontinued components, the Company has provided in the
current quarter for tax expense on the pre-tax income from its continuing
operations for the entire nine-month period and recorded a tax benefit of
approximately $3.9 million in total, in connection with its discontinued
operations.
Discontinued operations. The Company experienced a loss from
discontinued operations in the
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third quarter of 2000 of $14.4 million, compared with a loss of $696,000 in
discontinued operations in the comparable prior period. This increase in loss of
approximately $11.7 million is primarily the result of a one-time, non-cash,
charge of approximately $11.7 million to write-down the assets associated with
those operations to their estimated net realizable value.
ASSETS, LIQUIDITY AND CAPITAL RESOURCES - SEPTEMBER 30, 2000
At September 30, 2000, our total assets were $90.2 million, an increase
of approximately $22.7 million from December 31, 1999. This aggregate increase
is primarily related to the increases in our accounts receivable of $4.5
million, inventories of $19.8 million, excess of costs over net assets acquired
of $6.4 million, net property and equipment of $3.1 million and deferred taxes
of approximately $2.9 million. Except for the deferred tax amount, these
increases are directly attributable to (i) the increased sales volume in our
automotive dealership operations and (ii) the assets obtained through the
acquisitions in the first nine months of 2000. The deferred taxes increased as a
result of the tax effects of the loss from discontinued operations. Significant
offsets to these asset increases, include a decrease in cash of $4.7 million, a
decrease in other assets of $2.0 million and a decrease of $6.4 million in net
assets held for sale. This latter category represents the total of assets less
related liabilities from the Company's former technology operations, which the
Company has discontinued and is seeking to divest in an economically productive
manner.
The Company's primary source of liquidity for the nine months ended
September 30, 2000 was $2,464,834 from its financing activities. This was the
net effect of $5,440,088 of net proceeds from the private placement and the
exercise of warrants for our common stock, $726,756 of proceeds from the
incurrence of short-term debt and decreases in notes receivable - officer of
$167,175, as offset by a redemption of warrants for $2,500,000, purchases of
treasury stock for $631,390 and payments of outstanding debt of $737,795.
Cash used in operating activities was $5,609,392. This was the result
of cash used through our loss of $13,727,408, comprised of our net loss of
$14,986,210 less non-cash charges of $1,258,802, and net increase in assets of
$10,412,341 (primarily from increases in accounts receivable of $4,467,915;
inventories of $16,062,553, less decreases in assets held for sale of $6,366,908
and other assets of $2,973,359) partially offset by net additions to liabilities
of $10,412,341 (primarily from increases in floor plan notes payable of
$16,573,004 and accrued expenses of $1,945,556). The increases in assets and
liabilities were significantly attributable to the large volume of sales in the
first nine months of 2000, as well as the acquisitions of automotive dealerships
that were consummated during that period.
The net use of cash from operating activities of $5,609,392 was further
increased by the cash used in investing activities of $1,604,271 for the net
additions to property and equipment and business combinations.
The foregoing activities, i.e. financing, operating and investing, plus
an exchange rate cash effect increase of $2,390, resulted in a net cash decrease
of $4,746,439 for the nine months ended September 30, 2000.
We believe that the cash generated from existing operations, together
with cash on hand, available credit from its current lenders, including banks
and floor planning, will be sufficient to finance our current operations and
internal growth for at least the next twenty-four months. However, we will
require additional financing in connection with future planned acquisitions of
automobile dealerships. There can be no assurance that, for additional growth,
such funding will be available. We are exploring financing alternatives with
respect to our projected cash requirements.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
FOREIGN CURRENCY RISK
Although we have discontinued our non-automotive operations, until the
final disposition of those entities, we will continue to develop technology
products in the United States, Canada and Israel. However, substantially all our
revenues come from sales of vehicles in the Unites States. Consequently, foreign
sales constitute a minimal amount of our revenues. Even so, our financial
results could be affected by changes in foreign currency exchange rates or weak
economic conditions in foreign markets. Because substantially all our revenues
are currently denominated in U.S. dollars, a strengthening of the dollar could
make our products less competitive in foreign markets. Due to the nature of our
investments and operations, we believe that there is not a material risk
exposure.
INTEREST RATE RISK
Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since all of our investments are in short-term
instruments, including money market funds. Our interest rate expense is also
sensitive to changes in the general level of U.S. interest rates because the
interest rate charged varies with the prime rate. Due to the nature of our
operations, we believe that there is not a material risk exposure.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not engaged in any other significant litigation other than as previously
reported.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 Financial Data Schedule
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIDELITY HOLDINGS, INC.
Date: November 28, 2000 /s/ Bruce Bendell
Bruce Bendell
Chairman of the Board and
Chief Executive Officer
/s/ Richard L. Feinstein
Richard L. Feinstein
Senior Vice President-Finance and
Chief Financial Officer
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