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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER: 0-29182
FIDELITY HOLDINGS, INC.
(Exact name of registrant as specified 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, including Zip Code, of principal executive offices)
Registrant's telephone number, including area code: (718) 520-6500
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant as
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. YES [ ] NO [x]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [ ]
As of April 10, 2001, the aggregate market value of voting stock held by
non-affiliates of the registrant, based on the closing sales price for the
registrant's common stock, as reported by the Nasdaq National Market was
approximately $5,872,040 calculated by excluding shares owned beneficially by
directors and officers).
As of April 10, 2001, there were 25,184,699 shares of the registrant's common
stock outstanding.
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PART I
ITEM 1. 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 the automotive market, government regulation, the nature of possible supplier
or customer arrangements which may become available to us in the future,
uncollectible accounts receivable, slow moving inventory, ability to dispose of
discontinued operations, lack of adequate financing, increased competition and
unfavorable general economic conditions. Our actual results may differ
materially from the results discussed in any forward-looking statement.
Although we believe that the expectations in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
THE COMPANY
GENERAL
Fidelity Holdings, Inc. (d/b/a The Major Automotive Companies) ("we,"
"us," "our" 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. Unless otherwise indicated, all references to the
"Company," "we," "us," and "our" include reference to our subsidiaries.
Automotive Operations
We sell new and used vehicles through the Major Dealer Group (the "Major
Dealer Group"), a leading consolidator of automobile dealerships in the New York
metropolitan area, which operates through twelve (12) retail automobile
franchises. Our leasing operations consist of providing leases and other
financing.
Discontinued Operations
In November 2000, we announced our intent to divest our non-automotive
activities, specifically, our former technology division, by way of sale,
merger, consolidation or otherwise. Our former technology division was headed by
IG2, Inc. (f/k/a Computer Business Services, Inc. ("CBS")). Its operations
consisted primarily of voice processing and computer telephony technology,
including development of a proposed leading edge network, the IG2(R) Network. We
have divested and continue to divest our former technology division in order to
maximize shareholders' value from these operations and to maintain our focus on
the operation and consolidation of our retail automotive dealerships.
Year 2000 Summary
The year 2000 has been one of significant change for us. Our automotive
operations generated revenues in excess of $322 million and a historical high
gross profit of approximately $50 million. These levels were reached through
both internal growth and expansion of dealer networks.
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Although the automotive operations were profitable, losses from our discontinued
operations were primarily responsible for a net loss of $21,125,075.
AUTOMOTIVE OPERATIONS
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, our Chief Executive Officer, Chairman and beneficial owner of
approximately 30% of our outstanding common stock. Pursuant to the Merger
Agreement, Bruce Bendell contributed to Major Auto all of his shares of common
stock of Major Chevrolet, Inc., Major Subaru, Inc., Major Dodge, Inc. and Major
Chrysler, Plymouth, Jeep Eagle, Inc. 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, Inc. and Major Chrysler, Plymouth, Jeep
Eagle, Inc. from Harold Bendell, Bruce Bendell's brother, for $4 million in cash
pursuant to a stock purchase agreement. In addition, Major Acquisition Corp.
acquired certain real estate components from Bruce Bendell and Harold Bendell
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 500,000 shares of 1997-Major Series of Convertible Preferred Stock
issued to Mr. Bendell were originally convertible was 2,250,000 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, which
aggregated $7 million ($4 million for Harold Bendell and $3 million to purchase
the real estate component), 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 (5) 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
acquired 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 its 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 seven franchised
automobile dealerships in the New York metropolitan area: (i) Chevrolet; (ii)
Chrysler; (iii) Plymouth; (iv) Dodge; (v) Jeep; (vi) Subaru; and (vii) Kia. In
addition, the Major Dealer Group owns five other franchised dealerships in the
New York metropolitan area: (i) Lincoln-Mercury; (ii) Mazda; (iii) Dodge; (iv)
Nissan; and (v) Daewoo. Major Auto also distributes General Motors vehicles in
the former Soviet Union. Through its
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dealerships, the Major Dealer Group sells new and used automobiles, provides
related financing, sells replacement parts and provides vehicle repair service
and maintenance.
Our Chief Executive Officer and Chairman, Bruce Bendell, has
approximately 29 years experience in the automobile industry. Mr. Bendell 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, the Major Dealer Group has expanded from a
single-franchise dealership having approximately $10 million in revenues and 25
employees in 1985 to a twelve-franchise dealership group having more than $320
million in revenues and more than 300 employees in 2000.
Industry Background
According to industry data from the National Automobile Dealers
Association ("NADA Data"), on average in 2000, new vehicle sales constituted
60.1% of a franchised dealership's total sales. Unit sales of new vehicles rose
3.9% in 2000 to a total of 17.4 million units sold. At an average retail selling
price of $24,923 per vehicle, new vehicle sales totaled approximately $432
billion in 2000. From 1995 to 2000 sales revenue from the sale of new vehicles
increased approximately 42.5%. The annual net profit before taxes of the typical
United States franchised dealer is estimated to be $453,000. The average
dealership's gross profit as a percentage of selling price for new vehicles was
6.1% in 2000.
According to NADA Data, on average in 2000, used vehicle sales
constituted 28.6% of a franchised dealership's total sales. In 2000, franchised
new vehicle dealers sold 12.6 million retail used vehicles. At an average
selling price of $13,648 per vehicle, used vehicle sales totaled approximately
$172 billion in 2000. From 1995 to 2000, sales revenue from the retail sale of
used vehicles increased approximately 36.5%. The average dealership's gross
profit as a percentage of selling price for used vehicles was 10.9% in 2000. 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
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
(Units in million; dollars in billions)
New vehicle unit sales 14.8 15.1 15.1 16.2 16.9 17.4
New vehicle sales revenue (1) $303.0 $328.0 $338.2 $383.0 $413.1 $432.0
Used vehicle unit sales-retail 11.4 11.9 12.0 12.2 11.1 12.6
Used vehicle retail sales revenue $126.0 $137.0 $145.2 $153.0 $146.9 $172.0
(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.
In addition to revenues from the sale of new and used vehicles,
automotive dealerships derive revenues from repair and warranty work, sale of
replacement parts, financing and credit insurance and the sale of extended
warranty coverage. According to NADA Data, revenues resulting from service and
parts sales increased approximately 8.3% in 2000 for franchised dealerships, a
portion of
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which is accounted for by the increase in the amount of used vehicle
reconditioning. Revenue from parts and services constitutes, on average,
approximately 11.4% of a franchised dealership's total sales.
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 2000, total franchised dealership gross
profits were, on average, $3.7 million, with an average net profit before taxes
of $453,000.
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 recent years, however, this trend has diminished and
continues to do so. 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 21,674 at the end
of 2000.
We believe that franchised automobile dealerships will continue to
consolidate because the capital required to operate dealerships continues to
increase, many dealership owners are approaching retirement age and certain
automobile manufacturers want to consolidate their franchised dealerships to
strengthen their brand identity. For example, General Motors Corporation and
Ford Motor Company have been reducing the number of their franchises to upgrade
their retail networks and increase dealer profitability. We believe that
dealership groups that have significant equity capital and experience in
acquiring and running dealerships will have an opportunity to acquire additional
franchised dealerships. Additionally, we believe that the increased percentages
of leased versus owned vehicles in recent years may provide some protection
against the historical trends of decreased motor vehicle purchasers during
periods of economic downturns.
Operating Strategy
Our operating strategy is to continually increase customer satisfaction
and loyalty and to increase operating efficiencies. Key elements of this
operating strategy are as follows:
Focus on Used Vehicle Sales. A key element of our operating strategy is
to focus on the sale of used vehicles. In 2000, approximately 12.6 million used
cars were sold retail by dealers, over 13.5% more than the number of such sales
in 1999. Sales of used vehicles are generally more profitable than sales of new
vehicles. For the industry as a whole, average gross profit on used vehicles was
10.9%, compared with new vehicle average gross profits of 6.1%. Our dealerships
average gross profit on used vehicles was approximately 18.1% and on new
vehicles was
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approximately 8.2%. We believe that the New York metropolitan area is one of the
largest markets for used car sales in the United States and that we sell more
used cars in the New York metropolitan area than any other automobile dealership
or dealership group. We strive to attract customers and enhance buyer
satisfaction by offering multiple financing and leasing options and competitive
warranty products on every used vehicle we sell. We believe that a well-managed
used vehicle operation affords us 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, we acquire used vehicles from
trade-ins and a variety of sources nationwide, including direct purchases from
individuals and fleets, and manufacturers' and independent auctions. We believe
that the price at which we acquire used vehicles, our success in providing
non-recourse financing to prospective buyers who may otherwise find it difficult
to obtain financing and selling high priced quality used cars are the most
significant factors contributing to the profitability of our used vehicle
operations. We believe that, because of the large volume of used vehicles that
we sell each month and the more than 29 years of experience in the used vehicle
business of our Chief Executive Officer, we are able to identify quality used
vehicles, assess their value, purchase them for a favorable price and sell them
profitably to a diverse customer base.
Major World Branding. We have established our 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 our
efforts in our regional acquisition strategy and our accomplishments in used car
sales through our dealerships in the New York metropolitan area.
Provide a Broad Range of Products and Services. We offer 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 our
various locations, we offer, collectively, twelve (12) makes of new vehicles-
Chevrolet, Chrysler, Plymouth, Dodge, Jeep, Subaru, Kia, Lincoln, Mercury,
Nissan, Mazda and Daewoo. In addition, we sell a variety of used vehicles at a
wide range of prices. We believe 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 manufacturer and helps reduce our
exposure to supply problems and product cycles.
Operate Multiple Dealerships in Target Market. Our goal is to become the
leading automotive dealer in our target market, the New York metropolitan area,
by operating multiple dealerships in that market. To accomplish this, we seek to
acquire new franchises at favorable prices in our existing market and to expand
our existing franchises to new markets. This strategy enables us to achieve
economies of scale in advertising, inventory management, management information
systems and corporate overhead.
Emphasize Sales of Higher Margin Products and Services. We generate
substantial incremental revenue and achieve increased profitability through the
sale of certain ancillary products and services such as financing, extended
service contracts and vehicle maintenance. We provide our employees with special
training and compensate them, in part, with commissions based on their sales of
such products and services. We believe that these ancillary products and
services enhance the value of purchased or leased vehicles and increase customer
satisfaction.
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Employ Professional Management Techniques. We employ professional
management techniques in all aspects of our operations, including information
technology, employee training, profit-based compensation and cash management.
Each of our dealership locations, our centralized used vehicle operation and our
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. We compensate our general managers based, in
part, on the profitability of the operations they control rather than on sales
volume. Our senior management meets weekly with our 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. We believe that the application of our professional
management techniques provides us with a competitive advantage over other
dealerships and dealership groups.
Internet Sales and Other Innovations. We believe that we have achieved a
competitive advantage through the use of technology. Our dealerships were one of
the first to provide customers with an 800 telephone number and price quotations
via facsimile. During the past several years, the Major Dealer Group has also
increased 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. Additionally, we presently enable our customers to obtain credit
approvals over the telephone via a customized telephone interactive voice
response system, that operates 24 hours per day, seven days per week, in nine
different languages and permits 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. We continue to seek to take advantage of
new innovations that will enable us to provide better customer service and
enhance customer satisfaction.
Target Sales to Ethnic Groups. Because the New York metropolitan area,
our primary market, is ethnically diverse, we target our selling efforts to a
broad range of ethnic groups. We employ a multi-lingual sales force, advertise
in ethnic media, intend to further expand our electronic-related media to
accommodate multiple languages and also offer pre-paid international telephone
calling time.
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, we believe
are underperforming and possess either the sole franchise of a major automobile
manufacturer or a significant share of new vehicle sales in each targeted
market. In evaluating potential acquisition candidates, we 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. We believe
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.
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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 and 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
an 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 a closing
of an acquisition to enable us to accelerate the implementation of our operating
strategy after a 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 our management team has considerable experience in
evaluating potential acquisition candidates, determining whether a particular
dealership can be successfully integrated into our existing operations and
implementing our operating strategy to improve our performance and profitability
following an acquisition. We also believe that an increasing number of
acquisition opportunities will become available to us. See "Industry Background"
and "Proposed Acquisitions."
Dealership Operations
We own and operate seven (7) automobile franchises at four (4) locations
in Long Island City, New York, three (3) franchises in three (3) locations in
Hempstead, New York and two (2) franchises in two (2) locations in Orange, New
Jersey. We conduct our parts and service business and our used vehicle business
from three additional locations in Long Island City. We offer the following
twelve (12) makes of new vehicles: Chevrolet, Chrysler, Plymouth, Dodge, Jeep,
Subaru, Kia, Lincoln, Mercury, Mazda, Nissan and Daewoo. 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 (2)
managers, one for parts and one for service. Each manager meets with our senior
management on a weekly basis.
Bruce Bendell, our Chief Executive Officer and Chairman, James Wallick,
our President and Chief Operating Officer, and Harold Bendell, a key employee,
are responsible for management of our 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 respective 1997A-Major Automotive Group Series of Preferred Stock shares and
his respective 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. We sell a complete product line of cars, sport
utility vehicles, minivans and light trucks manufactured by Chevrolet, Chrysler,
Plymouth, Dodge, Jeep, Subaru, Kia, Lincoln,
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Mercury, Nissan, Mazda and Daewoo. For the year ended December 31, 2000, our
dealerships sold new vehicles generating total sales of approximately $132.5
million, which constituted approximately 41.2% of our total revenues. Our gross
profit margin on new vehicle sales for the year ended December 31, 2000 was
approximately 8.2%, which is significantly higher than the industry average of
6.1%. The relative percentages of our new vehicle sales among makes of vehicles
for the year ended December 31, 2000 was as follows:
Percentage of
Manufacturer New Vehicle Sales
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Chevrolet 42.6%
Dodge 19.4%
Chrysler, Plymouth and Jeep 13.7%
Subaru and Kia 8.6%
Lincoln-Mercury 6.3%
Mazda 5.8%
Nissan and Daewoo 3.6%
The following table sets forth information with respect to our new
vehicle sales for the year ended December 31, 2000:
NEW VEHICLE SALES
(dollars in millions)
Unit Sales 5,369
Sales Revenue $132.5
Gross Profit $ 10.8
Gross Profit Margin 8.2%
We purchase substantially all of our 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, we post the manufacturer's suggested retail price on
all new vehicles, but the final sales price of a new vehicle is typically
determined by negotiation between the dealership and the purchaser.
In addition to our dealership operations, we have a distributorship
agreement with General Motors pursuant to which we distribute new vehicles
manufactured by General Motors to countries of the former Soviet Union. We
generally receive a deposit on the purchase price of the vehicle from the local
dealer and release 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. We intend to expand our distributorship operation to former countries of
the Soviet Union in the future to include the sale of used vehicles.
Used Vehicle Sales. We offer a wide variety of makes and models of used
vehicles, retail and wholesale, for sale. For the year ended December 31, 2000,
we sold 13,291 used vehicles generating total sales of approximately $178.0
million, which constituted approximately 55.4% of our total revenues. Our gross
profit margin on used vehicle sales for the year ended December 31, 2000 was
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approximately 18.1%, as compared with the industry average of 10.9%. We are one
of the largest sellers of used vehicles in the New York metropolitan area.
Our primary location for used vehicle sales is at a single site at Long
Island City, New York. We also sell used vehicles, however, at dealerships
located in Hempstead, New York and Orange, New Jersey. We acquire the used
vehicles we sell 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.
We believe 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 our used
vehicle sales for the year ended December 31, 2000:
USED VEHICLE SALES
(dollars in millions)
Unit Sales 13,291
Sales Revenue $178.0
Gross Profit $ 32.2
Gross Profit Margin 18.1%
Parts and Service. We provide parts and service for new and used
vehicles that we sell, and also service other makes of vehicles. For the period
ended December 31, 2000, our parts and service operations generated total
revenues of approximately $11.0 million, which constituted approximately 4.3% of
our total revenues at a gross profit margin of approximately 50.9%.
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, we believe that repair work
will increasingly be performed at dealerships that have the sophisticated
equipment and skilled personnel necessary to perform the repairs.
We consider our parts and service departments to be integral to our
customer service efforts and a valuable opportunity to strengthen customer
relations and deepen customer loyalty. We attempt to notify owners of vehicles
purchased at our dealerships when their vehicles are due for periodic service,
thereby encouraging preventative maintenance rather than post-breakdown repairs.
Our parts and service business provides a stable, recurring revenue
stream to our dealerships. In addition, we believe 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. We believe
that this revenue stream helps mitigate the effects of a downturn in the
new-vehicle sales cycle.
We do not operate a body shop, but instead contract with third parties
for body repair work.
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The following table sets forth information with respect to our sales of
parts and services for the year ended December 31, 2000:
SALES OF PARTS AND SERVICES
(dollars in millions)
Sales Revenue $11.0
Gross Profit $ 5.6
Gross Profit Margin 50.9%
Vehicle Financing. We provide a wide variety of financing and leasing
alternatives for our customers. We believe that our customers' ability to obtain
financing at our dealerships significantly enhances our ability to sell new and
used vehicles. We believe that our ability to provide our customers with a
variety of financing options provides us with an advantage over many of our
competitors, particularly smaller competitors that do not have sufficient sales
volumes to attract the diversity of financing sources available to us.
In most instances, we assign our vehicle finance contracts and leases to
third parties, instead of directly financing vehicle sales or leases, which
minimizes our credit risk. We typically receive a finance fee or commission from
the third party, which provides the financing. In certain limited instances in
which we determine that our credit risk is manageable, estimated by us to be
less than 1% of our vehicles sales and leases, we directly finance the purchase
or lease of a vehicle. In such instances, we bear the credit risk that the
customer will default, but will have the right to repossess the vehicle upon
default. We maintain relationships with a wide variety of financing sources,
including commercial banks, automobile finance companies and other financial
institutions. We also utilize the financial services of our subsidiary, Major
Fleet, which purchases less than 1% of our leases and none of our finance
contracts. See "Leasing Operations."
Sales and Marketing
We believe that marketing and advertising are significant to our
operations. As is typical in our industry, we receive a subsidy for a portion of
our expenses from the automobile manufacturers with which we have franchise
agreements. The automobile manufacturers also assist us by providing us with
market research to develop our own advertising.
Our marketing effort is conducted over numerous forms of media including
television, newspaper, direct mail, billboards and the Internet. Our advertising
seeks to promote our image as a reputable dealer offering quality products at
affordable prices and with attractive financing options. Each of our dealerships
periodically offers price discounts or other promotions to attract additional
customers. The individual dealerships' promotions are coordinated by us and,
because we own and operate several dealerships in the metropolitan New York
market, we realize cost savings through volume discounts and other media
concessions.
Our operations have been fostered by our ability to achieve economies of
scale with respect to our marketing and advertising. Nationwide, the average
cost of marketing and advertising per new vehicle sold in 2000 was approximately
$448. Although advertising costs in the New York metropolitan area are generally
higher than the national average, our cost of marketing and
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advertising per vehicle sold is approximately equal to the national average.
Combined with a substantial increase in media exposure, which resulted in
increased volume, our costs show the economies that we have achieved. These
lower costs result from the fact that we: (i) have favorable contracts with four
major area daily newspapers; (ii) advertise in lower-cost niche markets (such as
local ethnic markets, employee purchase programs and discount buying services);
and (iii) utilize telephonic marketing and electronic marketing via services
such as the Internet.
Relationships with Manufacturers
Each of our 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, our dealership
agreement with General Motors, with respect to our Chevrolet dealership,
provides General Motors with a right of first refusal to purchase such a
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.
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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,
we compete with other new automobile dealers that operate in the New York
metropolitan area. Some competing dealerships offer some of the same makes as
our 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, we compete 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, we compete with used car "superstores" that have
inventories that are larger and more varied than ours.
We believe 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. We believe that our dealerships are competitive in
all of these areas.
In addition, we, due to the size and number of automobile dealerships we
own and operate, are larger than most of the independent operators with which we
compete. Our size has historically permitted us to attract experienced and
professional sales and service personnel and has provided us 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.
We believe that our 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.
We also compete though our Internet vehicle purchasing services against
a variety of Internet and traditional vehicle purchasing services and automotive
broker. Entities which maintain similar commercial Web sites include
Autoweb.com, Autobytel.com, Carsdirect.com, Cendant Membership Service, Inc.'s
AutoVantage and Microsoft Corporation's Carpoint and Stoneage Corporation.
Additionally, we compete indirectly against vehicle brokerage firms and affinity
programs offered by several companies, including Costco Wholesale Corporation
and Wal-Mart Stores, Inc. Moreover, our 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
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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.
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, our 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, our 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, we are subject to federal, state and local
environmental laws governing health, environmental quality, and remediation of
contamination at facilities we operate or to which we send 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.
Leasing Operations
In October 1996, we acquired Major Fleet & Leasing Corp. ("Major
Fleet"). Major Fleet has historically provided lease financing solely for motor
vehicles. Major Fleet typically arranges for the 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 our dealerships, in almost all
cases, Major Fleet will acquire the vehicle from us 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 us.
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 our credit risk. In these instances,
Major Fleet typically receives a finance fee or commission from the third party
who provides the financing. In certain instances, Major Fleet directly finances
the lease of a vehicle. When Major Fleet provides lease financing, it bears the
credit risk that its customers will default in the payment of the lease
installments. In order to minimize its risk of loss, Major Fleet carefully
evaluates the credit of its lease customers. It also requires that its lease
customers have adequate collision and liability insurance on the leased vehicle
and that Major Fleet be named as loss payee and additional insured on the
customer's collision and liability insurance policies. Major Fleet does not
finance the purchase of the vehicles, so if a customer desires purchase
financing, the customer will need to obtain financing from a third party;
however, as discussed above, Major Fleet will broker financing contracts.
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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 Five Towns Nissan and Five Towns Kia. This dealership is 80% owned
by our Chief Executive Officer and Chairman, Bruce Bendell. This dealership has
three separate showroom locations. Nicholas Guadagno is the President and 20%
shareholder of Major of the Five Towns. Mr. Guadagno's interest is in the
process of being purchased by Bruce Bendell, which purchase must be completed
before any transaction may occur with us.
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 Bruce Bendell and John
McDermott, a 33% owner. The related real estate owned jointly by Bruce Bendell
and Harold Bendell is undergoing a revision in corporate structure. After this
restructuring takes place, a fairness opinion is to be obtained from an
independent appraiser before a sale price can be determined.
We have terminated an agreement to purchase 80% of B&L Auto Group Inc.,
a Bronx, New York-based dealer. This dealership group includes Toyota, Subaru
and Kia franchises, and has subsequently been acquired by Harold Bendell.
An agreement has been reached, and approval has granted by Suzuki, to
acquire a Suzuki franchise at a certain location in Hempstead, New York from
Hempstead F.S. Motors, Ltd. Approval, however, is required from Suzuki for a
different location for the franchise before a final price can be determined.
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.
DISCONTINUED OPERATIONS
In November 2000, we announced our intention to divest our
non-automotive operations by way of sale, merger, consolidation or otherwise by
the most economically viable means, in order to maximize shareholders' value
from these operations and to maintain our focus on the operation and
consolidation of our retail automotive dealerships. 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, for the year ended December 31, 2000 was
approximately $23.7 million, compared with a loss from discontinued operations
of $4.9 million for the year ended December 31, 1999. Such loss includes, net of
taxes, the actual operating costs of those operations of approximately $2.5
million, plus a one-time, non-cash, charge of approximately $19.2 million to
write-down the assets associated with those operations to their
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estimated net realizable value and a charge of $2.0 million to accrue an
estimate of operating and other costs to be incurred until the divestiture has
been completed.
In partial fulfillment of such intent, in February 2001, we completed an
asset sale of our Richmond, Virginia based Internet Creations, Inc. (d/b/a/
Internet Connections) to Access Technology, Inc. ("Access"). The purchase price
for the assets was $320,000, of which $47,000 was paid at the closing, and of
which $273,000 was evidenced by a senior secured promissory note, bearing
interest at a rate of nine percent (9%) per annum, payable in equal installments
every three months for thirty-six (36) months beginning one year following the
closing. As collateral security for the due payment and performance of all
indebtedness, liabilities and obligation under the note, Access granted a lien
and security interest in all of its assets. See "Recent Developments."
Additionally, in March 2001, we sold our majority interest in our IG2,
Inc. subsidiary (f/k/a/ Computer Business Sciences, Inc.), which, at the time of
sale, consisted solely of IG2, Inc., a Florida corporation, incorporated as
Reynard Service Bureau, Inc., through a stock purchase to Global Communications
of NY, Inc. ("Global"). The purchase price consisted of a senior subordinated
secured promissory note in the amount of approximately $1,800,000 and a certain
number of Series A Preferred Stock of Global, equal to 10% of the capital stock
of Global as of the closing date. The subordinated note bears interest at a rate
of eight and one-half percent (8-1/2%) per annum, payable in equal payments
every three months for forty-eight (48) months beginning on the first
anniversary of the closing. The indebtedness evidenced by the subordinated note
and the payment of the principal and interest thereof is senior to, and has
priority in right of payment over, any and all other indebtedness of Global,
except in connection with any extension of credit to Global by equipment vendors
(including loans, lines of credit, guarantees or other financing arrangements).
As collateral security for the due payment and performance of all indebtedness,
liabilities and obligations under the subordinated note, Global and IG2 granted
a lien on and security interest in all of their assets, subject to a senior lien
by holder(s) of senior indebtedness, as well pledged the interest sold in IG2.
See "Recent Developments."
We are also currently in negotiations to divest ourselves of our
remaining technological subsidiaries, including C.B.S. Computer Business
Sciences Ltd. (Israel), 786710 Ontario Ltd., ICS Globe, Inc. and International
Calling Services, Inc.
Arrangements with Nissko
In November 1999, IG2 entered an agreement (the "Nissko Agreement") with
Joseph Koren, Chamuel Livian, Avraham Nissanian and Robert Rimburg (the "Nissko
Group") and Nissko Telecom Ltd. to purchase their interest in a joint venture
which is a master agent to provide the Telephony Business (defined below).
As a result of this transaction with our former subsidiary, we 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. If by May 30, 2001 we have not caused the common stock of IG2 to become
publicly traded, the Nissko Group will receive the accrued 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 shares, if any, are to remain in escrow until November 30,
2001. In the event we have caused the common stock of IG2 to become publicly
traded prior to May 30, 2001 and the
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net proceeds of the sale of the IG2 Shares by the Nissko Group do not equal a
total of $2,500,000, or, if the IG2 Shares have not been sold, and the value of
such IG2 Shares does not equal at least $2,500,000, then additional shares, if
any, already in escrow, 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,
IG2 secures a bona fide third party purchaser of the IG2 Shares for a cash
purchase price of $2,500,000, or a proportional amount of the IG2 Shares, and
any member of the Nissko Group rejects such offer, then no additional 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 IG2 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 liabilities of IG2 or related to the purchased
liabilities, as described above. In the event that IG2 has exhausted all options
and payment remains due, then the escrowed shares are to be sold to satisfy the
payment of any such obligations.
In December 1999, IG2 entered an agreement with Dr. Roland Nassim and
Roberto Nassim where it agreed to purchase the Telephony Business (long distance
telephone service, internet service, data and any and all other telephony
services) which includes all Telephony Business in Venezuela, Brazil, Chile,
Mexico, Argentina and the United States and all rights to any and all equipment
related to the Telephony Business in exchange for 25,000 shares of our common
stock, pre-June-1999-split ("Pre-Split Stock") to be issued in the name of Dr.
Nassim and 40,000 shares of CBS, now IG2, to be issued in the name of Roberto
Nassim.
IG2 guaranteed the value per share of the Pre-Split Stock to be no less
than $500,000 ($20.00 per share, pre-split) thirteen months from December 1,
1999 ("Guaranteed Value"). If the closing price per share of our common stock on
the trading day preceding January 1, 2001 is less than the Guaranteed Value (the
"Closing Price"), the difference between the Closing Price per share (adjusted
for the 3-for-2 June 1999 stock split) multiplied by the Pre-Split Stock and the
Guaranteed Value (the "Shortfall") will be paid, at the option of IG2, either in
cash or in shares of our common stock whose approximate value is equal to the
Shortfall. IG2 shall not be released from its obligations as provided in such
agreement. We are currently negotiating the settlement of such Shortfall either
in cash or in shares of our common stock.
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 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 served 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%
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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.
Since our decision to discontinue our technology operations, we are
currently in negotiations with Mr. Hardge to renegotiate the transaction entered
into in June 1999, with the intent of returning all rights acquired by us to Mr.
Hardge and canceling all of our obligations under the agreement.
Intellectual Property
We have 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 also 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).
Currently, we have two U.S. Trademark registrations to the names
"Talkie(R)" and "Talkie Globe(R)," and three pending U.S. Trademark applications
to the names "BCS," Knock-Out 112"and "Browse N Talk." We have also registered
the name "Talkie" as a trademark in Canada.
In connection with our divestiture of our IG2 subsidiary, we have
subsequently relinquished our rights to a U.S. Trademark registration to the
name "IG2(R) and three pending U.S. Trademark applications to the names "IG2
Networks," "IG2 Communications," and "NAICS."
RECENT DEVELOPMENTS
Financing Transactions
On June 24, 1999, we entered into an agreement with three investors,
pursuant to which we had 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 "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. Under the terms of the Purchase Agreements, we issued
adjustable warrant in connection with the purchase of our common stock, which
entitled the purchasers 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
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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 were satisfied, we and the purchasers
would have been entitled, upon satisfaction of certain milestones to be
established with respect to the third tranche, 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 subsequently registered
the shares purchased and the shares underlying the warrants issued to
purchasers. With respect to the first tranche, adjustable warrants issued
pursuant to the Purchase Agreements, based on the market price of the various
measurement dates, we issued an aggregate of 273,495 shares of our common stock.
The calculation of amounts due pursuant to the adjustable warrants issued in the
second tranche resulted in a potential liability to us for approximately 4.7
million shares or we could elect to issue only the minimum number of 393,587
shares plus a cash payment of $6,625,016. We entered into a Redemption Agreement
and promissory note with the investors whereby we would issue the minimum number
of shares and make cash payments aggregating $6,000,000 to be paid in
installments of varying amounts over time. Accordingly, we issued 393,587 shares
of our common stock on August 28, 2000 and made aggregate cash payments of
$4,750,000 through December 31, 2000, and owed a balance of $1,250,000 at that
date. Pursuant to the terms of the note, this balance is due to be paid in
aggregate installments of $250,000 in each of five months beginning in February
2001.
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., represented its Internet division and cable
divisions, respectively. Since our decision to discontinue our technology
operations, we have recently completed an asset sale of our subsidiary Internet
Creations, Inc. (d/b/a/ Internet Connections) to Access Technology, Inc. and
integrated operations of Cars into those of Major Auto.
Asset Sale of Internet Creations, Inc.
In February 2001, we completed an asset sale of our Richmond, Virginia
based Internet Creations, Inc. (d/b/a/ Internet Connections) to Access
Technology, Inc. The purchase price for the assets was $320,000, $47,000 of
which was paid at the closing, and $273,000 of which was evidenced by a senior
secured promissory note. See "Discontinued Operations."
Sale of IG2, Inc. Interest
In March 2001, we sold our majority interest in our IG2, Inc. subsidiary
(f/k/a/ Computer Business Sciences, Inc.), which, at the time of sale, consisted
solely of IG2, Inc., a Florida corporation, incorporated as Reynard Service
Bureau, Inc., through a stock purchase to Global Communications of NY, Inc. The
purchase price consisted of a senior subordinated secured promissory note in the
amount of approximately $1,800,000 and a certain number of Series A
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Preferred Stock of Global, equal to 10% of the capital stock of Global as of the
closing date. See "Discontinued Operations."
RISK FACTORS
The following risk factors should be reviewed carefully, in conjunction
with the other information in this Form 10-K 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-K 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 us 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 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. The
Company may become dependent on additional manufacturers in the future as a
result of its acquisition strategy and changes in the Company's sales mix.
As is typical of franchised new vehicle dealers, the success of our
franchises depend 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:
- financial condition;
- marketing strategy;
- vehicle demand;
- production capabilities;
- management;
- events such as labor strikes; and
- negative publicity, including safety recalls of a particular vehicle
model.
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.
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Historically, manufacturers have exercised significant control over
dealerships through the terms and conditions of the franchise agreements
pursuant to which our 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, our acquisitions have been approved and we have 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 we will not be materially
adversely affected by other limitations.
The franchise agreements between us 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. Each of these
agreements includes provisions for the termination or non-renewal of the
manufacturer-dealer relationship for a variety of causes including any
unapproved change of ownership or management and other material breaches of the
franchise agreement. 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 have 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:
- general and local economic conditions;
- taxes;
- consumer confidence;
- interest rates;
- credit availability; and
- the level of personal discretionary income.
Although we believe that our access to new and used vehicles over a wide
range of price points provides us some measure of stability in a potentially
cyclical market, a material decrease in vehicle sales from the historical level
of vehicle sales achieved by us would materially adversely affect our business,
financial condition and results of operations.
THE AUTOMOTIVE INDUSTRY IS SUBJECT TO SEASONAL VARIATIONS.
The automobile industry is subject to seasonal variations in revenues.
Demand for vehicles is generally lower during the winter months than in other
seasons, particularly in regions of the United States which experience
potentially severe winters. Accordingly, revenues and operating results may be
lower in our first and fourth quarters than in our second and third quarters.
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IMPORTED PRODUCTS MAY AFFECT OUR OPERATIONS.
A portion of our new vehicle business involves the sale of vehicles,
parts or vehicles composed of parts that are manufactured outside the United
States. As a result, our operations will be subject to customary risks of
importing merchandise, including fluctuations in the value of currencies, import
duties, exchange controls, trade restrictions, work stoppages and general
political and economic conditions in foreign countries. The United States or the
countries from which our products are imported may, from time to time, impose
new quotas, duties, tariffs or other restrictions, or adjust presently
prevailing quotas, duties or tariffs, which could affect our operations and our
ability to purchase imported vehicles and/or parts.
OUR AUTOMOBILE OPERATIONS ARE GEOGRAPHICALLY CONCENTRATED AND SUBJECT TO LOCAL
ECONOMIC CONDITIONS.
All of the 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:
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- incurring significantly higher capital expenditures and operating
expenses;
- failing to assimilate the operations and personnel of the acquired
dealerships;
- disrupting our ongoing business;
- dissipating our limited management resources;
- failing to maintain uniform standards, controls and policies; and
- impairing relationships with employees and customers as a result of
changes in management.
There can be no assurance that 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 EXIST RISKS RELATING TO THE FAILURE TO MEET MANUFACTURER CSI SCORES.
Many manufacturers attempt to measure customers' satisfaction with
automobile dealerships through a CSI, or customer satisfaction index, rating
system. These manufacturers may use a dealership's CSI scores as a factor in
evaluating applications for additional dealership acquisitions and participation
by a dealership in incentive programs. The dealerships operated by us currently
meet or exceed their manufacturers' CSI standards. However, there can be no
assurance that either our dealerships or other subsequently acquired dealerships
will continue to meet such standards. Moreover, from time to time, the
components of the various manufacturer CSI scores have been modified and there
is no assurance that such components will not be further modified or replaced by
different systems in the future, which make it more difficult for our
dealerships to meet such standards.
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 Chief Executive Officer and Chairman of the
Board, and James Wallick, our President and Chief Operating Officer. The loss of
the services of these, or certain other key employees, would likely have a
material adverse effect on our business. Mr. Bendell is 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 may 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 Chief Executive Officer and controlling stockholder, Bruce
Bendell, and/or his brother, Harold
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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 Bendell 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: (i) disposition of any of the
Major Auto dealerships; (ii) acquisition of new dealerships; and
(iii) 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).
- We are currently negotiating a transaction with Bruce Bendell
concerning our acquisition of Major of the Five Towns, a dealership
which will be wholly-owned by Bruce Bendell.
- We are currently negotiating a transaction with Bruce Bendell
concerning our acquisition of Major Motors of Pennsylvania, a Hyundai
dealer in Stroudsberg, Pennsylvania, of which Bruce Bendell is a 67%
owner.
- In March 2001, Harold Bendell acquired B&L Auto Group, Inc., a Bronx,
New York based-dealer, which includes Toyota, Subaru and Kia
franchises.
These transactions may involve situations in which Bruce Bendell's
interests as our officer, director and majority shareholder 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.
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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.
The automobile dealership business is highly competitive. Our
competitors include:
- automobile dealers;
- private sellers of used vehicles;
- used vehicle dealers;
- other franchised dealers;
- service center chains; and
- independent service and repair shops.
Gross profit margins on the sale of new vehicles have been decreasing
over 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 ours. Some of our
competitors may be larger, have access to greater financial resources and be
capable of operating on smaller gross margins than we do. 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.
GOVERNMENT REGULATION AND ENVIRONMENTAL REGULATION COMPLIANCE COSTS MAY
ADVERSELY AFFECT OUR PROFITABILITY.
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 may 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
service operations in particular, our 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;
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- degreasing agents; and
- gasoline and diesel fuels.
Accordingly, we are subject to federal, state and local environmental
laws governing health, environmental quality, and remediation of contamination
at facilities we operate or to which we 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.
WE FACE RISKS IN OUR INTERNATIONAL OPERATIONS.
We intend to expand our new and used vehicle purchasing service to
foreign markets 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:
- changes in political conditions;
- regulatory requirements;
- potentially weaker intellectual property protections;
- tariffs and other trade barriers;
- fluctuations in currency exchange rates;
- potentially adverse tax consequences;
- difficulties in managing or overseeing foreign operations;
- seasonal reductions in business activities during summer months in
Europe and other areas; and
- 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.
WE FACE RISKS IN CONNECTION WITH LEGAL PROCEEDINGS IN WHICH WE ARE INVOLVED.
We are subject to a number of lawsuits including the following: (i)
Stephen B. Wechsler, et al. v. Fidelity Holdings, Inc., et al.; (ii) In re:
Fidelity Holdings Securities Litigation; (iii) S & L Telecom, Inc., Jacob
Steinmetz and Joseph Luria v. Fidelity Holdings, Inc. and Doron Cohen; (iv) Dale
A. Harris and Fouad Tobagi v. Computer Business Sciences, Inc., et al; (v)
RealTech Systems Corporation v. IG2, Inc. v. Fidelity Holdings, Inc.; (vi)
Fidelity Holdings, Inc., Computer Business
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Sciences, Inc. and 786710 Ontario, Ltd. v. Michael Marom and M.M. Telecom Corp.;
(vii) Daniel Tepper v. Fidelity Holdings, Inc; Fidelity Holdings, Inc. (Third
Party Plaintiff) v. InvestAmerica et al.; (viii) Russell Reynolds, Inc. v.
Fidelity Holdings Inc.; (ix) MCI International, Inc. v. Schiano Bros. Inc.;
Schiano Bros. Inc. (Third Party Plaintiff) v. Computer Business Sciences Inc.
(Third Party Defendant); (x) Waterview Resolution Corp. f/k/a Colonial Pacific
Leasing Corporation v. Schiano Bros. Inc. and Ronald Tiongson; Schiano Bros.
Inc. and Ronald Tiongson (Third Party Plaintiffs) v. Fidelity Holdings, Inc.,
Taylor Financial Services et al. (Third Party Defendants); and (xi) Ronald
Shapss Corporate Services, Inc. v. Fidelity Holdings, Inc. While we believe that
we have substantial defenses to the asserted claims and intend to vigorously
defend these suits, judgments against us with respect to these actions could
have a material adverse effect on our financial condition. See "Legal
Proceedings."
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:
- Autoweb.com;
- Autobytel.com;
- Carsdirect.com;
- Cendant Membership Service, Inc.'s AutoVantage; and
- Microsoft Corporation's Carpoint and Stoneage Corporation.
Some of these recent market entrants may have greater financial,
marketing and personnel resources and/or lower overhead or sales costs than the
Company. 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, our 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. Further,
there can be no assurance that our strategy will be more effective than the
strategies of our competitors.
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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 depend in part 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 may 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. There can be no assurances 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
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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.
We face risks associated with government regulation and legal
uncertainties associated 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:
- online content;
- user privacy;
- taxation;
- access charges;
- liability for third-party activities; and
- 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 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.
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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. Bruce Bendell is the beneficial owner of approximately 30.0% 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.) In addition, our former President and Chief Executive Officer, Mr. Doron
Cohen, is the beneficial owner of approximately 10.3% of our common stock.
Pursuant to a Separation and Release Agreement with us dated August 8, 2000, Mr.
Cohen is required to take all necessary steps to cause all of these shares to be
voted in accordance with the recommendation of the majority of our Board of
Directors, provided that such majority includes a majority of our non-employee
directors. This concentration of voting power may 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 the Company. We
are also subject to the provisions of the Nevada Revised Statutes 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 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.
Moreover, at our annual meeting, our Board of Directors and majority
shareholders approved amendments to our Articles of Incorporation to provide for
the classification of our Board of Directors into three classes of directors
with staggered terms of office. One class of directors holds office initially
for a term expiring at the 2001 annual meeting; a second class of directors
holds office initially for a term expiring at the 2002 annual meeting; and a
third class of directors holds office initially for a term expiring at the 2003
annual meeting. At each annual meeting following this initial classification and
election, the successors to the class of directors whose terms expire at that
meeting are elected for a term of office to expire at the third succeeding
annual meeting after their election and until their successors have been duly
elected and qualified. This classified board amendment will significantly extend
the time required to effect a change in control of our Board of Directors and
may discourage hostile takeover bids for us. It will take at least two annual
meetings for even a majority of shareholders to effect a change in control of
our Board of Directors, because only a minority of the directors will be elected
at each meeting. The classified board proposal is designed to assure continuity
and stability in our Board of Directors' leadership and policies. Because of the
additional time required to change control of our Board of Directors, the
classified board amendment tends to perpetuate present management. Without the
ability to obtain immediate control of our Board of Directors, a takeover bidder
will not be able to take action to remove other impediments to its acquisition
of us. Because the classified board amendment increases the amount of time
required for a takeover bidder to obtain control of us without the
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cooperation of our Board of Directors, even if the takeover bidder were to
acquire a majority of our outstanding stock, it tends to discourage certain
tender offers, perhaps including some tender offers that shareholders may feel
would be in their best interests. The classified board proposal also makes it
more difficult for the shareholders to change the composition of our Board of
Directors even if the shareholders believe such a change would be desirable.
Additionally, at our annual meeting, our Board of Directors and majority
shareholders approved amendments to our Articles of Incorporation to increase
the number of authorized shares of Common Stock from 50,000,000 to 100,000,000.
The amendment authorized sufficient additional shares of our Common Stock to
provide us with the flexibility to make such issuances from time to time for any
proper purpose approved by our Board of Directors, including issuances to effect
acquisitions or raise capital and issuances in connection with future stock
splits or dividends, without the necessity of delaying such activities for
further stockholder approval except as may be required in a particular case by
our charter documents, applicable law or the rules of any stock exchange or
other system on which our securities may then be listed. The amendment, however,
could have an anti-takeover effect, although that was not its intention. For
example, if we were the subject of a hostile takeover attempt, we could impede
the takeover by issuing shares of our Common Stock, thereby diluting the voting
power of the other outstanding shares and increasing the potential cost of the
takeover. The availability of this defensive strategy to us could discourage
unsolicited takeover attempts, thereby limiting the opportunity for our
stockholders to realize a higher price for their shares than is generally
available in the public markets.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Future sales of shares of common stock by existing shareholders under
Rule 144 of the Securities Act of 1933, as amended (the "Securities Act") or
through the exercise of outstanding registration rights or the issuance of
shares of our 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 our common stock is 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 our common stock prevailing from time to time.
Holders of our outstanding options and warrants are likely to exercise
them when, in all likelihood, we can 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,
registration statements covering the common stock described under "Business -
Recent Developments - Financing Transactions." Castle Trust and Management
Services Limited, as Trustee under the Millennium I 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
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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. Bruce Bendell converted 400,000 shares of 1997
Major Preferred into 1,000,000 shares of common stock.
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 our
common stock are subject to the preferences for dividends on our preferred
stock. Any future dividends will depend upon our earnings, if any, our financial
requirements, and other factors.
WE MAY BE SUBJECT TO THE SECURITIES ENFORCEMENT AND PENNY STOCK REFORM ACT OF
1990.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure and documentation related to the market for penny stock
and for trades in any stock defined as a penny stock. Unless we can acquire
substantial assets and trade at over $5.00 per share on the bid, it is more
likely than not that our securities, for some period of time, would be defined
under that Act as a "penny stock." As a result, those who trade in our
securities may be required to provide additional information related to their
fitness to trade our shares. Also, there is the requirement of a broker-dealer,
prior to a transaction in a penny stock, to deliver a standardized risk
disclosure document that provides information about penny stocks and the risks
in the penny stock market. Further, a broker-dealer must provide the customer
with current bid and offer quotations for the penny stock, the compensation of
the broker-dealer and its salesperson in the transaction, and monthly account
statements showing the market value of each penny stock held in the customer's
account. These requirements present a substantial burden on any person or
brokerage firm who plans to trade our securities and would thereby make it
unlikely that any liquid trading market would ever result in our securities
while the provisions of this Act might be applicable to those securities.
WE MAY BE SUBJECT TO BLUE SKY COMPLIANCE.
The trading of penny stock companies may be restricted by the blue sky
laws of several states. We are aware that a number of states currently prohibit
the unrestricted trading of penny stock companies absent the availability of
exemptions, which are in the discretion of the states' securities
administrators. The effect of these states' laws would be to limit the trading
market, if any, for our shares and to make resale of shares acquired by
investors more difficult.
OUR COMMON STOCK MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET.
Our common stock has been trading at below $1.00 per share for more
than thirty consecutive days. We received a letter from Nasdaq advising us that
our common stock had not met Nasdaq's minimum bid price closing requirement for
thirty (30) consecutive trading days and that, if we were unable to demonstrate
compliance with this requirement for ten (10) consecutive trading days during
the ninety (90) calendar days ending February 20, 2001, our common stock would
be de-listed at the opening of business on February 22, 2001. We, however,
applied to Nasdaq for a hearing, and the de-listing was stayed during the
hearing period. The hearing was held on March 22, 2001. As a result of the
hearing, Nasdaq determined to continue listing of our common stock on the Nasdaq
National Market provided that on or before May 4, 2001, we demonstrate a closing
bid price of at least $1.00 per share
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and, immediately thereafter, a closing bid price of at least $1.00 per share for
a minimum of ten (10) consecutive trading days. If a delisting were to occur,
our common stock would trade on the OTC Bulletin Board or in the "pink sheets"
maintained by the National Quotation Bureau, Inc. Such alternatives are
generally considered to be less efficient markets, and our stock price, as well
as the liquidity of our common stock, may be adversely impacted as a result.
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ITEM 2. PROPERTIES
We own an approximately 12,000 square foot facility consisting of office
and automobile showroom space in Long Island City, New York, an approximately
40,000 square foot service facility in Long Island City, New York and a vehicle
storage facility in Orange, New Jersey. All of our other operations and
subsidiaries are conducted from locations leased from unaffiliated third
parties.
We lease approximately 2,800 square feet in Kew Gardens, New York, which
we use for executive offices. The lease expires on March 31, 2001, but we have
the option to extend the lease for one additional five-year term. We have not
exercised that option. 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.
One of our subsidiaries, C.B.S. 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.
One of our subsidiaries, 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.
One of our subsidiaries, Mid Atlantic Telecommunications, Inc. leased
from an unrelated third party approximately 3,500 square feet of office space in
Richmond, Virginia. The lease expired in March 2001.
One of our subsidiaries, Major Subaru, Inc., 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:
- 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.
- Major Auto leases from an unrelated third party approximately 2,000
square feet of lot space in Astoria, New York adjacent to the main
Major Dodge showroom. This lease expired on June 30, 1997 at which
time the annual rent was $33,000. Major Auto is currently
renegotiating such lease and remains in possession of the premises
under an oral month-to-month lease. Major Auto does not believe that
this property is material to the operation of Major Auto.
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- 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.
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. This lease was scheduled to expire
on April 30, 2000, but was extended until September 30, 2001, while a new lease
or purchase is negotiated. The annual rent is $70,000. Additionally, Compass
leases 7,000 square feet of showroom, office and storage space in Orange, New
Jersey, from an unaffiliated third party at an annual rental of $90,000. This
lease was scheduled to expire on March 31, 2001, but was extended for an
additional three years. Compass also leases space for a service department and
storage facilities in Orange, New Jersey, at an annual rental of $150,000. This
lease expires on August 31, 2006.
One of our subsidiaries, Hempstead Mazda, Inc., leases from its former
owner, approximately 140,000 square feet of land and buildings in Hempstead, New
York, that is used for showroom, office and storage space. The leases expires on
September 30, 2009. The current annual rent is $234,000.
One of our subsidiaries, Major Nissan of Garden City, Inc., leases from
an unrelated third party approximately 105,000 square feet used for showroom,
office, service department and storage facilities. The property is located on
the borderline of Hempstead, New York and Garden City, New York. The current
annual rent is $390,000 and the lease expires on March 15, 2002. Upon our
acquisition of the dealership, this lease was purchased for $1.0 million with a
bargain purchase option for $3 million, which must be executed prior to the
expiration of the lease. The property was appraised for $5 million.
ITEM 3. LEGAL PROCEEDINGS
Daniel Tepper v. Fidelity Holdings, Inc; Fidelity Holdings, Inc. (Third Party
Plaintiff) v. InvestAmerica et al.
On July 27, 1999, Mr. Daniel Tepper of Los Angeles, California, filed a
lawsuit against us, two of our officers (Bruce Bendell and Richard Feinstein)
and our former officer, Doron Cohen, in the Eighth Judicial District Court in
Clark County, Nevada. The original complaint was not served on the named
officers or us. 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 the
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 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 were previously informed by Progressive Polymerics International, Inc.
n/k/a InvestAmerica that it is the rightful owner of the shares, and that Mr.
Tepper
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acquired the shares improperly. Because of these competing claims to ownership
of the shares, we did not release full ownership of the shares to Mr. Tepper.
Subsequently, all shares were released in unrestricted form to Mr. Tepper, and
he has sold some of them. Mr. Tepper has filed another Amended Complaint
alleging, among other things, that our officers manipulated the price of the
shares to the disadvantage of Mr. Tepper and other shareholders. We have filed a
Third Party Complaint against InvestAmerica, alleging, among other things,
claims for indemnification and breach of contract. The basis of this pleading is
that if we are liable to Mr. Tepper, it is due to InvestAmerica's actions of:
(1) improperly transferring the shares in the first place; and (2) asserting a
claim of ownership in the shares. The court has now ruled that Mr. Tepper is the
proper present owner of the subject shares, and that neither we nor
InvestAmerica can claim ownership of those shares going forward. However, this
ruling has not ended the litigation. Mr. Tepper is still asserting damages
against us for our refusal to release the shares earlier. Our third party claims
against InvestAmerica are also being litigated in that same lawsuit. The court
has scheduled the trial of this case to begin October 15, 2001. We believe we
have substantial defenses to the asserted claims and intend to vigorously defend
this suit.
Ronald Shapss Corporate Services, Inc. v. Fidelity Holdings, Inc.
By Summons and Complaint dated June 11, 1999, we were named as the
defendant in an action titled Ronald Shapss Corporate Services, Inc. v. Fidelity
Holdings, Inc., brought in the Supreme Court of the State of New York, 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 plaintiff contended
that we wrongfully refused to allow the exercise of options for 50,000 shares of
our stock at $4.50 per share. The plaintiff also alleged an anticipatory breach
of plaintiff's right to exercise an option to purchase 100,000 more shares for
$4.50 per share. The plaintiff alleged it sustained damages in the sum of
$5,000,000 in punitive damages on the conversion claim.
We initially filed a motion to dismiss the cause of action alleging
conversion. At that time RSCS cross-moved for partial summary judgment in its
favor on the claim for damages caused by our refusal to recognize the exercise
of the option to purchase the first 50,000 shares. The court granted our motion
and dismissed the cause of action for conversion. The court denied the
plaintiff's motion for partial summary judgment. We then filed an answer denying
the allegations of the complaint, asserting affirmative defenses and asserting
counterclaims against the plaintiff and Ronald Shapss, the principal of the
plaintiff corporation. The plaintiff re-filed its motion for partial summary
judgment and the motion was again denied. The plaintiff filed an appeal to the
Appellate Division of the Supreme Court, Second Department. The Appellate
Division affirmed the order of the lower court. During the pendency of the
appeal, we filed a motion for partial summary judgment declaring that the
plaintiff was not entitled to purchase the 100,000 shares for $1,000.00 and was
not entitled to receive or exercise the options for 100,000 shares at $4.50 per
share. The court granted that motion.
The parties are conducting discovery on the plaintiff's remaining claim
that it was damaged in the sum of $1,375,000.00 for our failure to allow the
exercise of options for 50,000 shares. In addition, the parties are conducting
discovery on our counterclaim to rescind the contract and cancel said options as
well as cancel 50,000 shares of stock previously issued pursuant to that
contract.
The plaintiff's motion for summary judgment was based on its claim that
we made various admissions that plaintiff had fully performed its contract. The
courts agreed that we had offered
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sufficient factual details to support our claim that plaintiff had not fully
performed and failed to explain the alleged admissions. Therefore, we believe we
have substantial defenses to the asserted claims and intend to vigorously defend
this suit.
S&L Telecom, Inc., Jacob Steinmetz and Joseph Luria v. Fidelity Holdings, Inc.
A legal action has been commenced against us by S&L Telecom, Inc., Jacob
Steinmetz and Joseph Luria in the Supreme Court of the State of New York, County
of New York, Index No. 605513/99. Plaintiffs filed a complaint on December 7,
1999 against us alleging that we failed to deliver shares of stock pursuant to
the terms of an agreement between the parties. Plaintiffs are seeking delivery
of the shares and damages. Limited discovery has begun and is continuing at this
time. 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 our financial condition.
Fidelity Holdings, Inc., IG2 and 786710 Ontario, Ltd. v. Michael Marom and M.M.
Telecom, Corp.
We, IG2 and 786710 Ontario, Ltd. are plaintiffs in a legal action
against Michael Marom and M.M. Telecom, Corp. in the Supreme Court of the State
of New York, County of Queens, Index No. 25678/96. We filed a complaint on
December 23, 1996 against the defendants alleging: (i) breach of a letter
agreement between the parties; (ii) tortuous interference with business
opportunities; and (iii) slander. Defendants filed an answer with counterclaims,
which included, inter alia: (i) fraud; (ii) breach of contract; (iii) tortious
interference with business opportunities; and (iv) tortuous interference with
contract. Both parties are currently still engaged in ongoing discovery at this
time. While we believe that 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.
RealTech Systems Corporation v. IG2, Inc. & Fidelity Holdings, Inc.
On or about November 9, 2000, Realtech Systems Corporation ("Realtech")
served us as well as IG2 a Demand for Arbitration before the Commercial
Arbitration tribunal of the American Arbitration Association relating to work
and services allegedly provided by Realtech to IG2. The Demand asserted that
pursuant to a Master Agreement dated November 16, 1999 between Realtech and IG2,
both parties agreed to arbitration in the event of any potential disputes. The
Demand further asserts that Realtech has provided work and services to us in the
unpaid amount of $198,000, and that we and IG2 further breached the agreement by
hiring John Honovich, a former Realtech employee. Realtech seeks in excess of
$243,849.50 in damages. Realtech included us in an arbitration based on the idea
that IG2 is "our wholly owned subsidiary" and not on the basis of the agreement.
On December 1, 2000, we served a Notice of Petition and a Petition seeking a
stay of arbitration on our behalf on the grounds that IG2 is not a signatory to
any arbitration agreements between Realtech and us. Realtech served reply papers
as well as a cross motion compelling us to arbitrate on December 14, 2000. On
January 12, 2001, we filed an Order to Show Cause, to which Realtech answered.
On January 29, 2001, Justice Tolub of the New York State Supreme Court ordered
the Arbitration stayed as to us, and denied Realtech's arbitration claim.
With respect to IG2, there is a good possibility that the claim will be
dismissed since Realtech failed to perform as per the Agreement. We believe we
have substantial defenses to the asserted claims and intend to vigorously defend
this suit.
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MCI International, Inc. v. Schiano Bros. Inc.; Schiano Bros. Inc. (Third Party
Plaintiff) v. Computer Business Sciences Inc. (Third Party Defendant).
On August 28, 2000, Schiano Bros. Inc. ("Schiano") filed a third party
lawsuit against Computer Business Sciences Inc. ("CBS") in the Supreme Court of
the State of New York, Kings County. The suit alleged that phone services
provided to the Dominican Republic through MCI International, Inc. ("MCI") were
wrongfully attributed to Schiano and should have been attributed to CBS. In
addition, an intentional tort claim was also filed against CBS. The suit seeks
$150,000 in damages. We filed an Answer on September 20, 2000, as well as a
Demand for a Third Party Bill of Particulars on the plaintiff MCI, and Discovery
and Inspection Demands on all parties. Plaintiff responded only with a set of
invoices, to which we requested a more thorough inquiry. On December 10, 2000,
Schiano served a Bill of Particular and Interrogatory Demands upon us, as well
as Notices for Discovery and Inspection. A Preliminary Conference Order was
scheduled for March 3, 2001.
There were no agreements made between us and Schiano, or between us and
MCI; the sole basis for Schiano's claim is a verbal/oral agreement upon facts
that do not exist. We believe we have substantial defenses to the asserted
claims and intend to vigorously defend this suit.
Waterview Resolution Corp. f/k/a Colonial Pacific Leasing Corporation v. Schiano
Bros. Inc. and Ronald Tiongson; Schiano Bros. Inc. and Ronald Tiongson (Third
Party Plaintiffs) v. Fidelity Holdings Inc., Taylor Financial Services Inc.,
Doron Cohen, and Geoffrey Alexander (Third Party Defendants).
An action has been commenced by Waterview Resolution Corp. ("Waterview")
against Schiano, who third party impleaded us in November 2000 in the Supreme
Court of the State of New York, New York County. Schiano leased equipment from
Waterview with the expectation of entering into a business arrangement with us.
On January 23, 2001, Schiano served upon us a lawsuit alleging an agreement with
us to sell telephone service to the Philippines in which we (i) failed to
disclose the financial interest of Taylor Financial Services Inc. to Schiano,
(ii) failed to engage in a joint venture or partnership with Schiano and (iii)
failed to disclose the substantial risk of termination of the business by the
Philippine government. No written agreement has been produced to substantiate
the aforementioned claims. A Notice to take Examination Before Trial was served
on both the defendant and plaintiff by us on March 6, 2001.
Since there were no written agreements regarding us, we believe we have
substantial defenses to the asserted claims and intend to vigorously defend this
suit.
Dale Harris & Fouad Tobagi v. Computer Business Sciences, Inc., et al.
On June 6, 2000 plaintiffs filed a lawsuit against CBS in the amount of
$1,000,000 in the Northern District of California, San Francisco division.
Plaintiffs allege that they were convinced to join the advisory board of CBS in
return for: (i) a seat on the Technical Advisory Board; (ii) stock options;
(iii) a signing bonus; and (iv) a consulting agreement. Plaintiffs further
allege that CBS used their names to further our image and received nothing in
return. Plaintiffs filed an amended complaint on October 16, 2000, and we
subsequently filed a Motion to Dismiss and Transfer Venue on November 6, 2000.
Plaintiffs opposed the motion to dismiss, to which we replied on September 8,
2000. The Motion was granted as to Rule 10-5b for failure to state a claim,
granted as to Lack of Personal Jurisdiction over Mr. Cohen, Mr. Bendell and Ms.
Peacock, and denied as to all other
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claims. A case management conference was re-set for April 6, 2001. A
substitution of Attorney Robert Rimberg for Brobeck, Phleger & Harrison was
entered March 30, 2001, and is pending.
Since there were no damages sustained by either plaintiff, we believe we
have substantial defenses to the asserted claims and intend to vigorously defend
this suit.
Russell Reynolds Associates, Inc. v. Fidelity Holdings, Inc.
On December 21, 2000, Russell Reynolds Associates, Inc. ("Russell
Reynolds") filed a complaint against us in the Supreme Court of the State of New
York, New York County. The suit alleged that we had not paid for employee search
services based upon an alleged agreement entered into by us with Russell
Reynolds. The suit further alleged an amount outstanding of $108,688.09 for
services rendered in connection with executive search services. We served an
Answer on the plaintiff on February 20, 2001 as well as a Notice to take
Deposition and a Notice to Produce.
As discovery has not yet commenced and all the facts have not been
disclosed, it is too early to render a determination in this case. Nevertheless,
we believe we have substantial defenses to the asserted claims and intend to
vigorously defend this suit.
Stephen B. Wechsler, et al. v. Fidelity Holdings, Inc. et al.
An action entitled Stephen B. Wechsler, et al. v. Fidelity Holdings,
Inc. et al., CV 00 6488 (CPS) (the "Wechsler Litigation") has been commenced in
the United States District Court for the Eastern District of New York. The
Wechsler Litigation is brought on behalf of certain persons who acquired an
unstated number of shares of our common stock between December 1999 and May
2000. Named as defendants are the Company, Doron Cohen, Richard L. Feinstein and
Bruce Bendell (the "Defendants"). On December 26, 2000, plaintiffs filed a
Second Amended Complaint, which alleged, among other things, that plaintiffs
sustained damages when they acquired our common stock because Defendants
allegedly issued materially false and misleading statements and failed to
disclose material information which purportedly caused such stock to trade at
artificially inflated prices. The Second Amended Complaint alleges violations of
Section 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") and Rule 10b-5 promulgated thereunder. The allegedly misstated and omitted
information concerns our reported income for the first three quarters of 1999
and the prospects for our technology business. The Second Amended Complaint
seeks, among other things, damages "in an amount, not less than" one million
dollars. On February 16, 2001, we and Messrs. Bendell and Feinstein filed a
motion to dismiss the Second Amended Complaint for failure to plead fraud with
particularity. We understand that Mr. Cohen has not been served with process for
this action. We believe we have substantial defenses to the asserted claims and
intend to vigorously defend this suit.
In re: Fidelity Holdings Securities Litigation.
A class action has been commenced against us in an action entitled In
re: Fidelity Holdings Securities Litigation, Master File No. 005078 (CPS)
(E.D.N.Y.) (the "Class Action"). The Class Action, also pending in the United
States District Court for the Eastern District of New York, consists of twelve
putative class actions that were originally filed in the Southern District of
New York and the Eastern District of New York. The Class Action is purportedly
brought on behalf of all persons who acquired shares of Fidelity common stock
between June 24, 1999 and May 22, 2000. Named as defendants are Fidelity, Doron
Cohen, Richard L. Feinstein and Bruce Bendell (the
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"Defendants"). The constituent actions were all commenced subsequent to our
April 12, 2000 announcement of our financial results for the fiscal year ended
December 31, 1999. The complaints allege, among other things, that plaintiffs
were damaged when they acquired shares of our common stock because Defendants
allegedly issued materially false and misleading statements and failed to
disclose material information during the class period, which purportedly caused
such stock to trade at artificially inflated prices during the class period. The
complaints allege violations of Sections 10(b) and 20(a) of the Exchange Act,
and Rule 10b-5 promulgated thereunder. The allegedly misstated and omitted
information concerns our reported income for the first three quarters of 1999
and the prospects for our technology business. To date, no consolidated
complaint has been served and our time to answer each of the constituent
complaints has been served has been adjourned indefinitely. The complaints seek,
among other things, damages in unspecified amounts. We believe we have
substantial defenses to the asserted claims and intend to vigorously defend this
suit.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 8, 2000, we held our Annual Meeting of Shareholders, where
our shareholders approved the foregoing proposals. Proxies were solicited by us
pursuant to Regulation 14A under the Exchange Act, as amended. As of November 3,
2000, the record date for the Annual Meeting, there were approximately
26,148,699 shares of common stock outstanding and entitled to vote, of which
21,332,986 shares of common stock were present in person or by proxy and voted
at the meeting and 500,000 shares of 1997 Major Series of Convertible Preferred
Stock outstanding and entitled to two votes per share, all of which were present
in person or by proxy and voted at the meeting.
1. Proposal to approve amendments to our Articles of Incorporation to
provide for the classification of the Board of Directors into three classes of
directors with staggered three-year terms of office.
For..................... 10,258,945
Against................. 0
Abstain................. 11,074,039
Not Voted............... 4,815,715
2. Proposal to elect five (5) directors to the Board of Directors to
serve for terms of one to three years, respectively, or until their successors
are elected and qualified if a classified board structure is approved, or to
elect the same persons as directors for a term of one year if classified board
structure is not approved.
For Abstain Against Not Voted
--- ------- ------- ---------
Bruce Bendell 21,144,760 22,500 0 4,981,439
James Wallick 21,167,260 0 0 4,981,439
Dennis Roth 21,167,260 0 0 4,981,439
Jeffrey Weiner 21,167,260 0 0 4,981,439
David Edelstein 21,167,260 0 0 4,981,439
3. Proposal to approve an amendment to our Articles of Incorporation to
increase the number of authorized shares of our common stock from 50,000,000 to
100,000,000.
For..................... 20,846,828
Against................. 0
Abstain................. 0
Not Voted............... 5,301,871
4. Proposal to ratify the appointment of BDO Seidman LLP as our
independent auditors for the year 2000.
For..................... 21,332,986
Against................. 0
Abstain................. 0
Not Voted............... 4,815,713
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock trades on the NASDAQ National Market. The quarter-end
high and low bid price of our common stock were (as reported by Nasdaq National
Market), 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
------------- -------- -------
December 31, 2000 $ 1.00 $ .125
September 30, 2000 $ 2.063 $ .875
June 30, 2000 $ 20.063 $ 1.25
March 31, 2000 $ 23.625 $ 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
Shareholders
As of April 10, 2001 there were approximately 5,098 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 were sold by us during 2000 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.
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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 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,
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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 July 1999, 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 for legal services.
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
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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.
32. In January 2000, in connection with the exercise of adjustable warrants, we
issued 37,307 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.
33. In January 2000, we issued 4,632 shares of common stock to International
Securities Corporation at a per share price of $12.50 as a financing fee.
34. In February 2000, in connection with a private placement offering, we issued
88,889 shares of common stock, at a per share price of $15.00, along with
warrants to purchase 88,889 shares of common stock and one adjustable warrant,
to each of three investors: Strong River Investments, Inc., Montrose
Investments, Ltd. and Augusta Street LLC.
35. In February 2000, we issued 22,500 shares of common stock to James Wallick
at a per share price of $10.77 as employment compensation.
36. In February 2000, we issued 4,667 shares of common stock to International
Securities Corporation at a per share price of $13.18 as a financing fee.
37. In February 2000, we issued 7,500 shares of common stock to Warren Foreman
at a per share price of $14.08 as employment compensation, subject to vesting
provisions.
38. In February 2000, in connection with a private placement offering, we issued
50,000 shares of common stock, at a per share price of $13.90, along with
warrants to purchase 50,000 shares of common stock Strong River Investments,
Inc.
39. In March 2000, we issued 1,125 shares of common stock at a per share price
of $19.34 to Packard Press, Inc. and 375 shares of common stock to Elliot
Fishman, Esq. at a per share price of $19.34, both issuances in consideration of
settlement of litigation.
40. In March 2000, we issued 200 shares of common stock to Mordechai Book at a
per share price of $19.33 as employment compensation.
41. In March 2000, we issued an aggregate of 577,591 shares at a per share price
of $12.11 in consideration for the acquisition of CarsTV, Inc.
42. In March 2000, we issued 4,500 shares of common stock to Tomasz Mludzik at a
per share price of $11.90 as employment compensation.
43. In March 2000, in connection with the exercise of warrants, we issued an
aggregate of 398,443 shares at a per share price of $1.87 to: Bruno Guazzoni,
43,127 shares; Claudio Guazzoni, 96,681 shares; David McCarthy, 100,430 shares;
Zannett Lombardier, Ltd., 93,752 shares and Samuel Milbank, 64,453 shares.
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44. In March 2000, we issued 30,000 shares to Kimberly Peacock at a per share
price of $15.88 as employment compensation.
45. In March 2000, in connection with the exercise of adjustable warrants, we
issued 21,428 shares of common stock, at a per share price of $.067, to each of
three investors: Strong River Investments, Inc, Bay Harbor Investments, Inc. and
Augusta Street LLC.
46. In March 2000, we issued 1,971 shares of common stock to International
Securities Corporation at a per share price of $16.26 as a financing fee.
47. In March 2000, we issued 2,500 shares of common stock, 1,250 each to Arthur
and Scott Picon, at a per share price of $16.68 in partial consideration for the
acquisition of the Compass dealerships.
48. In April 2000, we issued an aggregate of 87,211 shares of common stock,
25,640 shares to Gabry, Inc. and 61,571 to Frank Graziadei, as Escrow Agent, at
a per share price of $12.38, in partial consideration for the acquisition of the
Hempstead Mazda dealership.
49. In April 2000 we issued 4,500 shares of common stock to Jeffrey Weiner, at a
per share price of $5.31, as consideration for services as a director of
Fidelity Holdings, Inc.
50. In April 2000 we issued 4,500 shares of common stock to David Edelstein, at
a per share price of $5.31, as consideration for services as a director of
Fidelity Holdings, Inc.
51. In May 2000, we issued 6,530 shares of common stock to Mordechai Book at a
per share price of $6.13, as employment compensation.
52. In August 2000, we issued 7,500 shares of common stock to Scott Picon, at a
per share price of $1.56 and 5,000 shares of common stock to Arthur Picon at a
per share price of $1.56, in partial consideration for the acquisition of the
Compass dealerships.
53. In August 2000, in connection with the exercise of adjustable warrants, we
issued 131,198 shares of common stock, at a per share price of $.01, to each of
three investors: Strong River Investments, Inc., Montrose Investments, Ltd. and
Augusta Street LLC.
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ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below for, and as of the end of, each of the
years in the five-year period ended December 31, 2000 are derived from our
audited financial statements. The data set forth below should be read in
connection with, and are qualified by reference to, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the related notes included elsewhere in this Form 10-K.
As at and for the years ended:
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(restated) (restated) (restated) (restated)
Revenues $ 322,142,231 $ 209,531,993 $ 98,578,970 $ 953,033 $ 258,947
Income (loss) from continuing operations 1,302,247 815,955 1,052,897 (383,261) 63,621
Income (loss) from discontinued operations (22,427,322) (4,006,103) (473,161) 752,400 612,345
Net income (loss) (21,125,075) (3,190,148) 579,736 369,139 675,966
Income per common share-continuing operations
Basic: $ 0.05 $ 0.04 $ 0.06 $ (0.03) $ 0.01
Diluted: 0.04 0.04 0.05 (0.03) 0.00
Income (loss) from discontinued operations
Basic: (0.87) (0.19) (0.03) 0.05 0.05
Diluted: (0.87) (0.19) (0.03) 0.04 0.04
Net income (loss) per common share
Basic: (0.83) (0.15) 0.04 0.03 0.05
Diluted: (0.83) (0.15) 0.03 0.02 0.05
Average number of shares used in computation:
Basic 25,509,144 21,054,183 16,507,786 14,522,288 12,653,413
Diluted 33,955,520 21,054,183 20,207,034 16,988,729 14,209,850
BALANCE SHEET DATA:
Total assets $ 86,781,397 $ 68,319,331 $ 49,426,735 $ 9,401,343 $ 9,316,864
Long-term liabilities, less current
Portion 10,411,463 7,416,784 7,953,278 427,387 515,609
Total stockholders' equity 15,599,970 28,917,595 16,453,516 6,524,735 5,244,213
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See Notes 1, 10, 15 and 17 to Consolidated Financial Statements for discussions
of business acquisitions and divestitures, restatements, stockholders' equity,
earnings (loss) per share, restructuring and impairment charges, discontinued
operations and their effects on comparability of year- to-year data. See "Item
5. Market for the Registrant's Common Equity and Related Stockholder Matters"
for a discussion of our dividend policy.
ITEM 7. 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.
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").
The year 2000 has been significant in the Company's history. We have
substantially increased the revenues and gross profits from our existing
dealerships and at the same time integrated the operations of three dealerships
we acquired this year and the one we acquired in September of 1999. By that
measure, we have generated substantial growth. Despite the fact that our income
from continuing operations was adversely impacted by the expected one-time
operating costs incurred in the start-up and integration of these newly acquired
dealerships, we had record sales and gross profits from our automotive
dealerships' operations. On the other hand, we have discontinued the operations
of our former Technology division. In connection with the discontinuance of our
technology enterprises we have incurred material losses from their operations,
as well as significant charges associated with their discontinuance. Management
believes, however, that the divestiture of the technology operations will allow
it to focus on the historically profitable automotive dealership segment of the
business and, thereby, enhance shareholders' value.
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RESULTS OF CONTINUING OPERATIONS - YEAR ENDED DECEMBER 31, 2000 AND YEAR ENDED
DECEMBER 31, 1999
Revenues. Revenues for the year ended December 31, 2000 increased to
approximately $322.1 million, which is $112.6 million, or 53.7%, more than the
prior year's revenues of $209.5 million. Such increase was solely attributable
to the revenues of our automotive dealership operations, which were
approximately $321.5 million for the 2000 year, an increase of $112.7 million,
or 54.0%, over the prior year's revenue of $208.8 million. Of this increase,
approximately $43.6 million relates to revenues generated by four dealerships we
acquired between September 1999 and December 2000. The other primary reason for
the significant growth in revenues was the substantial increase in unit sales.
New car unit sales increased by 1,653 units, or 44.5% in 2000 from 1999, while
used car unit sales increased 5,595 units, or 72.7%, in the 2000 year over the
prior year. On a same-store basis, i.e., dealerships that were owned for the
entire twelve months in both the 2000 and 1999 years, the increase in new
vehicles sold was 662, or 18.2%, while used vehicles sold, retail and wholesale,
increased by 4,019 units or 53.4%. 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 1,108 used vehicles, retail and
wholesale, were sold during each of the months in the 2000 year, compared with
an average of 641 used vehicles per month during the prior year. Our automotive
dealership operations' sales efforts included extensive Internet promotions,
local advertising in all media and the branding of our 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 $744 (3.1%), per vehicle in 2000 as compared with 1999, while
the average sales price in 2000 for used vehicles, retail and wholesale,
decreased by approximately $672 (4.8%) from the year 1999.
New vehicle sales revenue was approximately $132.5 million in 2000, an
increase of $43.6 million or 49.0% from 1999 new vehicle sales revenue of $88.9
million. Approximately $18.9 million of this increase was represented by sales
from dealerships that were owned for twelve months in each of the years.
Used vehicle sales revenue was $178.1 million in 2000 and $108.3 million
in 1999, an increase of approximately $69.8 million or 64.5%. On a same-store
basis, the increase in used vehicle sales revenue in 2000 over 1999 was
approximately $54.3 million, or 51.2%. These changes in sales volume of used
vehicles is attributable, in part, to 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 $96.1 million, or 54.5 %,
to $272.2 million in the year 2000 from $176.1 million in the year ended
December 31, 1999, is solely attributable to our automotive dealership
operations. The percentage increase is slightly more than the revenues
percentage increase and reflects an increase of almost $981 or 4.5% in the
average cost of new vehicles and an decrease of $503 or 4.4% in the average unit
cost of used vehicles.
Gross profit. Our automotive dealership operations generated almost all
of the total gross profit of $49.9 million for the year ended December 31, 2000.
The gross profit for automotive dealerships in 2000 was $49.2 million compared
with the 1999 amount of $32.2 million, an increase of $17.0 million or 52.8%.
The four dealerships we acquired between September 1999 and December
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2000 generated approximately $6.0 million or 35.3% of this total increase.
Additionally, we changed our method of accounting for our new vehicle inventory
from the last-in, first-out method ("LIFO") to the first-in, first-out method.
This resulted in a positive gross profit effect of approximately $300,000 in
2000. We retroactively restated the 1999 and 1998 inventory to conform with the
current year's presentation. This resulted in increased gross profits of
approximately $400,000 in 1999 and $50,000 in 1998.
The balance of the gross profits increase was primarily attributable to
(i) the increase in units sold and (ii) the change in revenue percentage mix.
Automotive dealership revenues went from 42.9% of total revenues generated by
new vehicle sales and 52.2% generated by used vehicles sales in 1999 to 40.8% of
total revenues generated by new vehicle sales and 54.9% generated by used
vehicle sales in 2000. For the industry as a whole, the average percentage of
new and used vehicles' revenue as a percentage of total dealership revenue is
60.1% and 28.6% respectively. Our dealerships' overall gross profit as a
percentage of sales was 15.0%, compared with the industry average of 12.7%. Our
gross profit percentage on new vehicles of 8.2% is above the industry average of
6.1%, while our gross profit percentage on used vehicle sales of 18.1% is
significantly over the industry average used vehicle gross profit of 10.9%.
Management believes that our product mix, i.e. our concentration on the more
profitable used vehicle segment, is the significant factor in our profitability.
Operating expenses. In the year ended December 31, 2000, operating
expenses increased approximately $14.6 million to approximately $44.5 million,
from $29.9 million in 1999. The most significant component of this increase is
the start-up and integration expenses associated with the new dealerships we
acquired since September 1999. These dealerships accounted for approximately
$8.2 million of such increase. The balance of the increase is significantly
attributable to the costs associated with increased sales efforts and results,
principally, advertising and compensation of the previously existing
dealerships.
Interest expense. Interest expense had a net increase of approximately
$900,000 to approximately $2.6 million in 2000 from interest expense of $1.7
million incurred in 1999. 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 2000 as compared with 1999.
Income tax expense. Local income tax expense of approximately $100,000
for the year ended December 31, 2000 was calculated on pre-tax income from
continuing operations. The Company has provided for tax expense on the pre-tax
income from its continuing operations for the year and recorded a tax benefit of
approximately $500,000 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 2000 was approximately $22.4 million, compared with
a loss from discontinued operations of $4.0 million in 1999. Such loss includes,
net of taxes, the actual operating costs of those operations of approximately
$6.8 million, plus a one-time, non-cash, charge of approximately $13.6 million
to write-down the assets associated with those operations to their estimated net
realizable value and a charge of $2.0 million to accrue an estimate of operating
and other costs to be incurred until the divestiture has been completed.
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RESULTS OF CONTINUING OPERATIONS - YEAR ENDED DECEMBER 31, 1999 AND YEAR ENDED
DECEMBER 31, 1998
Revenues. Revenues for the year ended December 31, 1999 increased to
approximately $209.5 million, which is $110.9 million, or 112.5%, more than the
prior year's revenues of $98.6 million. The increase in revenues was
attributable primarily to the sales generated by our automotive dealerships,
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 the automotive
dealerships during the year 1999 with the average monthly revenue generated by
automotive dealerships for the seven and one-half month period they were owned
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 our successful efforts in selling used vehicles at our expansive facility in
Long Island City, New York. Average monthly used car sales revenues increased
almost 65% in the 1999 period as Major Auto 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."
Cost of sales. The automotive dealerships' cost of sales in 1999
increased $92.0 million or, 110%, to approximately $176.1 million from $84.1
million in 1998. The 1998 amount is attributable to Major Auto's operations
since its acquisition on May 14, 1998 and is not directly comparable to the
current year.
Gross profit. Our automotive dealership operations generated almost all
of the total gross profit of $33.4 million for the year ended December 31, 1999.
Gross profit showed a net increase of $18.9 million, or 130% compared with 1998
gross profit of $14.5 million. This increase is almost solely attributable to
the automotive dealership operations, 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 dealership operations in 1999 was 15.9%, compared
with 13.8% in 1998. Almost $800,000 of the gross profit is attributable to Major
Fleet's leasing operations.
Operating expenses. In the year ended December 31, 1999, operating
expenses increased approximately $18.2 million to approximately $29.9 million,
from $11.7 million in 1998. This increase is primarily attributable to a full
year's operations for our automotive division in 1999 and is not directly
comparable to 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 the Company's Chairman.
Interest expense. Interest expense had a net increase of approximately
$1.0 million, or 133%, to $1.7 million in 1999 from interest expense of $754,000
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 dealership operations and increased
automotive sales and related inventory carrying costs. 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
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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.
Discontinued operations. The non-automotive components of our business
that our Board of Directors has determined to divest have generated a loss from
discontinued operations, net of taxes, in 1999 of approximately $4.0 million,
compared with a loss from discontinued operations of $.5 million in 1998.
ASSETS, LIQUIDITY AND CAPITAL RESOURCES - DECEMBER 31, 2000
At December 31, 2000, our total assets were approximately $86.8 million,
an increase of approximately $18.5 million from December 31, 1999. This
aggregate increase is primarily related to the increases in our accounts
receivable of $2.7 million, inventories of $22.5 million, excess of costs over
net assets acquired of $6.4 million and net property and equipment of $3.3
million. 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 year of 2000. Significant offsets to these asset
increases, include a decrease in cash of $3.8 million, a decrease in other
assets of $1.0 million and a decrease of $12.0 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 year 2000 was
$1,659,689 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 plus proceeds from long-term debt and lines of credit, aggregating
$2,500,000, as offset by a redemption of adjustable warrants for $4,746,079,
purchases of treasury stock for $631,390, payments of outstanding debt of
$397,371 and an increase of amounts due from officers and shareholders of
$505,559.
Cash used in operating activities was $3,800,190. This was the result of
cash used through our loss of $34,992, comprised of our net loss of $21,125,075,
less non-cash charges of $21,090,083, and a net increase in assets of
$20,985,539 (primarily from increases in accounts receivable of $2,742,427;
inventories of $15,348,990 and other assets of $3,220,549, partially offset by
additions to liabilities of $17,220,341 (primarily from increases in floor plan
notes payable of $16,643,439 and accrued expenses of $2,286,126, partially
offset by a decrease in accounts payable of $1,715,428). The increases in assets
and liabilities were significantly attributable to the large volume of sales in
the year of 2000, as well as the acquisitions of automotive dealerships that
were consummated during that year.
The net use of cash from operating activities of $3,800,190 was further
increased by the cash used in investing activities of $1,698,641 for the net
additions to property and equipment and business combinations.
The foregoing activities, i.e. financing, operating and investing,
resulted in a net cash decrease of $3,839,142 for the year ended December 31,
2000.
We believe that the cash generated from existing operations, together
with cash on hand, 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. However, we will
require additional financing in connection with future planned acquisitions of
automobile
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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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
We have discontinued our non-automotive operations, which increased the
development of technology products in the United States, Canada and Israel.
Although we sell some vehicles in the former Soviet republics, substantially all
our revenues come from sales of vehicles in the United States. Consequently,
foreign sales constitute a minimal amount of our revenues. Even so, our
financial results could be affected by changes in foreign currency exchange
rates or weak economic conditions in foreign markets. Because substantially all
our revenues are currently denominated in U.S. dollars, a strengthening of the
dollar could make our vehicles 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are set forth in Item
14 of this Form 10-K. All information which has been omitted is either
inapplicable or not required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of April 10, 2001, our directors and executive officers were as
follows:
NAME AGE POSITION
- ---- --- --------
Bruce Bendell ................. 46 Chairman of the Board, Chief Executive Officer and
Director
James Wallick ................. 49 President, Chief Operating Officer and Director
Richard L. Feinstein ........... 57 Senior Vice-President, Finance and Chief Financial
Officer
David Edelstein ................ 47 Director
Dennis Roth .................... 58 Director
Jeffrey Weiner ................. 43 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, as our President from May 14, 1998 to December 1998, and as
our Chief Executive Officer since July 2000. Mr. Bendell has also served as the
Chief Executive Officer and Chairman of our former subsidiary IG2, Inc. since
its inception to March 2000 and as the President and a Director of Major Auto
and its affiliates since December 1985. Mr. Bendell also serves on the board of
E-Star Holdings, Inc., a privately held company.
David Edelstein. Mr. Edelstein has served as our 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. Mr.
Roth also served as Chairman and Chief Executive Officer of our former
subsidiary, IG2, Inc. from March 2000 to September 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 to 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. Mr. Roth has served as President and Chief Executive Officer of
ViaGate Technologies, Inc. since October 2000.
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James Wallick. Mr. Wallick has served as our Director since May 1998,
Executive Vice President and Chief Operating Officer since September 1999 and
President and Chief Operating Officer since July 2000. Mr. Wallick was also
President of our former subsidiary, IG2, Inc. from September 2000 to March 2000.
Mr. Wallick has been in the automotive dealership and financing business since
1971. He is currently Vice-President of MIC Leasing.
Jeffrey Weiner. Mr. Weiner has served as our 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 person, although not an executive officers or director, is
regarded by management as a key employee:
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 the
Major Dealer Group.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act 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 us,
or written representations from certain reporting persons, we believe that
during 2000, Bruce Bendell is the only reporting person to have made late
filings under Section 16(a). Mr. Bendell filed (i) a Form 4 in May 2000, to
report sale transactions relating to our common stock that were consummated in
January, February, March and April of 2000 and (ii) a Form 4 in June 2000, to
report sale transactions relating to our common stock that were consummated
April and May of 2000. These transactions were required to be reported on a Form
4 by Mr. Bendell in February, March and April, respectively.
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ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for each of our fiscal years
ended December 31, 2000 and 1999 concerning compensation of (i) all individuals
serving as our Chief Executive Officer during the fiscal year ended December 31,
2000 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, 2000
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS (#)
- --------------------------- ---- ------ ----- ----- ----------
Doron Cohen (1) 2000 $ 118,248 0 0 0
President, Chief Executive Officer 1999 $ 244,580 0 0 0
and Treasurer 1998 $ 246,500 0 0 0
Bruce Bendell (1)(2) 2000 $ 236,426 0 0 400,000
Chairman of the Board and 1999 $ 278,000 1,800,000 0 0
Chief Executive Officer 1998 $ 248,530 $ 127,437 0 0
James Wallick (3) 2000 $ 200,000 $ 492,251 19,100 200,000
President and Chief Operating Officer 1999 $ 50,000 0 0 0
1998 0 0 0 0
Richard L. Feinstein (4) 2000 $ 165,654 0 $ 6,324 15,000
Senior Vice President, Finance 1999 $ 170,715 $ 70,000 $ 6,324 112,500
and Chief Financial Officer 1998 $ 125,000 0 $ 3,166 0
(1) Salary in 1998 includes $150,000 from us (subsequently paid through the
issuance of 87,804 shares of our common stock). In July 2000, Mr. Cohen
resigned from all of his positions with us. As part of his Separation and
Release Agreement, we agreed to pay him an aggregate of $662,000, subject
to certain considerations. Additionally, we agreed to a potential
forgiveness of Mr. Cohen's indebtedness to us in the aggregate amount of
$1,048,067 to begin, under certain circumstances, on August 8, 2003 and
continue on the next two anniversary dates, with one-third lapsing at each
date. See "Employment Contracts and Termination of Employment, and Change
in Control Arrangements."
(2) Salary in 1998 includes $150,000 from us (subsequently paid through the
issuance of our 87,804 shares of common stock). In 1998, 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 incurred a
liability for a one-time charge of $1.8 million to Mr. Bendell for
reimbursement of certain expenses and a bonus.
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(3) The amount reported for 1999 represents amounts paid Mr. Wallick in that
year from the date of his employment. For 2000, the amount reported under
Bonus represents an aggregate cash bonus of $250,000, plus the issuance of
22,500 shares of our common stock valued at $242,251 at the date of
issuance. The amount reported under Other Annual Compensation represents an
automobile allowance of $1,175 per month.
(4) Other Annual Compensation amount represents an automobile allowance of $527
per month since July 1998. The amount reported under Bonus reflects the
value of shares issued to Mr. Feinstein in January 1999.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock
options granted to the Named Executive Officers during 2000. We have never
granted any stock appreciation rights.
INDIVIDUAL GRANTS (1)
PERCENT OF POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION
NAME GRANTED 2000 (2) SHARE ($) DATE 5% 10%
- ---- ---------- ------------ --------- ---------- --------- ---------
Bruce Bendell 400,000 (4) 62.0% $.875 10/17/2010 $220,113 $557,810
James Wallick 200,000 (4) 31.0% $.875 10/17/2010 $110,057 $278,905
Richard L. Feinstein 15,000 (4) 2.3% $.875 10/17/2010 $ 8,254 $ 20,918
(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, 2000, we granted options to officers and
employees to purchase an aggregate of 645,000 shares of our 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 Securities and Exchange Commission 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) The options vested immediately upon their grant.
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, 2000. There were no unexercised
"in-the-money" options held by any Named Executive Officers as of December 31,
2000.
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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 2000 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 October 19, 1999, we have entered into a memorandum of
understanding with James Wallick, our President and Chief Operating Officer,
pursuant to which he is to serve as our Executive Vice-President for a term of
three years, at an annual base salary of $200,000. The annual salary is subject
to a $100,000 incentive pursuant to commissions to be mutually agreed upon. Mr.
Wallick was also granted a signing bonus consisting of 22,500 shares of our
common stock. In addition, Mr. Wallick 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.
In July 2000, Doron Cohen resigned from all positions with the Company
and entered into a Separation and Release Agreement with the Company dated
August 8, 2000 (the "Agreement"). The financially significant provisions of the
Agreement provide for periodic payments to begin on August 15, 2000. Such cash
payments consist of an initial payment of $250,000; monthly payments of $500
beginning July 1, 2000 and ending June 1, 2002, aggregating $12,000; plus
monthly payments of $20,833.33 beginning July 1, 2001 through June 1, 2002 and
$4,166.66 per month beginning July 1, 2002 and ending on June 1, 2005, the
aggregate amount of which is $650,000. The total of all cash payments to Mr.
Cohen is $662,000. In order to qualify for such future payments, Mr. Cohen must
remain in compliance with non-disparagement, non-solicitation, non-compete and
voting restriction provisions embodied in the Agreement. We have also agreed to
continue Mr. Cohen and his family on our health plan and to provide him with an
automobile for two years. Additionally, we agreed to a potential forgiveness of
Mr. Cohen's indebtedness to us in the aggregate amount of $1,048,067 to begin,
under certain circumstances, on August 8, 2003 and continue on the next two
anniversary dates, with one-third lapsing at each date. The requirements for
such forgiveness also include Mr. Cohen's compliance with the restrictive
provisions of the Agreement.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our Board of Directors consists of Messrs.
Edelstein and Weiner, none of whom has been an officer or employee at any time
since our inception. None of our executive officers serve as a member of the
Board of Directors or Compensation Committee of any entity that has one or more
executive officers serving as a member of our Board of Directors or Compensation
Committee. Prior to the formation of the Compensation Committee, the Board of
Directors as a whole made decisions relating to the compensation of our
executive officers.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Nevada Revised Statute, 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, our best
interests and, with respect to any criminal action or proceeding, if such
director had no reason to believe his or her conduct was unlawful. However with
respect to any action by or in the right of the Company, the Articles of
Incorporation prohibit indemnification in respect of any claim, issue or matter
as to which such director is adjudged liable for negligence or misconduct in the
performance is his or her duties to us, unless otherwise ordered by the relevant
court. Our Articles of Incorporation also permit us 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 Revised Statute, 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 Revised Statute, 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
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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 us and
our 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 12. 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 10, 2001,
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 our securities:
1997 Major Series of
Convertible
Preferred Stock (2)
---------------------
Name and Address Number of Shares Percent(1) Number Percent
- ---------------- ---------------- ---------- ------ -------
Bruce Bendell 8,754,344 (3)(12) 31.3% 2,250,000 100.0%
Doron Cohen 2,599,462 (4) 10.3%
David Edelstein 133,900 (5)(6) *
Richard L. Feinstein 185,500 (7) *
James Wallick 287,439 (8) 1.1%
Jeffrey Weiner 451,450 (5)(9) 1.8%
Dennis Roth 15,000 (10) *
Millennium III Trust 2,292,500 (11) 9.1%
All directors and
executive officers as a
group 9,827,633 (12)(13) 34.2%
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Based on 25,184,199 shares of common stock outstanding on April 10, 2001.
(2) Based on 500,000 shares of the 1997-Major Series of Convertible Preferred
Stock outstanding on April 10, 2001, which converts into 2,250,000 shares
of common stock.
(3) Includes: (i) 23 shares of common stock owned by Mr. Bendell's wife and the
following shares of common stock which Mr. Bendell has the right to acquire
within 60 days: (a) 112,500 shares of common stock which Mr. 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 Mr. Bendell are convertible into common stock;
and (ii) options for 400,000 shares of common stock which are immediately
exercisable.
(4) Based on a Schedule 13G/A filed on February 1, 2001. Pursuant to a
Separation and Release
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Agreement dated August 8, 2000, the shares will be voted in accordance with
the recommendation of the majority of the non-employee directors of the
Company.
(5) Includes options for 124,000 shares of common stock which are immediately
exercisable.
(6) Includes 9,900 shares of common stock owned by Mr. Edelstein's children.
(7) Includes options for 105,000 shares of common stock which are immediately
exercisable.
(8) Includes options for 204,500 shares of common stock which are immediately
exercisable.
(9) Includes options for 250,000 shares of common stock which are immediately
exercisable and 14,500 shares of common stock owned by Mr. Weiner's wife.
(10) Includes options for 15,000 shares of common stock which are immediately
exercisable.
(11) Include shares owned by an irrevocable trust of which Mr. Bendell is a
beneficiary, but which Mr. Bendell disclaims any voting or dispositive
power.
(12) Includes (i) 24,423 shares of common stock owned by immediate family
members of directors and executive officers as a group, (ii) 2,362,500
shares of common stock that the directors and executive officers as a group
have the right to acquire within 60 days and (iii) options for 1,222,500 of
common stock which are immediately exercisable.
(13) The address for each beneficial owner is c/o Fidelity Holdings, Inc., 80-02
Kew Gardens Rd., Suite 5000, Kew Gardens, NY 11415.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 8, 2000, Mr. Cohen signed a Separation and Release Agreement
(the "Agreement") with the Company. The financially significant provisions of
the Agreement provide for periodic payments to begin on August 15, 2000. Such
cash payments consist of an initial payment of $250,000; monthly payments of
$500 beginning July 1, 2000 and ending June 1, 2002, aggregating $12,000; plus
monthly payments of $20,833.33 beginning July 1, 2001 through June 1, 2002 and
$4,166.66 per month beginning July 1, 2002 and ending on June 1, 2005, the
aggregate amount of which is $650,000. The total of all cash payments to Mr.
Cohen is $662,000. In order to qualify for such future payments, Mr. Cohen must
remain in compliance with non-disparagement, non-solicitation, non-compete and
voting restriction provisions embodied in the Agreement. We have also agreed to
continue Mr. Cohen and his family on our health plan and to provide him with an
automobile for two years. Additionally, we have agreed to a potential
forgiveness of Mr. Cohen's indebtedness to us in the aggregate amount of
$1,048,067 to begin, under certain circumstances, on August 8, 2003 and continue
on the next two anniversary dates, with one-third lapsing at each date. The
requirements for such forgiveness also include Mr. Cohen's compliance with the
restrictive provisions of the Agreement. The payments are due to begin in August
2001. Based on the report of an independent appraiser, we have 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, $175,000, representing five months of amortization, has been
charged in the year ended December 31, 2000.
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We have retained the accounting firm of Marcum & Kliegman LLP to provide
certain accounting and tax services for us and our subsidiary Major Fleet. In
2000, we paid Marcum & Kliegman LLP $99,500 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, 2000, these
affiliated dealerships were indebted to Major Auto in an amount of approximately
$707,613.
On December 11, 2000, we issued to M&K Equities, Ltd., a New York
corporation ("M&K"), which is an affiliate of Jeffrey Weiner, a member of our
board of directors, a senior subordinated secured promissory note in the
principal amount of $2,000,000 in consideration for a $2,000,000 loan from M&K.
The note is due on December 11, 2002 (the "Maturity Date") at a rate per annum
of ten percent (10%). Interest under the note is payable in monthly installments
with all outstanding principal and interest due on the Maturity Date. In order
to induce M&K to make the loan, we also agreed to grant a lien on and security
interest in all of our assets, other than our technology assets, as collateral
security for the due payment and performance of all indebtedness, liabilities
and obligations under the note, which collateral is set forth in a security
agreement, subject to prior senior liens. Mr. Weiner also received options under
the 1999 Employee Stock Option Plan to purchase 250,000 shares of our common
stock at an exercise price of $0.47. The fair value ascribed to the options was
approximately $95,000 based on the Black-Scholes option-pricing model; such
amount was recorded as a deferred charge and as additional paid-in-capital of
stockholders equity. The amount of the deferred charge will be amortized ratably
over the term of the note.
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PART IV
ITEM. 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number Description Page
- -------------- ----------- ----
3.1* Articles of Incorporation of Fidelity Holdings, Inc.,
("Company") incorporated by reference to Exhibit 3.1 of
Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange Commission
on March 7, 1997. N/A
3.2* Articles of Incorporation of Computer Business Sciences,
Inc., incorporated by reference to Exhibit 3.2 of Company's
Registration Statement on Form 10-SB, as amended, filed with
the Securities and Exchange Commission on March 7, 1997. N/A
3.3* Articles of Incorporation of 786710 (Ontario) Limited,
incorporated by reference to Exhibit 3.3 of Company's
Registration Statement on Form 10-SB, as amended, filed with
the Securities and Exchange Commission on March 7, 1997. N/A
3.4* Articles of Incorporation of Premo-Plast, Inc., incorporated
by reference to Exhibit 3.4 of Company's Registration
Statement on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7, 1997. N/A
3.5* Articles of Incorporation of C.B.S. Computer Business
Sciences Ltd., incorporated by reference to Exhibit 3.5 of
Company's Registration Statement on Form 10-SB, as amended,
filed with the Securities and Exchange Commission on March N/A
7, 1997.
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
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of Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange Commission
on March 7, 1997. N/A
3.10 Certificate of Amendment to Articles of Incorporation of the
Company filed on December 12, 2000. -
4.1* Certificate of Designation for the Company's 1996-MAJOR
Series of Convertible Preferred Stock, incorporated by
reference to Exhibit 4.1 of Company's Registration Statement
on Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
4.1(i)** Form of Amended and Restated Certificate of Designation for
the Company's 1996-MAJOR Series of Convertible Preferred N/A
Stock.
4.2* Warrant Agreement for Nissko Warrants, incorporated by
reference to Exhibit 4.2 of Company's Registration Statement
on Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
4.3* Warrant Agreement for Major Fleet Warrants, incorporated by
reference to Exhibit 4.3 of Company's Registration Statement
on Form 10-SB, as amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
4.3(i)** Amended and Restated Warrant Agreement, dated October 11,
1997 between the Company, Bruce Bendell and Harold Bendell. N/A
4.4* Warrant Agreement for Progressive Polymerics International,
Inc. Warrants, incorporated by reference to Exhibit 4.4 of
Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange Commission
on March 7, 1997. N/A
4.5** Form of Certificate of Designation for the Company's
1997A-Major Automotive Group Series of Preferred Stock. N/A
4.6** Form of Certificate of Designation for the Company's
1997-Major Series of Convertible Preferred Stock. N/A
4.7** Form of Registration Rights Agreement between the Company
and Bruce Bendell. N/A
4.8** Stock Pledge and Security Agreement, dated March 26, 1996,
between Doron Cohen, Bruce Bendell, Avraham Nissanian, Yossi
Koren, Sam Livian and Robert Rimberg. N/A
4.9** Form of Registration Rights Agreement between the Company,
Castle Trust and Management Services Limited and Bruce
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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
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
65
66
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
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-
66
67
SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.12* Indemnification Agreement dated March 28, 1996 between the
Company and Dr. Barak, incorporated by reference to Exhibit
10.12 of Company's Registration Statement on Form 10-SB,
as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.13* Indemnification Agreement dated March 28, 1996 between the
Company and Yossi Koren, incorporated by reference to
Exhibit 10.13 of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.14* Plan of Reorganization for acquisition of Major Fleet &
Leasing Corp. dated August 23, 1996 between the Company,
Bruce Bendell and Harold Bendell, incorporated by reference
to Exhibit 10.17 of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
10.15* Patent Purchase Agreement dated December 30, 1996 between
Premo-Plast, Inc. and John Pinciaro, incorporated by
reference to Exhibit 10.16 of Company's Registration
Statement on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7, 1997. N/A
10.16* Employment Agreement dated December 30, 1996 between
Premo-Plast, Inc. and John Pinciaro, incorporated by
reference to Exhibit 10.17 of Company's Registration
Statement on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7, 1997. N/A
10.17* Employment Agreement dated January 27, 1997 between the
Company and Ronald K. Premo, incorporated by reference to
Exhibit 10.18 of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities and Exchange
Commission on March 7, 1997. N/A
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,
67
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Inc., Major Acquisition Corp. and Bruce Bendell. N/A
10.18(ii)** Amendment to Plan and Agreement of Merger, dated August 26,
1997, between Fidelity Holdings, Inc., Major Automotive
Group, Inc., Major Acquisition Corp. and Bruce Bendell. N/A
10.18(iii)** Amendment to Plan and Agreement of Merger, dated November
20, 1997, between Fidelity Holdings, Inc., Major Automotive
Group, Inc., Major Acquisition Corp. and Bruce Bendell. N/A
10.18(iv)**** Amendment to Plan and Agreement of Merger, dated March 20,
1998, between Fidelity Holdings, Inc., Major Automotive
Group, Inc., Major Acquisition Corp., and Bruce Bendell. N/A
10.19* Stock Purchase Agreement with Escrow Agreement attached,
incorporated by reference to Exhibit 10.20 of Company's
Registration Statement on Form 10-SB, as amended, filed with
the Securities and Exchange Commission on March 7, 1997. N/A
10.20* Management Agreement, incorporated by reference to Exhibit
10.21 of Company's Registration Statement on Form 10-SB, as
amended, filed with the Securities and Exchange Commission
on March 7, 1997. N/A
10.21* Employment Agreement with Moise Benedid, incorporated by
reference to Exhibit 10.22 of Company's Registration
Statement on Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March 7, 1997. N/A
10.22** Partnership Agreement between Nissko Telecom Associates and
the Company. N/A
10.23** Memorandum of Understanding, dated September 9, 1997, by and
among Computer Business Sciences, Inc., Nissko Telecom Ltd.,
the Company and Robert L. Rimberg. N/A
10.24** Letter of Intent, dated June 6, 1997, between the Company
and SouthWall Capital Corp. (formerly known as Sun Coast
Capital Corp.) N/A
10.25** Letter of Intent, dated September 1997, between the Company,
Lichtenberg Robbins Buick, Inc. and Lichtenberg Motors Inc. N/A
10.26** Consulting Agreement, dated February 18, 1997, with Ronald
Shapss Corporate Services, Inc. N/A
10.27** Value Added Reseller Agreement between Summa Four, Inc. and
Computer Business Sciences, Inc., as Reseller. N/A
68
69
10.28** Lease Agreement, dated March 1996, between 80-02 Leasehold
Company, as Owners and the Company, as Tenant. N/A
10.29** Master Lease Agreement, dated December 26, 1996, between
Major Fleet & Leasing Corp., as Lessor, and Nissko Telecom,
Ltd., as Lessee. N/A
10.30** Sublease Agreement, dated March 1995, between Speedy R.A.C.,
Inc., as Sublessor, and Major Subaru Inc., as Sublessee. N/A
10.31** Lease Agreement, dated November 1, 1991, between Gloria
Hinsch, as Landlord, and Major Chrysler-Plymouth, Inc., as
Tenant. N/A
10.32** Store Lease Agreement, dated June 10, 1992, between Bill K.
Kartsonis, as Owner, and Major Automotive Group, as Tenant. N/A
10.33** Lease Agreement, dated June 3, 1994, between General Motors
Corporation, as Lessor, and Major Chevrolet, Inc., as Lessee. N/A
10.34** Lease Agreement, dated August 1990, between Bruce Bendell
and Harold Bendell, as Landlord and Major Chrysler-Plymouth,
Inc., as Tenant. N/A
10.34(i)** Extension of Lease Agreement, dated August 14, 1997, between
Bruce Bendell and Harold Bendell, as Landlord and Major
Dodge, Inc. (formerly known as Major Chrysler-Plymouth,
Inc.), as Tenant. N/A
10.34(ii)** Extension of Lease Agreement, dated December 16, 1997,
between Bruce Bendell and Harold Bendell, as Landlord and
Major Dodge (formerly known as Major Chrysler-Plymouth,
Inc.), as Tenant. N/A
10.35** Lease Agreement, dated February 1995, between Bendell
Realty, L.L.C., as Landlord, and Major Chrysler-Plymouth
Jeep Eagle, Inc., as Tenant. N/A
10.35(i)** Extension of Lease Agreement, dated August 14, 1997, between
Bendell Realty, L.L.C., as Landlord and Major
Chrysler-Plymouth Jeep Eagle, Inc., as Tenant. N/A
10.35(ii)** Extension of Lease Agreement, dated December 16, 1997,
between Bendell Realty, L.L.C., as Landlord and Major
Chrysler-Plymouth Jeep Eagle, Inc., as Tenant. N/A
10.36** Lease Agreement, dated February 1996, between Prajs Drimmer
69
70
Associates, as Landlord, and Barak Technology Inc., as N/A
Tenant.
10.37** Sublease Agreement, dated January 8, 1997, between Newsday,
Inc., as Sublessor, and Major Fleet & Leasing Corp.,
as Sublessee. N/A
10.37(i)** Consent to Sublease Agreement, dated January 16, 1997,
between 80-02 Leasehold Company, Newsday Inc. and Major
Fleet and Leasing Corp. N/A
10.38** General Security Agreement between Major Fleet & Leasing
Corp., as Debtor, and Marine Midland Bank, as Secured Party. N/A
10.39** Retail and Wholesale Dealer's Agreement, dated March 30,
1995, between Marine Midland Bank, as Bank, and Major Fleet
& Leasing Corp., as Dealer. N/A
10.40** Wholesale Lease Financing Line of Credit between General
Electric Capital Corporation, as Lender, and Major Fleet &
Leasing Corp., as Borrower. N/A
10.41** Chrysler Leasing System License Agreement between Chrysler
Motors Corporation, as Licensor, and Major Fleet &
Leasing Corp., as Licensee. N/A
10.42** GMAC Retail Plan Agreement between General Motors Acceptance
Corp. and Major Fleet & Leasing Corp., as Dealer. N/A
10.43** Fidelity Holdings, Inc. 1996 Employees' Performance
Recognition Plan. N/A
10.44** Secured Promissory Note, dated December 31, 1996, between
Doron Cohen, as Maker, and Fidelity Holdings, Inc., as N/A
Holder.
10.45** Dealer Master Agent Agreement and License, dated February
1996, between Computer Business Sciences, Inc. and
Progressive Polymerics International, Inc., as Master Agent. 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
70
71
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
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,
71
72
Inc., Zanett Lombardier, Ltd., Goldman Sachs Performance
Partners, L.P., Goldman Sachs Performance Partners,
(Offshore) L.P., David McCarthy and Bruno Guazzoni. N/A
10.62****** Registration Rights Agreement dated as of January 25, 1999,
by and among Fidelity Holdings, Inc., Zanett Lombardier,
Ltd., Goldman Sachs Performance Partners, L.P., Goldman
Sachs Performance Partners, (Offshore) L.P., David McCarthy
and Bruno Guazzoni. N/A
10.63******* Letter Agreement, dated as of June 24,1999, by and among
Fidelity Holdings, Inc. and Strong River Investments, Inc.,
Bay Harbor Investments, Inc. and Augusta Street LLC. N/A
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 N/A
Street LLC.
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 N/A
Street LLC.
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 N/A
Street LLC.
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 N/A
Street LLC.
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 N/A
Street LLC.
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 N/A
Street LLC.
10.70********** Merger Agreement dated January 18, 2000 by and among
Fidelity Holdings, Inc., Cars Acquisition, Inc., CarsTV.com,
Inc., and Jack H. Singer. N/A
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. N/A
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
72
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Roth & Ball P.C., as escrow agent. N/A
10.73********** Securities Purchase Agreement dated as of March 14, 2000, by
and between Fidelity Holdings, Inc. and Strong River
Investments, Inc. N/A
10.74********** Registration Rights Agreement dated as of March 14, 2000, by
and between Fidelity Holdings, Inc. and Strong River
Investments, Inc. N/A
10.75********** Lease Agreement dated as of January 28, 2000, by 80-02
Leasehold Company, L.P. and Mid-Atlantic
Telecommunications, Inc. N/A
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. N/A
10.77*********** Separation and Release Agreement dated as of August 8, 2000,
entered into by and among Fidelity Holdings, Inc. and Doron
Cohen. N/A
10.78************ Redemption Agreement dated as of September 8, 2000, entered
into by and among Fidelity Holdings, Inc., Strong River
Investments, Inc. and Montrose Investments Ltd. N/A
10.79************ Redemption Agreement dated as of September 8, 2000, entered
into between Fidelity Holdings, Inc. and Augusta Street LLC. N/A
10.80************* Senior Secured Promissory Note due December 11, 2002 dated
December 11, 2000. N/A
10.81************* Security and Pledge Agreement dated December 11, 2000
between Fidelity Holdings, Inc. and M&K Equities, Ltd. N/A
10.82 Asset Purchase Agreement Asset dated as of February 12, 2001
between Internet Creations, Inc. (d/b/a Internet
Connections) and Access Technology, Inc. -
10.83 Stock Purchase Agreement dated of March 27, 2001 by and
among Global Communications of NY, Inc., Fidelity Holdings,
Inc. and IG2, Inc. -
10.84 Senior Secured Promissory Note due March 27, 2006 dated
March 27, 2001. -
10.85 Separation and Release Agreement dated March 27, 2001
entered into by and between Fidelity Holdings, Inc. and
Kimberly Peacock. -
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10.86 Letter dated November 21, 2000 regarding Promissory Notes
in favor of Strong River Investments, Inc. and Montrose
Investments Ltd. -
11.1 Statement re: computation of per share earnings. -
16.1***** Letter from Peter C. Cosmas Co., CPAs, dated February 9, N/A
1999.
18.1 Letter from BDO Seidman, LLP, Independent Accountants,
regarding Change in Accounting Principles. -
21.1 List of Subsidiaries of the Company. -
23.1 Consent of BDO Seidman, LLP, Independent Accountants. -
* Previously filed with the Commission as Exhibits to, and
incorporated herein by reference from, the Company's
registration statement on Form 10-SB (File No. 0-29182).
** Previously filed with the Commission as Exhibits to, and
incorporated herein by reference from, the Company's
annual report on Form 10-KSB for the year ended December
31, 1997 (File No. 0-29182)
*** Previously filed with the Commission as Exhibits to, and
incorporated herein by reference from, the Company's
quarterly report on Form 10-QSB for the quarter ended
September 30, 1998 (File No. 0-29182).
**** Previously filed with the Commission as Exhibits to, and
incorporated herein by reference from, the Company's
current report on Form 8-K, dated May 14, 1998. (File No.
0-29182).
***** Previously filed with the Commission as Exhibits to, and
incorporated herein by reference from, the Company's
current report on form 8-K, dated February 5, 1999. (File
No. 0-29182).
****** Previously filed with the Commission as Exhibits to, and
incorporated herein by reference from, the Company's
current report on form 8-K, dated January 26, 1999. (File
No. 0-29182).
******* Previously filed with the Commission as Exhibits to, and
incorporated herein by reference from, the Company's
current report on form 8-K, dated July 3, 1999. (File No.
0-29182).
******** Previously filed with the Commission as Exhibits to, and
incorporated herein by reference from, the Company's
current report on form 8-K, dated December 10, 1999. (File
No. 0-29182).
********* Previously filed with the Commission as Exhibits to, and
incorporated herein by reference from, the Company's
current report on form 8-K, dated February 16, 2000 (File
No. 0-29182).
74
75
********** 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, 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 10-Q, dated August 21, 2000 (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 September 22, 2000 (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 21, 2000 (File No. 0-29182).
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K on December 12, 2000 reporting
the issuance to M&K Equities, Ltd. a certain senior subordinated secured
promissory note in the principal amount of $2,000,000 in consideration of a
$2,000,000 loan.
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76
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 17, 2001
By: /s/ Bruce Bendell
--------------------------------------
Bruce Bendell, 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/ Bruce Bendell Chief Executive Officer and Director April 17, 2001
- -------------------------
Bruce Bendell
/s/ James Wallick President, Chief Operating Officer and Director April 17, 2001
- -------------------------
James Wallick
/s/ David Edelstein Director April 17, 2001
- -------------------------
David Edelstein
/s/ Richard L. Feinstein Senior VP, Finance and Chief Financial Officer April 17, 2001
- -------------------------
Richard L. Feinstein
/s/ Dennis Roth Director April 17, 2001
- -------------------------
Dennis Roth
/s/ Jeffrey Weiner Director April 17, 2001
- -------------------------
Jeffrey Weiner
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77
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, 2000 and 1999, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Fidelity Holdings,
Inc. and subsidiaries at December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2000, the Company changed its method of accounting for inventory
pricing.
BDO Seidman, LLP
New York, New York
March 30, 2001
F-1
78
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 1999
- ------------- ---- ----------
(restated)
ASSETS
CURRENT:
Cash and cash equivalents $ 2,786,312 $ 6,625,454
Net investment in direct financing leases, current 289,010 411,444
Accounts receivable, net of allowance for doubtful accounts of
$200,000 and $385,000 8,078,111 5,335,684
Inventories 47,465,261 24,954,618
Other current assets 1,964,954 1,987,169
Net assets held for sale 1,000,000 13,075,711
----------- -----------
TOTAL CURRENT ASSETS 61,583,648 52,390,080
NET INVESTMENT IN DIRECT FINANCING LEASES, NET OF CURRENT PORTION 205,992 508,084
PROPERTY AND EQUIPMENT, NET 8,754,983 5,413,363
DEFERRED INCOME TAXES 645,000 125,000
EXCESS OF COSTS OVER NET ASSETS ACQUIRED 13,909,058 7,533,856
DUE FROM OFFICER 347,765 -
OTHER ASSETS 1,334,951 2,348,948
----------- -----------
$86,781,397 $68,319,331
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - floor plan $45,214,444 $21,661,654
Notes payable - other 1,250,001 -
Line of credit 500,000 -
Accounts payable 4,940,132 6,655,560
Accrued expenses 4,222,609 1,853,481
Current maturities of long-term debt 866,120 758,150
Customer deposits 701,963 600,362
Other current liabilities - 239,508
----------- -----------
TOTAL CURRENT LIABILITIES 57,695,269 31,768,715
LONG-TERM DEBT, LESS CURRENT MATURITIES 10,411,443 7,416,784
OBLIGATIONS UNDER CAPITAL LEASES 3,011,821 -
DUE TO OFFICER - 157,794
OTHER 62,894 58,443
----------- -----------
TOTAL LIABILITIES 71,181,427 39,401,736
----------- -----------
COMMITMENTS AND CONTINGENCIES
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;
26,085,698 and 24,029,694 shares issued and outstanding in 2000
and 1999, respectively 260,859 160,198
Unearned stock-based compensation (284,391) -
Additional paid-in capital 39,210,271 30,593,905
Cumulative currency translation adjustment - (6,204)
Treasury stock, at cost (894,970) (263,580)
Deficit (22,696,799) (1,571,724)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 15,599,970 28,917,595
----------- -----------
$86,781,397 $68,319,331
=========== ===========
See accompanying notes to consolidated financial statements.
F-2
79
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended December 31, 2000 1999 1998
----------------------- ---- ---- ----
(restated) (restated)
REVENUES:
Sales $322,142,231 $209,531,993 $98,578,970
Cost of sales 272,246,635 176,121,370 84,070,267
------------ ------------ -----------
GROSS PROFIT 49,895,596 33,410,623 14,508,703
OPERATING EXPENSES 44,548,711 29,957,748 11,681,617
INTEREST EXPENSE, NET OF INTEREST INCOME 2,660,638 1,746,920 754,189
------------ ------------ -----------
INCOME BEFORE INCOME TAX EXPENSE AND
LOSS FROM DISCONTINUED OPERATIONS 2,686,247 1,705,955 2,072,897
INCOME TAX EXPENSE 1,384,000 890,000 1,020,000
------------ ------------ -----------
INCOME FROM CONTINUING OPERATIONS 1,302,247 815,955 1,052,897
LOSS FROM DISCONTINUED OPERATIONS (NET OF INCOME TAX
BENEFIT) (22,427,322) (4,006,103) (473,161)
------------ ------------ -----------
NET INCOME (LOSS) $(21,125,075) $(3,190,148) $ 579,736
============ ============ ===========
Income per common share - continuing operations:
Basic $0.05 $0.04 $0.06
Diluted $0.04 $0.04 $0.05
============ ============ ===========
Loss per common share - discontinued operations:
Basic and diluted $(0.87) $(0.19) $(0.03)
============ ============ ===========
Net income (loss) per common share:
Basic $(0.83) $(0.15) $0.04
Diluted $(0.83) $(0.15) $0.03
============ ============ ===========
Average number of shares used in computation:
Basic 25,509,144 21,054,183 16,507,786
Diluted 33,955,520 21,054,183 20,207,034
============ ============ ===========
See accompanying notes to consolidated financial statements.
F-3
80
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2000, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock Treasury stock
--------------------- ------------------------ --------------------
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
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 150% stock dividend - - 4,321,949 43,219 - -
Original issue discount on 12% debentures
(stock and warrants) - - - - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 (CARRIED FORWARD) 500,000 5,000 16,019,796 160,198 20,980 (263,580)
===================================================================================================================================
Years ended December 31, 2000, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative
Additional Retained currency Unearned Total
paid-in earnings translation stock-based stockholders'
capital (deficit) adjustment compensation equity
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1998 $ 5,414,293 $ 1,090,284 $ 297 $ - $ 6,576,331
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 1,618,424 (4,977) - 16,505,112
Comprehensive income (loss):
Net loss - (3,190,148) - - (3,190,148)
Other comprehensive loss:
Translation adjustment - - (1,227) - (1,227)
---------
Comprehensive loss for the year - (3,191,375)
---------
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 150% stock dividend (43,219) - - - -
Original issue discount on 12% debentures
(stock and warrants) 977,500 - - - 977,500
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 (CARRIED FORWARD) 30,593,905 (1,571,724) (6,204) - 28,917,595
=============================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
81
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
Years ended December 31, 2000, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock Treasury stock
--------------------- ------------------------ --------------------
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 (BROUGHT FORWARD) 500,000 $ 5,000 16,019,796 $160,198 20,980 $(263,580)
Net loss - - - - - -
Currency translation adjustment - - - - - -
Issuance of common stock for:
Services - - 21,770 218 - -
Business combinations - - 678,102 6,781 - -
Exercise of warrants - - 574,648 5,747 - -
Stock compensation, net of deferred
amounts - - 71,230 712 - -
Issuance of common stock in connection with
private placements - - 316,667 3,167 - -
Redemption of warrants in connection with
private placements - - 393,587 3,936 - -
Purchase of treasury stock - - - - 130,947 (631,390)
Original issue discount - - - - - -
Three-for-two stock split effected in the
form of a 150% dividend - - 8,009,898 80,100 10,490 -
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 500,000 $ 5,000 26,085,698 $260,859 162,417 $(894,970)
====================================================================================================================================
Years ended December 31, 2000, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative
Additional Retained currency Unearned Total
paid-in earnings translation stock-based stockholders'
capital (deficit) adjustment compensation equity
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 (BROUGHT FORWARD) $30,593,905 $ (1,571,724) $(6,204) $ - $28,917,595
Net loss - (21,125,075) - - (21,125,075)
Currency translation adjustment - - 6,204 - 6,204
Issuance of common stock for:
Services 209,276 - - - 209,494
Business combinations 8,106,466 - - - 8,113,247
Exercise of warrants 739,342 - - - 745,089
Stock compensation, net of deferred
amounts 854,566 - - (284,391) 570,887
Issuance of common stock in connection with
private placements 4,691,832 - - - 4,694,999
Redemption of warrants in connection with
private placements (6,000,016) - - - (5,996,080)
Purchase of treasury stock - - - - (631,390)
Original issue discount 95,000 - - - 95,000
Three-for-two stock split effected in the
form of a 150% dividend (80,100) - - - -
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $39,210,271 $(22,696,799) $ - $(284,391) $15,599,970
============================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
82
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2000 1999 1998
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(21,125,075) $ (3,190,148) $ 579,736
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Amortization of intangible assets 655,000 518,417 477,504
Depreciation 436,787 647,268 514,780
Noncash financing costs -- 977,500 --
Stock-based compensation 570,887 2,100,770 739,434
Discontinued operations 19,217,915 -- --
Stock issuance for services 209,494 -- --
(Increase) decrease in assets:
Net investment in direct
financing leases 424,526 363,913 (622,294)
Accounts receivable (2,742,427) (1,062,700) (767,119)
Inventories (15,348,990) (5,901,352) 1,646,580
Customer deposits (98,099) (130,256) 11,730
Other assets (3,220,549) (1,482,487) 414,668
Increase (decrease) in
liabilities:
Accounts payable (1,709,224) 4,434,377 (94,339)
Accrued expenses 2,286,126 (1,303,941) 292,987
Floor plan notes payable 16,643,439 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 (3,800,190) (1,186,098) 1,064,672
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (305,230) (918,485) (61,694)
Business combinations (1,393,411) (1,022,753) (1,018,432)
- --------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING
ACTIVITIES (1,698,641) (1,941,238) (1,080,126)
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 500,000 (450,000) 300,000
Proceeds from long-term debt 2,000,000 -- 429,599
Payments of long-term debt (397,371) (628,192) --
Proceeds from issuance of common
stock and exercise of warrants,
net of expenses 5,440,088 9,284,168 --
Redemption of adjustable warrants (4,746,079) -- --
Decrease in notes payable -- -- (109,080)
Proceeds from convertible debentures -- 405,000 600,000
Loans to officers (347,765) 147,451 249,851
Purchase of treasury stock (631,390) (263,580) --
Increase (decrease) in due from
shareholders (157,794) 282,036 (689,699)
- --------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES 1,659,689 8,776,883 780,671
- --------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH -- (1,227) (5,274)
- --------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (3,839,142) 5,648,320 759,943
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 6,625,454 977,134 217,191
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,786,312 $ 6,625,454 $ 977,134
==================================================================================================
See accompanying notes to consolidated financial statements.
F-6
83
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2000 1999 1998
- ----------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $2,660,638 $1,966,053 $ 624,222
Income taxes -- 1,250,329 2,846
Noncash financing activities
Notes issued for redemption of
warrants 1,250,000 -- --
Common stock issued as stock
compensation 854,566 675,000 --
Common stock issued for business
combinations and services 8,322,000 4,285,000 3,405,000
Debt issued in connection with
business combinations 1,500,000 7,500,000 --
Capital lease obligations 3,000,000 -- --
Preferred stock issued in
connection with business
combinations -- -- 6,000,000
Debt conversions -- -- 1,050,000
Original issue discount 95,000 977,000 --
========================================================================================
See accompanying notes to consolidated financial statements.
F-7
84
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
Fidelity Holdings, Inc. (the "Company" or "Fidelity") was
incorporated under the laws of the State of Nevada on November
7, 1995. The Company is structured as a holding company that
has an automotive division and had a technology division that
included computer telephony, telecommunication operations and
plastics and utility operations. On November 3, 2000, the
Board of Directors determined to divest the Company's
non-automotive division (see Note 16). As a result of treating
the divestiture as discontinued operations, the Company
operates in one segment.
(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 (Loss) per Share
The Company has presented basic and diluted earnings (loss)
per share, where applicable. Basic earnings (loss) per share
excludes potential dilution and is calculated by dividing
income (loss) available to common stockholders by the weighted
average number of outstanding common shares. Diluted earnings
(loss) per share incorporates the potential dilutions from all
potential dilutive securities that would have reduced earnings
per share.
(d) Cash Equivalents
Cash equivalents consist of highly liquid investments,
principally money market account and contracts-in-transit,
with a maturity of three months or less at the time of
purchase. Cash equivalents are stated at cost which
approximates market value.
F-8
85
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 first-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.
The Company has changed the method of accounting for inventory
pricing from the last-in, first-out method to the first-in,
first-out method. The new method of accounting for inventory
pricing was adopted to be consistent with industry practice
and the financial statements of prior years have been restated
to apply the new method retroactively. For income tax
purposes, the last-in, first-out method has been continued.
The effect of the accounting change on income during the years
ended December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998
- --------------------------------------------------------------------------------
Effect on:
Income from continuing
operations $322,144 $ 350,218 $ 51,596
Net loss per common share:
Basic $ 0.01 $ 0.02 $ 0.01
Diluted $ 0.01 $ 0.02 --
================================================================================
F-9
86
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
(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.
F-10
87
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(i) Comprehensive Income (Loss)
Comprehensive income (loss) is defined to include all changes
in equity except those resulting from investments by owners
and distributions to owners. The Company's only item of other
comprehensive income (loss) is foreign currency translation
adjustments.
(j) Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America 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.
(k) 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 $655,000,
$518,417 and $477,504 for the years ended 2000, 1999 and 1998,
respectively.
(l) Long-lived Assets
Long-lived assets, such as ongoing client relationships,
goodwill and property and equipment, are evaluated for
impairment when events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable
through the estimated undiscounted future cash flows resulting
from the use of these assets. When any such impairment exists,
the related assets will be written down to fair value. In
connection with the discontinued operations, the Company took
an impairment charge of approximately $13.6 million (see Note
16).
F-11
88
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(m) Fair Value Disclosures
The carrying amounts reported in the consolidated balance
sheet for cash and cash equivalents, notes and accounts
receivable, inventories, accounts payable, 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, approximates book value,
estimated based on current rates offered to the Company for
similar debt.
(n) Income Taxes
The provision for income taxes is computed on the pretax
income (loss) based on the current tax law. Deferred income
taxes are recognized for the tax consequences in future years
of differences between the tax bases of assets and liabilities
and their financial reporting amounts at each year-end based
on enacted tax laws and statutory tax rates. Valuation
allowances are recorded when recoverability of the deferred
tax asset is in doubt.
(o) Stock-Based Compensation
The Company accounts for its stock option awards to employees
under the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Under the
intrinsic value based method, compensation cost is the excess,
if any, of the quoted market price of the stock at grant date
or other measurement date over the amount an employee must pay
to acquire the stock. The Company makes pro forma disclosures
of net income and earnings per share as if the fair value
based method of accounting had been applied as required by
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation."
F-12
89
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(p) Effect of Recently Issued Accounting Standards
During 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended, becomes effective January
1, 2001. SFAS No. 133 requires that all derivative financial
instruments be recorded on the consolidated balance sheets at
their fair value. Changes in the fair value of derivatives
will be recorded each period in earnings or other
comprehensive earnings, depending on whether a derivative is
designated as part of a hedge transaction and, if it is the
type of hedge transaction. Gains and losses on derivative
instruments reported in other comprehensive earnings will be
reclassified as earnings in the periods in which earnings are
affected by the hedged item. The adoption of this statement is
not expected to have a significant impact on the Company's
results of operations, financial position or cash flows since
the Company does not enter into any derivative instruments.
In 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements," which became effective in the fourth
quarter of 2000. The adoption of SAB No. 101 did not have a
material effect on the Company's financial statements.
F-13
90
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(q) Stock Split
The Company's Board of Directors declared a three-for-two
stock split effected in the form of a 150% 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 150% 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 stock splits.
2. NOTE RECEIVABLE - OFFICER/ STOCKHOLDER
The Company held a note from one officer/stockholder in the amount of $517,783,
including accrued interest, at December 31, 1999. The note was repaid in 2000.
3. NET INVESTMENT IN DIRECT FINANCING LEASES
Components of the net investment in direct financing leases is as follows:
December 31, 2000 1999
- --------------------------------------------------------------
Total minimum lease
payments to be received $ 433,692 $ 936,597
Estimated residual value of
leased property 102,755 100,569
Unearned income (41,445) (117,638)
- --------------------------------------------------------------
495,002 919,528
Less: Current portion (289,010) (411,444)
- --------------------------------------------------------------
Net investment in direct
financing leases, net of
current portion $ 205,992 $ 508,084
==============================================================
F-14
91
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum lease payments receivable at December 31, 2000 are as follows:
Year ending December 31, Amount
- ---------------------------------------
2001 $289,010
2002 100,479
2003 31,510
2004 12,693
- ---------------------------------------
Total $433,692
=======================================
4. INVENTORIES
Inventories consist of the following:
December 31, 2000 1999
- ---------------------------------------------------------------
New automobiles $17,784,121 $ 5,291,503
New trucks and vans 13,600,234 9,547,442
Used automobiles and trucks 14,207,376 9,253,161
Parts and accessories 1,768,694 805,976
Other 104,836 56,536
- ---------------------------------------------------------------
$47,465,261 $24,954,618
===============================================================
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, 2000 1999 Lives
- ---------------------------------------------------------------------------------------------
Land $3,858,000 $2,400,000 --
Building 3,293,000 1,000,000 40 years
Leasehold improvements 1,302,111 1,025,038 15 years
Furniture and fixtures 1,224,039 894,866 3-7 years
Equipment 1,493,092 2,071,931 3-7 years
- ---------------------------------------------------------------------------------------------
11,170,242 7,391,835
Less: Accumulated
depreciation and
amortization 2,415,259 1,978,472
- ---------------------------------------------------------------------------------------------
$8,754,983 $5,413,363
=============================================================================================
F-15
92
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. 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, including amounts
relating to the loss from discontinued operations of
$1,804,000, $1,082,000 and $506,000 in 2000, 1999 and 1998,
respectively, is as follows:
Year ended December 31, 2000 1999 1998
- -------------------------------------------------------------------------------------------
Federal:
Current $ -- $(134,000) $302,000
Deferred (442,000) -- --
State:
Current 100,000 67,000 212,000
Deferred ( 78,000) (125,000) --
- -------------------------------------------------------------------------------------------
Total $(420,000) $(192,000) $514,000
===========================================================================================
F-16
93
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation between the amount computed by applying the
Federal statutory rate to income (loss) from continuing and
discontinued operations before income taxes and the actual
income tax expense was as follows:
Year ended December 31, 2000 1999 1998
-------------------------------------------------------------------------------
Amount using the
statutory Federal
tax rate $(7,325,000) $(1,270,000) $ 348,000
Utilization of tax
loss carryforwards -- -- (102,000)
Losses of discontinued
operations that can
not be utilized 970,000 -- --
State and local income
taxes, net of
Federal tax benefit (900,000) (724,000) 140,000
Excess officers'
compensation -- 534,000 --
Original issue discount -- 522,000 --
Goodwill amortization 310,000 277,000 155,000
discontinued operations
asset writedown 6,528,000 -- --
Other, net (3,000) 199,000 (27,000)
Bad debt accrual 200,000 --
Foreign losses 70,000 --
-------------------------------------------------------------------------------
Provision (benefit)
for taxes on income $ (420,000) $ (192,000) $ 514,000
===============================================================================
At December 31, 2000, the Company had available domestic net
operating loss carryforwards primarily related to continuing
operations of approximately $1.4 million which begin to expire
in the year 2011. The Company believes that valuation
allowances to offset portions of deferred tax assets are
unnecessary since the realization of such deferred tax assets
will be probable given the profitability of such continuing
operations. In addition, the Company does not expect to be
able to utilize the benefits from any of the operating loss
carryforwards resulting from the discontinued operations.
7. SECURED LINES OF CREDIT AND FLOOR PLAN NOTES PAYABLE
Secured Lines of Credit
The Company has two lines of credit ("Lines") with a bank 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.
F-17
94
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Lines are 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, 2000 and 1999, the
outstanding balance on the Lines were $500,000
and $-0-, respectively.
Floor Plan Notes Payable
The Company finances the majority of its new
and used inventory primarily through secured
revolving floor plan financing arrangements
with various lenders. The Company makes monthly
interest payments on the amount financed, but
is required to make loan principal repayments
following the sale of the related new and used
vehicles. Outstanding borrowings under floor
plan financing arrangements amounted to
$45,214,444 and $21,661,654 at December 31,
2000 and 1999, respectively. The floor plan
arrangements grant a security interest in the
vehicles financed as well as the related sales
proceeds. Interest rates on the floor plan
agreements are variable and increase or
decrease based on movement in LIBOR or prime
borrowing rates. Floor plan interest for the
years ended December 31, 2000, 1999 and 1998
were $1,858,632, $796,810 and $194,888,
respectively. Interest rates in effect in the
year 2000 ranged between 8.0% and 9.5%. At
December 31, 2000, committed capacity of the
facilities was approximately $50 million.
8. CONVERTIBLE During April 1998, the Company issued $600,000
SUBORDINATED of 10% convertible subordinated debentures, due
DEBENTURES June 1999 with interest payable semi-annually.
During April 1999, the debentures were
converted into 459,000 shares of common stock
at a price of $1.96 per share.
F-18
95
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) 81.8181 shares of Common Stock, (iii)
warrants (the "Warrants") to acquire 187.4985 shares
of Common Stock at $1.86 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, 225,000 shares of Common Stock, Warrants to
acquire 515,627 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, 112,500 shares of the Company's Common
Stock, 30,000 shares of CBS Common Stock and Warrants
to purchase an aggregate of 257,811 shares of Common
Stock at an exercise price equal to $1.87 per share.
In 1999, eighty-five percent of the convertible
debentures were redeemed for cash, while the remaining
fifteen percent were converted into 241,458 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 which is included in loss from
discontinued operations for the year ended December
31, 1999. The loss consisted of unamortized original
issue discount.
F-19
96
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. 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, 2000
ranged between 8% and 9.75%. 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 (see Note 10). 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.
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. The
payments are due to begin in August 2001. Based on the
report of an independent appraiser, the Company has
recorded a deferred charge of $840,000 (included in
other assets) as the value of the noncompete 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, $175,000, representing five
months of amortization, has been charged in the year
ended December 31, 2000.
F-20
97
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $829,096 in 2000,
representing the difference between the aggregate
potential of payments and forgiveness provided for in
the Agreement and the non-compete amount determined by
the independent appraiser. This expense is directly
attributable to the value of Mr. Cohen's noncompete
provisions related to the Company's technology
operations. As such, it has been included in the
estimated loss from discontinued operations.
On December 11, 2000, the Company issued to M&K
Equities, Ltd. ("M&K"), an affiliate of a Director of
the Company, a senior subordinated promissory note in
the principal amount of $2,000,000 in exchange for a
$2,000,000 loan from M&K. The terms of the note
require payment of the $2,000,000 principal on
December 11, 2002. The note requires monthly interest
payments at a rate of 10% per annum. In order to
induce M&K to make the loan, the Company granted to
them a lien on, and a security interest in, all of
their non-technology assets, subject to prior senior
liens. The Director also received options under the
1999 Employee Stock Option Plan to purchase 250,000
shares of the Company's common stock at an exercise
price of $0.47 per share. The fair value ascribed to
the options was approximately $95,000 based on the
Black-Scholes option-pricing model; such amount was
recorded as a deferred charge and as additional
paid-in capital of stockholders' equity. The amount of
the deferred charge will be amortized ratably over the
term of the note.
F-21
98
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Long-term debt consists of the following:
December 31, 2000 1999
--------------------------------------------------------------------------------
Leasing notes payable $ 486,004 $1,019,484
Falcon loan payable 6,894,860 7,155,450
Note payable to former president 410,500 -
M&K note payable 2,000,000 -
World Omni note payable (see Note 10) 1,474,252 -
Other 11,947 -
--------------------------------------------------------------------------------
11,277,563 8,174,934
Less: Current portion 866,120 758,150
--------------------------------------------------------------------------------
$10,411,443 $7,416,784
================================================================================
Maturities are as follows:
December 31, 2000
--------------------------------------------------------------------------------
2001 $ 866,000
2002 2,682,000
2003 765,000
2004 743,000
2005 660,000
Thereafter 5,562,000
--------------------------------------------------------------------------------
$11,278,000
================================================================================
F-22
99
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. BUSINESS
COMBINATIONS On April 21, 1997, the Company, through a wholly-owned
subsidiary, Major Acquisition Corp., entered into a
merger agreement with Major Automotive Group Inc.
("Major Auto") and its sole stockholder, Bruce
Bendell, the Company's Chief Executive Officer and
Chairman. Pursuant to the Merger Agreement, Bruce
Bendell contributed to Major Auto all of his shares of
common stock of Major Chevrolet Inc., Major Subaru
Inc., Major Dodge Inc. and Major Chrysler, Plymouth,
Jeep Eagle Inc. 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, Inc. and Major Chrysler,
Plymouth, Jeep Eagle, Inc. 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 4.1 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% (see Note
9). 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-23
100
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 since the purchase
date.
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 68,617 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 as of September 9, 1999.
The Company waited for approval from the factory in
connection with the Compass Dodge purchase and has
included $300,000 of the purchase price in other
assets at December 31, 1999.
F-24
101
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 1996, Computer Business Sciences, Inc.
("CBS") formed a joint venture with Nissko Telecom,
L.P. (the "Nissko Group"). The joint venture is
between Nissko Telecom Associates ("Nissko") and Dr.
Nassim creating Nassim-Nissko Associates, a joint
venture ("Joint Venture"). CBS, now IG2, owns 45% of
the Joint Venture and Nissko owns 55%. Nissko L.P. is
a limited partnership, the general partner of which is
one of the Company's master agents, Nissko Telecom,
Ltd. (the "Agent"), and the limited partners of which
are four individuals, three of whom, including Yossi
Koren, a former director, are shareholders of the
Agent.
In November 1999, CBS, now IG2, a subsidiary, entered
an agreement (the "Nissko Agreement") with the
shareholders of the Agent (the Nissko Group") to
purchase Nissko L.P's share in NT 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 IG2 and
the Company.
As payment, CBS, now IG2, 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 882,000
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 882,000 shares of the Company (Fidelity
Shares) based on a maximum value of $2,500,000 of the
shares or 882,000 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.
F-25
102
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 882,000 shares.
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 300,000 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 300,000 restricted shares of Fidelity
Holdings, Inc. common stock have been placed in escrow
under the agreement to cover personal guarantees of
the Nissko Group.
In December 1999, CBS, now IG2 , entered an agreement
where it agreed to purchase from the Joint Venture
long distance telephone service, internet service,
data and any and all other telephony services (the
"Telephony Business"), which includes all business in
the Venezuela, Brazil, Chile, Mexico, Argentina and
the United States, and all rights to any and all
equipment related to the Telephony Business in
exchange for 37,500 shares of Fidelity common stock,
to be issued in the name of Dr. Nassim and 60,000
shares of CBS, now IG2 to be issued in the name of
Roberto Nassim.
F-26
103
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CBS, now IG2, guaranteed the value per share to be no
less than $500,000 thirteen months from December 1,
1999 ("Guaranteed Value"). If the closing price per
share of Fidelity common stock on the trading day
preceding January 1, 2001 is less than the Guaranteed
Value (the "Closing Price"), the difference between
the Closing Price per share multiplied by the
Guaranteed Value (the "Shortfall") will be paid, at
the option of IG2, either in cash or in shares of
Fidelity common stock whose approximate value is equal
to the Shortfall. IG2 shall not be released from its
obligations as provided in such agreement. Any
additional issuances of common stock will be recorded
at par value, since the purchase price originally
reflected the transaction value.
On February 23, 2000, in exchange for 575,862 shares
of its common stock valued at $6,975,480, the Company
acquired CarsTV.com. This company is a Richmond,
Virginia based regional, full-service Internet service
provider and digital subscriber line ("DSL") provider,
as well as a content supplier for the cable industry
focused on the automotive industry. The acquisition
was treated as a purchase and the excess cost over the
net assets acquired was approximately $7,108,000, and
was allocated to goodwill, of which the unamortized
balance has been charged to discontinued operations
(see Note 16). Accordingly, the results of operations
of CarsTV.com have been included as of February 23,
2000 and included in discontinued operations. Pursuant
to the Merger Agreement, if IG2 undergoes an initial
public offering ("IPO"), as defined in the agreement,
the selling shareholders of CarsTV.com have the option
to convert up to 287,931 common shares of the Company
into IPO common stock, at a conversion price as
defined in the agreement.
On August 9, 2000, the Company purchased assets of
Compass Dodge for approximately $402,000 of which
$385,000 was in cash and 12,500 shares of the
Company's common stock having a fair market value of
approximately $17,000. 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 $299,000 and was allocated
to goodwill.
F-27
104
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The acquisition was accounted for by the purchase
method of accounting for business combinations.
Results of operations have been included in the
Company's consolidated financial statements since the
purchase date.
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, of which $5.0
million was allocated to inventories and property and
equipment. The excess of the purchase price over the
fair value of net assets acquired (goodwill) was
approximately $1.8 million and is being amortized over
15 years. The acquisition was financed through
available cash and a note of $1.5 million issued to
World Omni. The acquisition was accounted for as a
purchase. Results of operations have been included in
the Company's consolidated financial statements since
the purchase date.
On April 12, 2000, the Company acquired substantially
all of the assets of the Hempstead Mazda automobile
dealership, a full-service retail new and used vehicle
dealership based on Long Island in New York, for
approximately $1,351,000 which included assumption of
certain liabilities. The Company paid $210,000 in cash
and 87,211 shares of its common stock valued at
$1,080,000. The purchase price was allocated to the
assets acquired based on their estimated fair values
of which $167,000 was allocated to inventories and
property and equipment. The excess of the purchase
price over the fair value of net assets acquired
(goodwill) was approximately $1,175,000 and is being
amortized over 15 years. The acquisition was accounted
for as a purchase. The agreement provided for a put
option that could be exercised by either party for
18,947 shares at $19 per share. On July 26, 2000, the
Company exercised the option and bought the 18,947
shares at $19 per share for $359,993. The agreement
also
F-28
105
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
calls for a make whole provision based upon a formula
determined by the fair value of the Company's stock on
the anniversary date of April 11, 2001. As of March
30, 2001, the Company would be required to issue
approximately 1,300,000 additional shares of common
stock. The issuance of these shares will be recorded
at par value since the purchase price originally
reflected the transaction value.
The pro forma unaudited consolidated results of
continuing operations assuming acquisitions accounted
for under the purchase method of accounting had
occurred at the beginning of each period are presented
as follows for the years ended December 31:
December 31, 2000 1999 1998
--------------------------------------------------------------------------------
Revenues $348,000,000 $ 217,000,000 $159,000,000
Income -
continuing
operations 671,000 808,000 1,154,000
Proforma earnings
per share -
continuing
operations - diluted .02 .04 .06
================================================================================
11. 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.
12. COMMITMENTS AND Operating Leases
CONTINGENCIES
The Company leases real property under various
operating leases, most of which have terms from 1 to 6
years.
F-29
106
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future net minimum lease payments under noncancelable
operating lease agreements as of December 31, 2000 are
as follows:
December 31,
-------------------------------------------------------
2001 $ 1,018,000
2002 668,000
2003 670,000
2004 397,000
2005 246,000
Thereafter 1,082,000
-------------------------------------------------------
$4,081,000
=======================================================
Rent expense was $1,841,000, $1,450,000 and $1,376,357
for the years ended December 31, 2000, 1999 and 1998,
respectively.
Capital Leases
In connection with the acquisition of Hempstead Nissan
(see Note 10), the Company was assigned a lease
agreement for facilities used for operations of the
dealership. The lease agreement provided for the
transfer of ownership at the option of the Company at
the end of the lease term for $3 million. The Company
also has capital equipment leases. The net book value
of all assets under capital leases at December 31,
2000 is approximately $3 million.
The future net minimum lease payments under capital
leases are as follows:
Fiscal year ending December 31,
-------------------------------------------------------
2001 $ 234,000
2002 3,129,000
-------------------------------------------------------
3,363,000
Less: Amount representing interest 351,000
-------------------------------------------------------
Present value of net minimum lease
payments $3,012,000
=======================================================
F-30
107
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings
On July 27, 1999, Mr. Daniel Tepper of Los Angeles,
California, 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 in 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 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
Company common stock. He contends that the Company has
wrongfully (i) refused to remove the "restricted"
legend from 240,000 of those shares, and (ii) withheld
the remaining 120,000 shares from him. The Company 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.
Subsequently, all shares were released in unrestricted
form to Mr. Tepper, and he has sold some of them. Mr.
Tepper has filed another Amended Complaint alleging,
among other things, that our officers manipulated the
price of the shares to the disadvantage of Mr. Tepper
and other shareholders. The Company has filed a Third
Party Complaint against InvestAmerica, alleging, among
other things, claims for indemnification and breach of
contract. The basis of this pleading is that if we are
liable to Mr. Tepper, it is due to InvestAmerica's
actions of: (1) improperly transferring the shares in
the first place; and (2) asserting a claim of
ownership in the shares. The court has now ruled that
Mr. Tepper is the proper present owner of the subject
shares, and that neither we nor InvestAmerica can
claim ownership of those shares going forward.
However, this ruling has not ended the litigation. Mr.
Tepper is still asserting damages against the Company
for our refusal to release the shares earlier. Our
third party claims against InvestAmerica are also
being litigated in that same lawsuit. The court has
scheduled the trial of this case to begin October 15,
2001.
F-31
108
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
By Summons and Complaint dated June 11, 1999, the
Company was named as the defendant in an action titled
Ronald Shapss Corporate Services, Inc. v. Fidelity
Holdings, Inc., brought in the Supreme Court of the
State of New York, Rockland County, Index No. 3248/99.
In this action, Ronald Shapss Corporate Services, Inc.
("RSCS") has alleged that the Company 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 plaintiff contended that the Company
wrongfully refused to allow the exercise of options
for 50,000 shares of our stock at $4.50 per share. The
plaintiff also alleged an anticipatory breach of
plaintiff's right to exercise an option to purchase
100,000 more shares for $4.50 per share. The plaintiff
alleged it sustained damages in the sum of $5,000,000
in punitive damages on the conversion claim.
The Company initially filed a motion to dismiss the
cause of action alleging conversion. At that time RSCS
cross-moved for partial summary judgment in its favor
on the claim for damages caused by our refusal to
recognize the exercise of the option to purchase the
first 50,000 shares. The court granted our motion and
dismissed the cause of action for conversion. The
court denied the plaintiff's motion for partial
summary judgment. The Company then filed an answer
denying the allegations of the complaint, asserting
affirmative defenses and asserting counterclaims
against the plaintiff and Ronald Shapss, the principal
of the plaintiff corporation. The plaintiff re-filed
its motion for partial summary judgment and the motion
was again denied. The plaintiff filed an appeal to the
Appellate Division of the Supreme Court, Second
Department. The Appellate Division affirmed the order
of the lower court. During the pendency of the appeal,
the Company filed a motion for partial summary
judgment declaring that the plaintiff was not entitled
to purchase the 100,000 shares for $1,000.00 and was
not entitled to receive or exercise the options for
100,000 shares at $4.50 per share. The court granted
that motion.
The parties are conducting discovery on the
plaintiff's remaining claim that it was damaged in the
sum of $1,375,000.00 for our failure to allow the
exercise of options for 50,000 shares. In addition,
the parties are conducting discovery on our
counterclaim to rescind the contract and cancel said
options as well as cancel 50,000 shares of stock
previously issued pursuant to that contract.
The plaintiff's motion for summary judgment was based
on its claim that the Company made various admissions
that plaintiff had fully performed its contract. The
courts agreed that we had offered sufficient factual
details to support our claim that plaintiff had not
fully performed and failed to explain the alleged
admissions.
F-32
109
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A legal action has been commenced against the Company
by plaintiffs S&L Telecom, Inc., Jacob Steinmetz and
Joseph Luria in the Supreme Court of the State of New
York, County of New York, Index No. 605513/99.
Plaintiffs filed a complaint on December 7, 1999
against the Company alleging that the Company failed
to deliver shares of stock to plaintiffs pursuant to
terms of an agreement between the parties. Plaintiffs
are seeking delivery of the shares and damages. The
parties are currently awaiting a decision from the
Court on the Company's motion to dismiss the complaint
and plaintiffs' motion for summary judgment and
dismissal of the Company's counterclaim. Limited
discovery has begun and is continuing at this time.
The Company, Computer Business Sciences and 786710
Ontario, Ltd. are plaintiffs in a legal action
against Michael Marom and M.M. Telecom Corp. in the
Supreme Court of the State of New York, County of
Queens, Index No. 25678/96. The plaintiffs filed a
complaint on December 23, 1996 against the defendants
alleging: (i) breach of a letter agreement between
the parties; (ii) tortuous interference with business
opportunities; and (iii) slander. Defendants filed an
answer with counterclaims. Both parties are currently
still engaged in ongoing discovery at this time.
On or about November 9, 2000, Realtech Systems
Corporation ("Realtech") served the Company as well as
IG2 a Demand for Arbitration before the Commercial
Arbitration tribunal of the American Arbitration
Association relating to work and services allegedly
provided by Realtech to IG2. The Demand asserted that
pursuant to a Master Agreement dated November 16, 1999
between Realtech and IG2, both parties agreed to
arbitration in the event of any potential disputes.
The Demand further asserts that Realtech has provided
work and services to the Company in the unpaid amount
of $198,000, and that the Company and IG2 further
breached the agreement by hiring John Honovich, a
former Realtech employee. Realtech seeks in excess of
$243,849 in damages. Realtech included the Company in
an arbitration based on the idea that IG2 is "our
wholly owned subsidiary" and not on the basis of the
agreement. On December 1, 2000, the Company served a
Notice of Petition and a Petition seeking a stay of
arbitration on our behalf on the grounds that IG2 is
not a signatory to any arbitration agreements between
Realtech and the Company. Realtech served reply papers
as well as a cross motion compelling the Company to
arbitrate on December 14, 2000. On January 12, 2001,
the Company filed an Order to Show Cause, to which
Realtech answered. On January 29, 2001, Justice Tolub
of the New York State Supreme Court ordered the
Arbitration stayed as to the Company, and denied
Realtech's arbitration claim.
With respect to IG2, there is a good possibility that
the claim will be dismissed since Realtech failed to
perform as per the Agreement.
F-33
110
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 28, 2000, Schiano Bros. Inc. ("Schiano")
filed a third party lawsuit against Computer Business
Sciences Inc. ("CBS") in the Supreme Court of the
State of New York, Kings County. The suit alleged that
phone services provided to the Dominican Republic
through MCI International, Inc. ("MCI") were
wrongfully attributed to Schiano and should have been
attributed to CBS. In addition, an intentional tort
claim was also filed against CBS. The suit seeks
$150,000 in damages. The Company filed an Answer on
September 20, 2000, as well as a Demand for a Third
Party Bill of Particulars on the plaintiff MCI, and
Discovery and Inspection Demands on all parties.
Plaintiff responded only with a set of invoices, to
which the Company requested a more thorough inquiry.
On December 10, 2000, Schiano served a Bill of
Particular and Interrogatory Demands upon us, as well
as Notices for Discovery and Inspection. A Preliminary
Conference Order was scheduled for March 3, 2001.
There were no agreements made between the Company and
Schiano, or between the Company and MCI; the sole
basis for Schiano's claim is a verbal/oral agreement
upon facts that do not exist.
An action has been commenced by Waterview Resolution
Corp. ("Waterview") against Schiano, who third party
impleaded the Company in November 2000 in the Supreme
Court of the State of New York, New York County.
Schiano leased equipment from Waterview with the
expectation of entering into a business arrangement
with the Company. On January 23, 2001, Schiano served
upon the Company a lawsuit alleging an agreement with
the Company to sell telephone service to the
Philippines in which the Company (i) failed to
disclose the financial interest of Taylor Financial
Services Inc. to Schiano, (ii) failed to engage in a
joint venture or partnership with Schiano and (iii)
failed to disclose the substantial risk of termination
of the business by the Philippine government. No
written agreement has been produced to substantiate
the aforementioned claims. A Notice to take
Examination Before Trial was served on both the
defendant and plaintiff by the Company on March 6,
2001.
On June 6, 2000 plaintiffs filed a lawsuit against CBS
in the amount of $1,000,000 in the Northern District
of California, San Francisco division. Plaintiffs
allege that they were convinced to join the advisory
board of CBS in return for: (i) a seat on the
Technical Advisory Board; (ii) stock options; (iii) a
signing bonus; and (iv) a consulting agreement.
Plaintiffs further allege that CBS used their names to
further our image and received nothing in return.
Plaintiffs filed an amended complaint on October 16,
2000, and the Company subsequently filed a Motion to
Dismiss and Transfer Venue on November 6, 2000.
Plaintiffs opposed the motion to dismiss, to which the
Company replied on September 8, 2000. The Motion was
granted as to Rule 10-5b for failure to state a claim,
granted as to Lack of Personal Jurisdiction over Mr.
Cohen, Mr. Bendell and Ms. Peacock, and denied as to
all other claims. A case management conference was
re-set for April 6, 2001. A substitution of Attorney
Robert Rimberg for Brobeck, Phleger & Harrison was
entered March 30, 2001, and is pending.
F-34
111
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 21, 2000, Russell Reynolds Associates,
Inc. ("Russell Reynolds") filed a complaint against
the Company in the Supreme Court of the State of New
York, New York County. The suit alleged that the
Company had not paid for employee search services
based upon an alleged agreement entered into by us
with Russell Reynolds. The suit further alleged an
amount outstanding of $108,688.09 for services
rendered in connection with executive search services.
The Company served an Answer on the plaintiff on
February 20, 2001 as well as a Notice to take
Deposition and a Notice to Produce.
As discovery has not yet commenced and all the facts
have not been disclosed, it is too early to render a
determination in this case.
An action entitled Stephen B. Wechsler, et al. v.
Fidelity Holdings, Inc. et al., CV 00 6488
(CPS)(E.D.N.Y.) (the "Wechsler Litigation") has been
commenced against Fidelity Holdings, Inc. The
Wechsler Litigation is an action pending in the
United States District Court for the Eastern District
of New York. The Wechsler Litigation is brought on
behalf of certain persons who acquired an unstated
number of shares of Fidelity common stock between
December 1999 and May 2000. Named as defendants are
Fidelity, Doron Cohen, Richard L. Feinstein and Bruce
Bendell (the "Defendants").
On December 26, 2000, plaintiffs filed a Second
Amended Complaint, which alleges, among other things,
that the plaintiffs sustained damages when they
acquired Fidelity common stock because the Defendants
allegedly issued materially false and misleading
statements and failed to disclose material information
which purportedly caused such stock to trade at
artificially inflated prices. The Second Amended
Complaint alleges violations of Section 10(b) and
20(a) of the Securities Exchange Act of 1934 (the
"Exchange Act") and Rule 10b-5 promulgated thereunder.
The allegedly misstated and omitted information
concerns Fidelity's reported income for the first
three quarters of 1999 and the prospects for its
technology business. The Second Amended Complaint
seeks, among other things, damages "in an amount, not
less than" one million dollars.
F-35
112
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 16, 2001, Fidelity and Messrs. Bendell and
Feinstein filed a motion to dismiss the Second Amended
Complaint for failure to plead fraud with
particularity. (The Company understands Mr. Cohen has
not been served with process for this action.)
A class action has been commenced against Fidelity in
the following entitled action: In re: Fidelity
Holdings Securities Litigation, Master File No. 005078
(CPS) (E.D.N.Y.) (the "Class Action"). The Class
Action, also pending in the United States District
Court for the Eastern District of New York, consists
of twelve putative class actions that were originally
filed in the Southern District of New York and the
Eastern District of New York. The Class Action is
purportedly brought on behalf of all persons who
acquired shares of Fidelity common stock between June
24, 1999 and May 22, 2000. Named as defendants are
Fidelity, Doron Cohen, Richard L. Feinstein and Bruce
Bendell (the "Defendants").
F-36
113
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The constituent actions were all commenced subsequent
to Fidelity's April 12, 2000 announcement of its
financial results for the fiscal year ended December
31, 1999. The complaints allege, among other things,
that the plaintiffs were damaged when they acquired
shares of Fidelity common stock because Defendants
allegedly issued materially false and misleading
statements and failed to disclose material information
during the class period, which purportedly caused such
stock to trade at artificially inflated prices during
the class period. The complaints allege violations of
Sections 10(b) and 20(a) of the Exchange Act, and Rule
10b-5 promulgated thereunder. The allegedly misstated
and omitted information concerns Fidelity's reported
income for the first three quarters of 1999 and the
prospects for its technology business. To date, no
consolidated complaint has been served and Fidelity's
time to answer each of the constituent complaints has
been served and Fidelity's time to answer each of the
constituent complaints has been adjourned
indefinitely. The complaints seek, among other things,
damages in unspecified amounts.
While the Company believes that it has substantial
defenses to the asserted claims discussed above and it
intends to vigorously defend these suits, a judgments
against it with respect to actions could have a
material adverse effect on the Company's financial
condition.
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.
13. RELATED PARTY Amounts due affiliates are amounts owed by the
TRANSACTIONS Company's leasing subsidiary for advances made in the
ordinary course of business from various entities
which are wholly owned by the subsidiaries' former
stockholders. The advances are in the form of
noninterest-bearing obligations with no specified
maturity dates. At December 31, 2000 and 1999, amounts
due from affiliates and officers of $3,438,000 and
$1,335,642 are included in accounts receivable,
respectively.
F-37
114
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Marcum & Kliegman LLP, an accounting firm of which a
director is a member, charged the Company
approximately $95,000, $104,000 and $48,000 in fees
for accounting services for the years ended December
31, 2000, 1999 and 1998, respectively. (See Note 9).
During 2000, the Company advanced $347,765 to an
officer of the Company. The advance is noninterest
bearing and due on demand.
All sales of used cars to affiliates were made at
wholesale cost plus related fees incurred by Major
Auto and therefore resulted in no profit to Major
Auto. Total sales revenue and unit counts were
estimated to be less than 5% of total sales for the
years ended December 31, 2000, 1999 and 1998.
14. WARRANTS AND (a) Warrants
OPTIONS
(i) In March 1996, the Company issued to Nissko
Telecom, Inc. and its investors warrants to
purchase 2,250,000 shares of the Company's
common stock at a price of $0.55 per share.
In 1997, warrants to purchase 784,500 shares
were exercised, leaving a balance of
1,465,500 outstanding. Of this amount, Class
B warrants for 1,125,000 shares, which were
exercisable through March 19, 1998, were
unexercised by that date and, therefore,
lapsed and warrants to purchase 217,071
shares of the Company's common stock were
exercised in December 1998, leaving a
balance of 185,143 outstanding as of
December 31, 2000.
(ii) In addition, the Company issued warrants in
1996 for the purchase of 225,000 shares at a
price of $0.55 per share, in connection with
the management agreement entered into when
the Company acquired Major Fleet & Leasing
Corp. As of December 31, 2000, these
warrants are still outstanding.
F-38
115
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(iii) In connection with the private placement of
its common stock, as described in Note 15,
in 2000 the Company issued warrants for
581,375 shares of its common stock at an
exercise price of $16.00. Such warrants have
an exercise period of five years from date
of grant.
(b) Stock Options
During November 1999; the Company adopted a Stock
Option Plan ("Plan") pursuant to which 1,800,000
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 issued options to purchase
112,500 shares of the Company's common stock for
$2.00 per share (market price), exercisable until
May 2002.
During 1999, the Company granted employees and
directors options to purchase 274,500 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-39
116
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During August 1999, the Company granted
consultants options to purchase 3,750 shares of
the Company's common stock at an exercise price
of $7.33. The charge to the Company was
immaterial.
During 2000, the Company granted officers,
directors and employees options to purchase
shares of the Company's common stock at the
market price on the date of grant. Of these
options, an aggregate of 890,000 have an
exercise price of $.875 per share and 250,000
have an exercis price of $.047.
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.
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 years
ended December 31, 2000, 1999 and 1998.
2000 1999 1998
--------------------------------------------------
Dividend yield 0% 0% 0%
Risk free interest
rate 5.7% 5% 5%
Expected lives 5 years 10 years 10 years
Volatility 104% 46% 46%
==================================================
F-40
117
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:
Year ended December 31, 2000 1999
---------------------------------------------------------
Net loss:
As reported $(21,125,075) $(3,190,148)
Pro forma (21,739,075) (4,110,143)
Pro forma net loss per
common share - basic
and diluted $ (.85) $ (.20)
=========================================================
A summary of the status of the Company's stock
option plan as of December 31, 2000 and changes
during the period January 1, 1998 through
December 31, 2000 is presented below:
Weighted
average
Number Expiration exercise
of shares date price
------------------------------------------------------------------------
Options outstanding at
January 1, 1998 -- -- $ --
Options granted 112,500 2002 2.00
------------------------------------------------------------------------
Options outstanding at
December 31, 1998 112,500 2002 2.00
Options granted 278,250 2009 8.52
------------------------------------------------------------------------
Options outstanding at
December 31,1999 390,750 2002-2009 6.64
Options granted 1,140,000 2005 0.79
------------------------------------------------------------------------
Options outstanding at
December 31, 2000 1,530,750 2002-2009 $ 2.28
========================================================================
F-41
118
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, 2000 is shown
below:
Options exercisable
--------------------------------------------------
Options exercisable at year-end 1,470,750
Weighted average exercise price $2.28
Weighted average fair value of
options granted during the year $0.79
Weighted average remaining
contractual life 5.2
==================================================
Weighted average fair value of options granted
during the years ended December 31, 1999 and 1998
was $5.70 and $2.00, respectively.
F-42
119
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock
options outstanding at December 31, 2000.
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
at Remaining Average at Average
December 31, Contractual Exercise December 31, Exercise
Exercise Price Range 2000 Life Price 2000 Price
--------------------------------------------------------------------------------------
$2.00 112,500 1.3 $ 2.00 90,000 $ 2.00
$11.00-$12.75 165,750 7.8 12.57 165,750 12.57
$2.56 112,500 9.0 2.56 75,000 2.56
$0.47-$0.88 1,140,000 4.8 0.79 1,140,000 0.79
---------------------------------------------------------------------------------------
1,530,750 5.2 $ 2.28 1,470,750 $ 2.28
=======================================================================================
F-43
120
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. STOCKHOLDERS' On May 14, 1998, the Company designated 900,000
EQUITY 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 four and a
half votes per share reflecting the underlying
conversion rate. The shares of 1997 Preferred Stock
are convertible, with each share converting into four
and a half shares of common stock if the market value
is equal to or greater than $6,000,000 for the
4,050,000 shares of common stock. If the 4,050,000
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 1,800,000 shares of common stock (after
the three-for-two stock splits).
Common Stock
During 1998, the Company issued 1,711,221 shares of
common stock at estimated market prices for telephony
territories and equipment and services to unrelated
parties. An aggregate of 687,000 shares valued at
$1,494,140 was issued for telephony territories and
equipment, while an aggregate of 1,024,221 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 428,571 shares of common stock
and warrants to purchase 428,571 shares of common
stock at a purchase price of $15.33 per share, for an
F-44
121
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
aggregate of $6,000,000 or $14 per share. On December
8, 1999, a portion representing three-sevenths of the
second tranche closed and the Company sold an
aggregate of 264,708 shares of common stock and
warrants to purchase 264,708 shares of common stock at
a purchase price of $11.50 per share, for an aggregate
of $3,000,000 or $11.33 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 310,715 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-45
122
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 used the balance for working capital
purposes of the Company and its subsidiaries.
On February 8, 2000, the balance of the second tranche
closed. This transaction resulted in the issuance of
an aggregate of 266,667 shares of common stock and
warrants to purchase 266,667 shares of common stock
for $15.00 per share, resulting in gross proceeds of
$4,000,000.
The terms of the purchase agreements called for
Adjustable Warrants to be issued to the investors in
each of the tranches in order to provide for a return
to the investors of 15% on their investment, based on
the average price of the Company's stock during
various periods prior to certain measurement dates.
If, based on the formula, the required return was not
achieved, the Company had the option of making up the
shortfall by issuing additional shares of stock for
the full amounts of the value of the shortfall or by
issuing a minimum number of shares for a portion of
the shortfall and paying the balance in cash.
In connection with the first tranche, in compliance
with the terms of the Adjustable Warrants, the Company
issued an aggregate of 273,495 shares; 64,860 shares
on November 16, 1999; 111,921 shares on January 11,
2000 and 64,284 shares on March 21, 2000 and received
aggregate proceeds of $1,832.42, or $.0067 per share.
F-46
123
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The calculation of amounts due pursuant to the
Adjustable Warrants issued in the second tranche,
resulted in a potential liability to the Company for
approximately 4.7 million shares or the Company could
elect to issue only the minimum number of 393,587
shares plus a cash payment of $6,625,016. The Company
entered into a Redemption Agreement and Promissory
Note with the investors, whereby the Company would
issue the minimum number of shares and make cash
payments aggregating $6,000,000 to be paid in
installments of varying amounts over time.
Accordingly, the Company issued 393,587 shares of its
common stock on August 28, 2000 and made aggregate
cash payments of $4,750,000 through December 31, 2000
and owes a balance $1,250,000 at that date which is
included in "Notes payable - other". Pursuant to the
terms of the note, this balance is due to be paid in
aggregate installments of $250,000 in each of the five
months beginning in February 2001. If the required
payments are not made, the Company will be required to
pay the difference between the settlement amount and
the original amount as defined in the redemption
agreement and promissory note.
During 1999, the Company issued 371,381 shares of
Common Stock at estimated market prices of
approximately $4.2 million for equipment and services.
16. DISCONTINUED On November 3, 2000, the Board of Directors
OPERATIONS determined to divest the Company's non-automotive
operations within the next twelve months. Continuing
operations are represented by the Company's automotive
dealership activities, including its automotive
leasing subsidiary, Major Fleet and Leasing, Inc.
Non-automotive operations are reported as discontinued
operations and the consolidated balance sheets have
been reclassified to segregate the net assets of these
businesses. Assets held for sale included on the
Company's consolidated balance sheets at December 31,
2000 and 1999 represent the estimated net realizable
value of the Company's discontinued operations.
F-47
124
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of net assets of non-automotive operations
as of December 31, 2000 and 1999 is as follows:
--------------------------------------------------------------------
Current assets $1,800,000 $ 2,600,000
Noncurrent assets 800,000 11,100,000
--------------------------------------------------------------------
Total assets 2,600,000 13,700,000
--------------------------------------------------------------------
Current liabilities 1,300,000 400,000
Noncurrent liabilities 300,000 200,000
--------------------------------------------------------------------
Total liabilities 1,600,000 600,000
--------------------------------------------------------------------
Net assets $1,000,000 $13,100,000
====================================================================
The loss from discontinued operations is comprised of
the following:
Year ended December 31, 2000 1999 1998
--------------------------------------------------------------------------------
Loss from discontinued
operations $ 8,613,907 $5,088,103 $979,161
Loss from disposition
of discontinued
operations 13,617,415(1) -- --
Provision for estimated
operating losses during
period of disposition 2,000,000 -- --
--------------------------------------------------------------------------------
24,231,322 5,088,103 979,161
Income tax benefit 1,804,000 1,082,000 506,000
--------------------------------------------------------------------------------
$22,427,322 $4,006,103 $473,161
================================================================================
(1) The $13.6 million loss from disposition of
discontinued operations consists of write off of
goodwill charges of $13.5 million and $0.1
million of other property.
The Company intends to complete the sale of its
non-automotive assets during 2001 resulting in the
complete divestiture of all non-automotive operations.
Although the assets are being aggressively marketed to
both inside and outside sources, the disposition is
not expected to be complete until late 2001 (see Note
19).
F-48
125
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company expects to realize the book value of the
non-automotive assets after write-downs taken in 2000.
The amounts the Company will ultimately realize could
differ materially from the amounts assumed arriving at
the loss on disposal of the discontinued operations
(see Note 18). Summary operating results of the
discontinued operations are as follows:
Year ended December 31, 2000 1999 1998
----------------------------------------------------------------
Revenues $ 1,940,000 $ 1,282,000 $1,089,000
Pretax loss from
discontinued operations 8,613,907 5,088,103 979,161
Pretax loss on disposition
of discontinued
operations 13,617,415 -- --
Income tax benefit 1,804,000 1,082,000 506,000
Net loss 22,427,000 4,006,000 473,000
================================================================
17. QUARTERLY
FINANCIAL DATA First Second Third Fourth
(UNAUDITED) 2000 quarter quarter quarter quarter
----------------------------------------------------------------------------------------
(In thousands except for per share data)
Sales $67,668 $85,907 $ 90,241 $ 78,236
Gross profit 10,968 13,658 12,899 12,370
Operating income (loss)
from continuing
operations 870 1,672 (916) (324)
Loss from discontinued
operations net of tax
benefits (736) (1,164) (14,472) (6,055)
Net income (loss) --
restated 134 508 (15,388)(1) (6,379)(1)
LIFO adjustment 80 80 80 (240)
Net income (loss) --
reported 54 428 (15,468) (6,139)
Income (loss) from
continuing operations
per share - diluted .03 .06 (.04) (.01)
Net income (loss) per
share - (diluted) .00 .02 (.60) (.19)
========================================================================================
F-49
126
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
First Second Third Fourth
1999 quarter quarter quarter quarter
---------------------------------------------------------------------------------------
(in thousands except for per share data)
Sales $45,843 $54,430 $51,015 $ 58,244
Gross profit 7,138 8,144 8,409 9,720
Operating income (loss)
from continuing
operations 32 746 810 (772)
Loss from discontinued
operations, net of
tax benefits (728) (615) (696) (1,967)
Net income (loss) -
restated 204 131 114 (3,639)(2)
LIFO adjustment 88 87 88 87
Net income (loss) as
reported 16 44 26 (3,726)
Income (loss) from
continuing operations
per share - diluted .04 .03 .03 (.05)
Net income (loss) per
share diluted .01 .01 .00 (.22)
========================================================================================================
(1) Third and fourth quarter losses reflect
write-down of discontinued operations (see Note
16).
(2) Fourth quarter losses reflect a bonus of
$1,800,000, charges for early extinguishment of
debt of $733,125, accrual of bonuses of
approximately $500,000 and start-up and
integration expenses in connection with
acquisitions and planned acquisitions.
18. SUBSEQUENT EVENTS Sale of Internet Creations, Inc.
In February 2001, the Company completed an asset sale
of our Richmond, Virginia based Internet Creations,
Inc. (d/b/a Internet Connections) to Access
Technology, Inc. ("Access"). The sale price for the
assets was $320,000, $47,000 of which was paid at the
closing, and $273,000 of which was evidenced by a
senior secured promissory note.
F-50
127
FIDELITY HOLDINGS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sale of IG2, Inc. Interest
In March 2001, the Company sold its majority interest
in its IG2, Inc. subsidiary (f/k/a/ Computer Business
Sciences, Inc.), which, at the time of sale,
consisted solely of IG2, Inc., a Florida corporation,
incorporated as Reynard Service Bureau, Inc., through
a stock purchase to Global Communications of NY, Inc.
("Global"). The purchase price consisted of a senior
subordinated secured promissory note (the
"Subordinated Note") in the amount of approximately
$1,800,000 and a certain number of Series A preferred
stock of Global, equal to 10% of the capital stock of
Global as of the closing date.
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