Back to GetFilings.com
1
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.
2
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.
2
3
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
3
4
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
4
5
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
5
6
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.
6
7
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.
7
8
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,
8
9
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
------------ -----------------
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
9
10
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.
10
11
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
11
12
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.
12
13
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
13
14
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.
14
15
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
15
16
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
16
17
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%
17
18
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
18
19
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
19
20
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.
20
21
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.
21
22
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:
22
23
- 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
23
24
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.
24
25
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;
25
26
- 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
26
27
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.
27
28
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
28
29
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.
29
30
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
30
31
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
31
32
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
32
33
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.
33
34
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.
34
35
- 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 105,00