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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
COMMISSION FILE NUMBER: 0-29182
THE MAJOR AUTOMOTIVE COMPANIES, 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.)
43-40 NORTHERN BOULEVARD, LONG ISLAND CITY, NEW YORK 11101
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (718) 937-3700
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 [X] NO [ ]
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 11, 2002, 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 $4,381,963 (calculated by excluding shares owned beneficially by
directors and officers).
As of April 11, 2002, there were 9,330,371 shares of the registrant's common
stock outstanding.
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, 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
The The Major Automotive Companies, Inc. ("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")). By July 2001, we
completed our divestiture of our former technology division, which was
undertaken 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 2001 Summary
The year 2001 has been one of significant change for us. During this year,
we became an entity with a single focus - our automotive operations. These
operations generated revenues in excess of $375 million and a historical high
gross profit of approximately $62 million. These levels were reached through
both internal growth and expansion of dealer networks.
Our net profit for the year ended December 31, 2001 was $2,679,524.
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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
President, Chief Executive Officer, Chairman and beneficial owner of
approximately 43.7% 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 was designated as the "1997-Major
Series of Convertible Preferred Stock." Mr. Bendell has now converted all of the
1997-Major Series of Convertible Preferred Stock into an aggregate of 3,471,111
shares of our common stock. 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. Moreover, 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 six (6) franchised
automobile dealerships in the New York metropolitan area: (i) Chevrolet; (ii)
Chrysler; (iii) Dodge; (iv) Jeep; (v) Subaru; and (vi) Kia. In addition, the
Major Dealer Group owns six (6) other franchised dealerships in the New York
metropolitan area: (i) Lincoln-Mercury; (ii) Mazda; (iii) Dodge; (iv) Nissan;
(v) Suzuki and (vi) Daewoo. Major Auto also distributes General Motors vehicles
in the former Soviet Union. Through its dealerships, the Major Dealer Group
sells new and used automobiles, provides related financing, sells replacement
parts and provides vehicle repair service and maintenance.
Our President, Chief Executive Officer and Chairman, Bruce Bendell, has
approximately 30 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
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million in revenues and 25 employees in 1985 to a twelve-franchise dealership
group having more than $375 million in revenues and more than 300 employees in
2001.
Industry Background
According to industry data from the National Automobile Dealers Association
("NADA Data"), on average in 2001, new vehicle sales constituted 59.4% of a
franchised dealership's total sales. Unit sales of new vehicles decreased 1.7%
in 2001 to a total of 17.1 million units sold. At an average retail selling
price of $25,797 per vehicle, new vehicle sales totaled approximately $441.1
billion in 2001. From 1997 to 2001, sales revenue from the sale of new vehicles
increased approximately 13.2%. The average dealership's gross profit as a
percentage of selling price for new vehicles was 6.0% in 2001.
According to NADA Data, on average in 2001, used vehicle sales constituted 29.0%
of a franchised dealership's total sales. In 2001, franchised new vehicle
dealers sold approximately 12.9 million retail used vehicles. At an average
selling price of $13,930 per vehicle, used vehicle sales totaled approximately
$179.8 billion in 2001. From 1997 to 2001, sales revenue from the retail sale of
used vehicles increased approximately 26.9%. The average dealership's gross
profit as a percentage of selling price for used vehicles was 11.0% in 2001. 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
1997 1998 1999 2000 2001
(Units in million; dollars in billions)
New Vehicle unit sales 15.1 16.2 16.9 17.4 17.1
New vehicle sales revenue (1) $338.2 $383.0 $413.1 $433.7 $441.1
Used vehicle unit sales-retail 12.0 12.2 11.1 12.6 12.9
Used vehicle retail sales revenue $145.2 $153.0 $146.9 $172.0 $179.8
(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, 2001.
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 10.2% in 2001 for franchised dealerships, a
portion of which is accounted for by the increase in the amount of used vehicle
reconditioning. Revenue from parts and services constitutes, on average,
approximately 11.6% 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 2001, total franchised dealership gross
profits were, on average, $4.2 million, with an average net profit before taxes
of $619,000.
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,
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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. In 2001, a number of vehicle
manufacturers have offered incentives, including 0% financing, to spur sales.
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 23,457 at the end of
2001.
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 2001, approximately 12.9 million used cars were
sold retail by dealers, which is 2.4% more than the number of such sales in
2000. 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
11.0%, compared with new vehicle average gross profits of 6.0%. Our dealerships
average gross profit on used vehicles was approximately 19.5% and on new
vehicles was approximately 8.5%. We believe that the New York metropolitan area
is one of the largest markets for used vehicle sales in the United States and
that we sell more used vehicles 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 30 years of experience in the used vehicle
business of our President and Chief Executive Officer, we are able to identify
quality
5
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, Dodge, Jeep, Subaru, Kia, Lincoln, Mercury, Nissan, Mazda, Suzuki 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 have
sought to acquire new franchises at favorable prices in our existing market and
to expand our existing franchises to new markets, where practicable. This
strategy enables us to achieve economies of scale in advertising, inventory
management, management information systems and corporate overhead. We believe
that our concentrations of dealerships in Long Island City, New York, Orange,
New Jersey, and Hempstead, Long Island, give us effective geographic coverage.
No assurances can be given that such a strategy will be successful.
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.
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
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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 and intend to further expand our electronic-related media to
accommodate multiple languages.
Growth Strategy
In the past, our strategy for growth was focused on expanding our dealership
group by making acquisitions of non-performing or underperforming dealerships in
the New York metropolitan area. When this strategy was formulated, our stock
price was relatively attractive and thus, a key component of the purchase price
was our common stock. Since the price of our stock has significantly declined
from its levels at the time our acquisition strategy was conceived, the use of
payment in the form of our common stock as currency in acquiring automotive
dealerships would be extremely dilutive to our shareholders. Additionally, we
believe that the current prices being sought for dealerships makes their
acquisition unattractive, at this time. Consequently, we have put on hold our
plans for growth through acquisition. Instead, we plan to focus on maximizing
revenues and profitability in our existing dealerships. However, while we are
not seeking dealerships to acquire, if a particularly attractive opportunity
should present itself, we would strongly consider an acquisition.
We intend to expand our volume and profitability by focusing on our core
dealership group and expanding and enhancing those operations. Part of this
focus will be to continue to build on our profitable new and used vehicle sales.
In particular, we believe that we can enhance used vehicle sales by capitalizing
on our "Major World" brand and by continuing and expanding our successful sales
efforts. In addition to thorough training of our sales and service staff and
attentive customer service at the dealership level, we expect to expand our
advertising in all media outlets. In addition, we continuously look to find
attractive and viable financing products for our customers. We will look to
improve upon our used car vehicle choices for our customers and maintain and
augment our already wide range of late model used vehicles, which go from entry
level to luxury and include custom vans and specialty vehicles.
To increase profitability, we expect to continue to utilize our expertise,
buying power and facilities to take advantage of opportunities to obtain
substantial numbers of quality used vehicles at attractive prices from public
auctions and off-lease programs. We have recently changed our significant floor
plan financing sources to others with lower interest rates and we expect to
realize significant saving from that change. Additionally, we will continue to
use our substantial buying power to lower costs for equipment, supplies and
outside vendor services.
Dealership Operations
We own and operate six (6) automobile franchises at four (4) locations in Long
Island City, New York, four (4) franchises in three (3) locations in Hempstead,
New York and two (2) franchises in one (1) location in Orange, New Jersey. We
offer the following twelve (12) makes of new vehicles: Chevrolet, Chrysler,
Dodge, Jeep, Subaru, Kia, Lincoln, Mercury, Mazda, Nissan, Suzuki 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 managers, one for parts and one for service. Each
manager meets with our senior management on a weekly basis.
Bruce Bendell, our President, Chief Executive Officer and Chairman, and Harold
Bendell, a key employee and the brother of Bruce Bendell, are responsible for
management of our dealerships. The Bendell brothers' management
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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, their 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, Dodge,
Jeep, Subaru, Kia, Lincoln, Mercury, Nissan, Mazda, Suzuki and Daewoo. For the
year ended December 31, 2001, our dealerships sold new vehicles generating total
sales of approximately $143.1 million, which constituted approximately 38.2% of
our total revenues. Our gross profit margin on new vehicle sales for the year
ended December 31, 2001 was approximately 8.5%, which is significantly higher
than the industry average of 6.0%. The relative percentages of our new vehicle
sales among makes of vehicles for the year ended December 31, 2001 was as
follows:
Percentage of
Manufacturer New Vehicle Sales
Chevrolet 37.5%
Dodge 13.5%
Chrysler, Plymouth and Jeep 10.4%
Subaru and Kia 7.4%
Lincoln-Mercury 3.0%
Mazda 5.8%
Nissan 20.5%
Suzuki and Daewoo 1.9%
The following table sets forth information with respect to our new vehicle sales
for the year ended December 31, 2001:
NEW VEHICLE SALES
(dollars in millions)
Unit Sales 5,820
Sales Revenue $143.1
Gross Profit $ 12.1
Gross Profit Margin 8.5%
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.
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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, 2001,
we sold 14,329 used vehicles generating total sales of approximately $211.8
million, which constituted approximately 56.5% of our total revenues. Our gross
profit margin on used vehicle sales for the year ended December 31, 2001 was
approximately 19.5%, as compared with the industry average of 11.0%. 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, 2001:
USED VEHICLE SALES
(dollars in millions)
Unit Sales 14,329
Sales Revenue $ 211.8
Gross Profit $ 41.3
Gross Profit Margin 19.5%
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, 2001, our parts and service operations generated total revenues of
approximately $18.3 million, which constituted approximately 4.9% of our total
revenues at a gross profit margin of approximately 37.1%.
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.
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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 counter-cyclical 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.
The following table sets forth information with respect to our sales of parts
and services for the year ended December 31, 2001:
SALES OF PARTS AND SERVICES
(dollars in millions)
Sales Revenue $ 18.3
Gross Profit $ 6.8
Gross Profit Margin 37.1%
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.
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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 2001 was approximately $460.
Although advertising costs in the New York metropolitan area are generally
higher than the national average, our cost of marketing and advertising per
vehicle sold is approximately equal to the national average. Combined with a
substantial increase in media exposure, which resulted in increased volume, our
costs show the economies that we have achieved. These lower costs result from
the fact that we: (i) have favorable contracts with four (4) 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.
We have also agreed that our dealerships offering new vehicles manufactured by
General Motors will not sell new vehicles of other manufacturers.
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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, should 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 launched 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.
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
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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
Our subsidiary, Major Fleet & Leasing Corp. ("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.
Acquisition Strategy
We previously had several purchases of dealerships pending. When those purchases
were contemplated, our strategy was that a key component of the purchase price
be paid in our common stock. Since the price of our stock has significantly
declined from its levels at the time our acquisition strategy was conceived, it
is no longer practicable for us to consider using our common stock as currency
in acquiring automotive dealerships. Additionally, we believe that the current
prices being sought for dealerships makes their acquisition unattractive, at
this time. Consequently, we have put on hold our plans for growth through
acquisition. Instead, we plan to focus on maximizing revenues and profitability
in our existing dealerships. However, while we are not seeking dealerships to
acquire, if a particularly attractive opportunity should present itself, we
would strongly consider an acquisition.
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
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these operations and to maintain our focus on the operation and consolidation of
our retail automotive dealerships. The non-automotive components of our business
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 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.
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, through a stock
purchase to Global Communications of NY, Inc.
Moreover, effective June 27, 2001, we sold our interest in our Israeli
technology subsidiary, C.B.S. (Israel), Ltd. and the assets of our Canadian
subsidiary, 786710 Ontario, Ltd., doing business as Info Systems, to GYT
International, Ltd., a Nevis Corporation.
Also, effective July 31, 2001, we sold our interest in our telephone calling
card subsidiary, ICS Globe, Inc. to Global Communications of NY, Inc.
The gains on the sales of these discontinued operations have been deferred due
to a lack of credit history. Such gains will be reflected when collectibility is
reasonably assured.
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Arrangements with Nissko
In November 1999, our former subsidiary, IG2, entered into an agreement (the
"Nissko Agreement") with certain persons (the "Nissko Group") and Nissko Telecom
Ltd. to purchase their interest in a joint venture which is a master agent to
provide certain telephone services. In connection with this transaction, we
placed 236,400 shares of our common stock in escrow to guarantee the value of
IG2 stock. By November 30, 2001, all such shares were issued to satisfy our
obligations thereunder. In addition, 60,000 restricted shares of our common
stock have been reserved to cover personal guarantees of the Nissko Group.
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Disposition of Intellectual Property
In connection with our divestiture of our technology division, we have
relinquished our rights to various patent and patents applications, including
two U.S. patents issued in June 1993 and May 1994 relating to armored conduit
technology, a Canadian patent application relating to such technology, one U.S.
patent issued November 1999 relating to a head cover with an eye spraying
capability, 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, three U.S. patent applications relating to a fire extinguishing agent, a
sludge treatment and fertilizer, and a cleaning and treatment agent, and a
provisional U.S. patent application relating to the control of internet protocol
traffic in a wide- or local-area-network (LAN or WAN). Moreover, we have
relinquished our rights to U.S. Trademark registrations to the names "IG2(R),
"Talkie(R)" and "Talkie Globe(R)," pending U.S. Trademark applications to the
names "IG2 Networks," "IG2 Communications," "NAICS," "BCS," "Knock-Out 112" and
"Browse N Talk" and to a Canadian Trademark registration to the name "Talkie."
RECENT DEVELOPMENTS
Floor Plan Financing
In September 2001, Chrysler Financial Company, LLC ("CFC"), one of our primary
floor plan credit sources for approximately $30 million for the financing of our
vehicle inventory, notified the Company that CFC had re-evaluated its credit and
lending relationship with us and was requiring us to seek a replacement lending
institution to refinance and replace all existing CFC credit facilities. In
March 2002, we entered into a floor plan financing arrangement with General
Motors Acceptance Corporation ("GMAC") for GMAC to provide the floor plan credit
for the financing of our Chevrolet dealership's new and used vehicle inventory.
This is the flagship dealership of the Company's operations and accounted for
more than 35% of the Company's new vehicle revenues and more than 80% of its
consolidated used vehicle revenues in the year 2001. Also in March 2002, we
entered into a credit agreement with HSBC Bank, USA ("HSBC") pursuant to which
HSBC is providing the floor plan credit for the financing of our Chrysler/Jeep,
Dodge and Kia dealerships' new and used vehicle inventory. As a result of the
GMAC and HSBC credit facilities, we completed the replacement of financing for
all of the dealerships that were previously financed by CFC.
Additionally, in March 2002, we signed a commitment letter with Nissan Motor
Acceptance Corporation ("NMAC") pursuant to which NMAC will replace the existing
floor plan credit for the financing of our Nissan dealership's new and used
vehicle inventory. The commitment from NMAC is subject to normal closing
conditions and is expected to close during the second quarter of 2002.
We believe that the terms of each of these new floor plan lines, including
interest rates, are more favorable than those of each of the lines they replace.
Bruce Bendell, Chairman of the Company, has agreed, temporarily, to guarantee
these obligations. The Company has agreed to compensate Mr. Bendell for the fair
market value of such credit enhancement.
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,
warrants and adjustable warrants in three tranches.
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The calculation of amounts due pursuant to the adjustable warrants issued in the
second tranche of this translation 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 as of that date. Pursuant to the terms of the note, this balance was
due to be paid in aggregate installments of $250,000 in each of five months
beginning in February 2001. We did not make any of these required payments. The
terms of the Redemption Agreement required that the balance be adjusted to
$1,666,667, an increase of $416,667 plus interest and reasonable attorneys fees.
Subsequently, we reached agreement with the institutional investors and settled
the matter for a total of $1,400,000. The $266,667 reduction of the liability
previously recorded has been adjusted as a credit to additional paid-in capital
in the third quarter of 2001. By December 31, 2001, the $1,400,000 balance has
been fully paid.
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. ("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.
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, 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 $1,000,000
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, and pledged the interest sold in IG2.
Sale of Interest in C.B.S. (Israel), Ltd. and Assets of 786710 Ontario, Ltd.
In June 27, 2001, we sold our interest in our Israeli technology subsidiary,
C.B.S. (Israel), Ltd. and the assets of its Canadian subsidiary, 786710 Ontario,
Ltd., doing business as Info Systems, to GYT International, Ltd., a Nevis
Corporation. The combined sales price in connection with these transactions was
$350,000 for both operations, less the assumption of certain of our liabilities,
resulting in a net amount due to the Company of $119,500. Such indebtedness is
evidenced by a note payable to us in the principal amount of $119,500, bearing
interest at 5% and payable in quarterly installments over 60 months, beginning
in June 2002.
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Sale of Interest in ICS Globe, Inc.
In July 31, 2001, we sold our interest in our telephone calling card subsidiary,
ICS Globe, Inc. to Global Communications of NY, Inc. The sale price was
$250,000, with a down payment of $10,000.
Acquisitions of Certain Dealerships
In April 2001, we acquired a Daewoo franchise and certain assets from Daewoo
Motors of America. The purchase price of $100,000 was paid on April 19, 2001.
In May, 2001, we acquired a Suzuki franchise and certain Suzuki vehicles and
parts from Hempstead F.S. Motors, Ltd. and a debtor-in-possession. The purchase
price of $309,877 out of a total deposit of $500,000 for this and other
potential, but subsequently abandoned, acquisitions, was paid on May 4, 2001.
The balance of the deposit is being held in escrow pending resolution of certain
issues relating to the closing.
Terminated Acquisitions
Previously, 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, wholly-owned by our
President, Chief Executive Officer and Director, Bruce Bendell. We were also
under contract to acquire Brunner Cadillac/Buick/Pontiac, an Essex County, New
Jersey dealer, from William Brunner. Additionally, an agreement was reached to
acquire Major Motors of Pennsylvania, a Hyundai dealer in Stroudsburg,
Pennsylvania, from Bruce Bendell and John McDermott.
Since we have put on hold our plans for growth through acquisition, these
acquisitions have been terminated. Instead, we plan to focus on maximizing
revenues and profitability in our existing dealerships.
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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.
To a certain extent, our dealerships also depend on the manufacturers for sales
incentives, warranties and other programs that are intended to promote and
support new vehicle sales by our dealerships. Some of these programs include
customer rebates on new vehicles, dealer incentives on new vehicles, special
financing or leasing terms, warranties on new and used vehicles and sponsorship
of used vehicle sales by authorized new vehicle dealers. Manufacturers have
historically made many changes to their incentive programs during each year. A
reduction or discontinuation of a manufacturer's incentive programs could
adversely affect our new vehicle sales volume and our profitability.
OUR FRANCHISE AGREEMENTS CONTAIN GEOGRAPHIC AND OTHER RESTRICTIONS WHICH COULD
LIMIT OUR FUTURE GROWTH.
Our franchise agreements with the manufacturers, like those of other franchised
new vehicle dealers, do not grant us the exclusive right to sell that
manufacturer's vehicles within a given geographical area. Accordingly, a
manufacturer could grant another dealer a franchise to start a new dealership or
permit an existing dealer to relocate to a geographic location that would be
directly competitive with us. Such an event could have a material adverse effect
on our business, financial condition and results of operations.
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Historically, manufacturers have exercised significant control over dealerships
through the terms and conditions of the franchise agreements pursuant to which
our dealerships operate. These franchise agreements restrict dealerships to
specific locations and retain for the manufacturers approval rights over changes
in the dealerships' ownership and management. Our ability to expand through the
acquisition of new dealerships requires the consent of the manufacturers. To
date, our acquisitions have been approved and we have not been materially
adversely affected by other limitations imposed by the manufacturers. However,
there can be no assurance that in the future we will be able to obtain necessary
approvals on acceptable terms or that we will not be materially adversely
affected by other limitations.
The franchise agreements between us and the manufacturers are for fixed terms
with no renewal obligation on the part of the manufacturers and permit the
manufacturers to terminate the agreements for a variety of causes. Each of these
agreements includes provisions for the termination or non-renewal of the
manufacturer-dealer relationship for a variety of causes including any
unapproved change of ownership or management and other material breaches of the
franchise agreement. We believe that we have been and continue to be in material
compliance with the terms of our franchise agreements. While none of the
manufacturers have terminated or failed to renew our franchise agreements, any
such termination or failure to renew could have a material adverse effect on us
and our business, financial condition and results of operations.
THE AUTOMOBILE INDUSTRY IS A MATURE INDUSTRY WITH LIMITED GROWTH POTENTIAL IN
NEW VEHICLE SALES AND AUTOMOBILE SALES ARE CYCLICAL AND SUBJECT TO DOWNTURNS.
The United States automobile industry is generally considered to be a mature
industry in which minimal growth is expected in unit sales of new vehicles. In
addition, the market for automobiles, particularly new vehicles, is subject to
substantial cyclical variation and has experienced significant downturns
characterized by oversupply and weak demand. Many factors affect the automobile
industry, including:
- general and local economic conditions;
- taxes;
- consumer confidence;
- interest rates;
- credit availability; and
- the level of personal discretionary income.
Although we believe that our access to new and used vehicles over a wide range
of price points provides us some measure of stability in a potentially cyclical
market, a material decrease in vehicle sales from the historical level of
vehicle sales achieved by us would materially adversely affect our business,
financial condition and results of operations.
THE AUTOMOTIVE INDUSTRY IS SUBJECT TO SEASONAL VARIATIONS.
The automobile industry is subject to seasonal variations in revenues. Demand
for vehicles is generally lower during the winter months than in other seasons,
particularly in regions of the United States which experience potentially severe
winters. Accordingly, revenues and operating results may be lower in our first
and fourth quarters than in our second and third quarters.
IMPORTED PRODUCTS MAY AFFECT OUR OPERATIONS.
20
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. 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 adequately insulate ourselves 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. During 2001, we were
notified by Chrysler Financing Company, LLC ("CFC") that it was terminating its
financing. Although we successfully about to replace CFC, 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.
If we chose to pursue growth through the acquisition of additional dealerships,
it will require substantial capital. In such case, 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 may depend, in part, on our ability to acquire additional
automobile dealerships. If we pursue such a strategy of acquiring additional
dealerships, we would face risks commonly encountered with growth through
acquisitions. These risks include:
- 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;
- impairing relationships with employees and customers as a
result of changes in management; and
- diluting ownership percentages of our current and future
shareholders.
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 could have a significant impact on our financial
condition and could cause substantial fluctuations in our quarterly and annual
operating results.
21
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 President, Chief Executive Officer and Chairman
of the Board, and his brother, Harold Bendell. The loss of the services of these
employees or certain other key employees, are likely have a material adverse
effect on our business. Bruce Bendell is currently employed at will, subject, in
the case of Bruce Bendell, to certain post-employment compensation arrangements
in the event of termination prior to June 30, 2004. 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 his brother, Harold Bendell, a senior executive of the Major
Dealer Group. Such transactions include the following:
- In 1996, we acquired Major Fleet from the Bendell brothers. In
exchange, the Bendell brothers received (a) shares of our
1996-Major Series of Convertible Preferred Stock, (b) warrants
that carry registration rights, which have been exercised, 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
22
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).
Moreover, we previously had several purchases of dealerships pending which
involved Bruce Bendell and Harold Bendell. Consequently, we have put on hold
our plans for growth through acquisition and, accordingly, these purchases have
been abandoned. However, while we are not seeking dealerships to acquire, if a
particularly attractive opportunity should present itself, we would strongly
consider an acquisition.
CHANGE OF OUR ACQUISITION GROWTH STRATEGY MAY AFFECT OUR OPERATIONS.
In the past, our strategy for growth was principally focused on expanding our
dealership group through acquisitions of non-performing or underperforming
dealerships in the New York metropolitan area. When this strategy was
formulated, our stock price was relatively attractive and thus, a key component
of the purchase price was our common stock. Since the price of our stock has
significantly declined from its levels at the time our acquisition strategy was
conceived, the use of payment in the form of our common stock as currency in
acquiring automotive dealerships would be extremely dilutive to our
shareholders. Additionally, we believe that the current prices being sought for
dealerships makes their acquisition unattractive, at this time. Consequently, we
have put on hold our plans for growth through acquisition. Instead, we plan to
focus on maximizing revenues and profitability in our existing dealerships.
There can be no assurance our adoption of such a strategy will not adversely
affect our business, financial condition and operations.
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
23
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;
- 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
24
- 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, many which have been settled. While we
believe that we have substantial defenses to the asserted claims and intend to
vigorously defend the active suits, judgments against us with respect to the
active 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 fairly 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.
25
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 launched 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.
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
26
of liability that is not covered by insurance or is in excess of insurance
coverage could have a material adverse effect on our business, results of
operations and financial condition.
We face risks associated with security breaches involving confidential
information transmitted via the Internet.
We rely on technology licensed from third parties that is designed to facilitate
the secure transmission of confidential information. Nevertheless, our computer
infrastructure is potentially vulnerable to physical or electronic computer
break-ins, viruses and similar disruptive problems. A party who is able to
circumvent our security measures could misappropriate proprietary information,
jeopardize the confidential nature of information transmitted over the Internet
or cause interruptions in our operations. Concerns over the security of Internet
transactions and the privacy of users could also inhibit the growth of the
Internet in general, particularly, as a means of conducting commercial
transactions. To the extent that our activities or those of third party
contractors involve the storage and transmission of proprietary information
(such as personal financial information), security breaches could expose us to a
risk of financial loss, litigation and other liabilities. Our insurance does not
currently protect against such losses. Any such security breach could have a
material adverse effect on our business, results of operations and financial
condition.
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.
27
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 43.7% of our common
stock. In addition, our former President and Chief Executive Officer, Mr. Doron
Cohen, is the beneficial owner of approximately 5.5% 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 2000 annual meeting, our Board of Directors and majority of our
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 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.
28
Additionally, at our annual meeting in December 2000, our Board of Directors and
majority of our 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 pursuant to certain registration
rights and 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 resale of 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, has the right (on
an unlimited number of occasions) to require us to register all or any portion
of the common stock, aggregating 147,784 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
22,500 shares of common stock underlying a warrant held by him (the "Warrant
Demand Shares"). Further, if we register any shares of common stock, we will
have to offer to include the 1996 Demand Shares, the Warrant Demand Shares and
the 3,471,111 shares of common stock into which the 1997-MAJOR Series of
Convertible Preferred Stock (the "1997 Major Preferred"), issued to Bruce
Bendell in the Major Auto Acquisition, was converted. In October 1999, Mr.
Bendell converted 400,000 shares of 1997 Major Preferred into 360,000 shares of
common stock. In May 2001, he converted an additional 400,000 shares of 1997
Major Preferred into 1,777,778 shares of common stock. In February 2002, Mr.
Bendell converted the balance of his 100,000 shares of 1997 Major Preferred
stock into 1,333,333 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.
29
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.
In November, 2000, 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 and, immediately thereafter, a
closing bid price of at least $1.00 per share for a minimum of ten (10)
consecutive trading days. We received an additional letter from Nasdaq on April
20, 2001 notifying us that we had also not maintained the net tangible
assets/market capitalization/total assets and total revenue requirements, and
that we had to be in compliance by April 26, 2001. We were granted an exception
to this requirement through June 14, 2001. Consequently, in May 2001, in order
to comply with all requirements for continued listing, we changed our name to
The The Major Automotive Companies, Inc. and our trading symbol to MAJR and
effected a one (1) for five (5) reverse stock split of our common stock.
Subsequently, on May 23, 2001, Nasdaq advised us of compliance with all
requirements for continued listing on the Nasdaq National Market.
However, on February 14, 2002, we received another letter from Nasdaq advising
us that our common stock had not maintained a minimum market value of publicly
held traded shares of $5,000,000 and a minimum bid price per hare of $1.00. If
we are unable to demonstrate a minimum market value of $5,000,000 or more and a
bid price of our common stock at $1.00 per share or more for a minimum of ten
(10) consecutive at any time before May 15, 2002, our common stock will be
de-listed. 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. Alternatively, we may apply to transfer our
common stock to the Nasdaq
30
SmallCap Market, which, if such application is accepted, will grant us an
extended grace period, until August 13, 2002 to demonstrate compliance with the
$1.00 minimum bid requirement.
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.
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 $95,500. This lease
expires on October 31, 2011.
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.
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 is currently on a month
to month basis at an annual cost of $132,000. 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 is scheduled
to expire on March 31, 2009. 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. Finally, Compass leases additional space
for storage facilities, on a month to month basis, from an unaffiliated third
party at an annual rent of $19,200.
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.
One of our subsidiaries, Hempstead Mazda, Inc., leases from its former owner,
approximately 140,000 square feet of land and buildings in Hempstead, New York,
that is used for showroom, office and storage space. The leases expires on
September 30, 2009. The current annual rent is $234,000.
One of our subsidiaries, Major Nissan of Garden City, Inc., leases from an
unrelated third party approximately 105,000 square feet used for showroom,
office, service department and storage facilities. The property is located on
the borderline of Hempstead, New York and Garden City, New York. The current
annual rent is $390,000 and the lease expires on March 15, 2002. Upon our
acquisition of the dealership, this lease was purchased for $1.0 million with a
purchase option for $3 million. The property was appraised for more than $5
million. We have notified the landlord that we are exercising the purchase
option.
31
ITEM 3. LEGAL PROCEEDINGS
In re: Fidelity Holdings Securities Litigation.
This class action, also pending in the United States District Court for the
Eastern District of New York, is purportedly brought on behalf of all persons
who acquired shares of our common stock between June 24, 1999 and April 17,
2000. Named as defendants along with us are Doron Cohen, Richard L. Feinstein
and Bruce Bendell.
In August 2001, the lead plaintiffs in this class action served a Consolidated
and Amended Class Action Complaint. This Complaint alleges, among other things,
that plaintiffs and other members of the putative class were damaged when they
acquired shares of our common stock because defendants allegedly issued
materially false and misleading statements and failed to disclose material
information which purportedly cause such stock to trade at artificially inflated
prices during the class period. The complaint alleges violations of Sections
10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. The
allegedly misstated and omitted information concerns primarily the prospects for
our technology business. The complaint seeks, among other things, damages in an
unspecified amount.
In September 2001, we moved to dismiss the Complaint for failure to state a
claim upon which relief can be granted and for failure to plead with the
legally-required factual particularity.
In October 2001, we reached an agreement with lead plaintiffs to settle this
action for $4.45 million, subject to the consent thereto by our insurance
company and court approval. To date, our insurance company has not consented to
this settlement nor has it been approved by the court.
Stephen B. Wechsler, et al. v. Fidelity Holdings, Inc. et al.
On December 26, 200, an action was commenced against us in the United States
District Court for the Eastern District of New York. This action was brought on
behalf of certain persons who acquired an unstated number of shares of our
common stock between December 1999 and May 2000. We are named as a defendant in
this case along with Doron Cohen, Richard L. Feinstein and Bruce Bendell.
On December 26, 2000, plaintiffs filed a Second Amended Complaint, which
alleges, among other things, that the plaintiffs sustained damages when they
acquired shares of our common stock because we allegedly issued materially false
and misleading statements and failed to disclose material information which
purportedly caused such stock to trade at artificially inflated prices. The
Second Amended Complaint alleges violations of Sections 10(b) and 20(a) of the
Exchange Act and Rule 10b-5 promulgated thereunder. The allegedly misstated and
omitted information concerns our reported income for the first three quarters of
1999 and the prospects for its technology business. The Second Amended Complaint
seeks, among other things, damages "in an amount, not less than" one million
dollars.
On February 16, 2001, we and Messrs. Bendell and Feinstein filed a motion to
dismiss the Second Amended Complaint for failure to plead with the
legally-required factual particularity. (We understand that Mr. Cohen has not
been served with process in this action.) In October 2001, we agreed with the
plaintiffs to settle this action for $120,000. The settlement is subject to the
consent thereto by the insurer on our D&O policy covering the time period within
which this action was filed, which consent has not yet been obtained.
Daniel Tepper v. Fidelity Holdings, Inc; Fidelity Holdings, Inc. (Third Party
Plaintiff) v. InvestAmerica et al.
In and around August 2001, Daniel Tepper ("Tepper") commenced a suit against the
above individuals for several causes of action. Voluntarily, however, the
majority of the claims were withdrawn and only four causes of action remain: (i)
violation of Article 8 of the Uniform Commercial Code, (ii) conversion, (iii)
breach of fiduciary duty; and (iv) negligence. The facts underlying these claims
are that we failed to remove restrictive legends that appeared on Tepper's stock
certificates. These claims were litigated in Nevada and Tepper secured a verdict
in the sum of $522,000 (compensatory damages of $300,000, and attorney's fees of
$222,000) against us. It is our position that any claim by Tepper was resolved
by the Nevada action under the doctrines of Res Judicata and Collateral
Estoppel, and that once the Nevada Judgment is paid it will extinguish all
claims. Currently, there is a motion to dismiss pending. Until there is a ruling
on the outstanding motion, no forecast of liability can be given.
Ronald Shapss Corporate Services, Inc. v. Fidelity Holdings, Inc.
On June 11, 1999, Ronald Shapss Corporate Services, Inc. commenced an action
against us in the Supreme Court of the State of New York. The venue for the
action was in Rockland County. The original complaint asserted causes of action
based on claims of breach of contract and conversion. The plaintiff contends
that we wrongfully refused to allow the exercise of options for 50,000 shares of
our common stock at $4.50 per share. The plaintiff also alleged an anticipatory
breach of plaintiff's right to exercise an option to purchase an additional
100,000 shares for $1,000.00 and to receive and exercise options to purchase
100,000 more shares for $4.50 per share. The plaintiff alleged it sustained
damages in the sum of $7,386,500.00 for breach of an agreement between the
parties and sought an additional sum of $5,000,000.00 in punitive damages on the
conversion claim.
Subsequently, in November 2001, the parties settled the action. Pursuant to a
settlement agreement, the plaintiff received 175,000 shares of common stock and
may be entitled to receive an additional 50,000 shares based on future market
value of our common stock.
Fidelity Holdings, Inc., IG2 and 786710 Ontario, Ltd. v. Michael Marom and M.M.
Telecom, Corp.
We, IG2 and 786710 Ontario, Ltd. are plaintiffs in a legal action against
Michael Marom and M.M. Telecom, Corp. in the Supreme Court of the State of New
York, County of Queens, Index No. 25678/96. We filed a complaint on December 23,
1996 against the defendants alleging: (i) breach of a letter agreement between
the parties; (ii) tortuous interference with business opportunities; and (iii)
slander. Defendants filed an answer with counterclaims, which included, inter
alia: (i) fraud; (ii) breach of contract; (iii) tortious interference with
business opportunities; and (iv) tortuous interference with contract. Both
parties have completed discovery and the collective Plaintiffs, including us,
have made a motion for summary judgment against Defendants seeking to have
Defendants' counterclaims dismissed entirely and with prejudice. In the event
such counterclaims are dismissed, the Plaintiffs will only be able to proceed on
their causes of action against Defendants. This motion is currently pending
before the court. We believe we have substantial defenses to the asserted claims
and intend to vigorously defend this suit.
32
Realtech Systems Corporation v. IG2, Inc. & Fidelity Holdings, Inc.
On or about November 9, 2000, Realtech Systems Corporation ("Realtech") served
us as well as IG2 a Demand for Arbitration before the Commercial Arbitration
tribunal of the American Arbitration Association relating to work and services
allegedly provided by Realtech to IG2. The Demand asserted that pursuant to a
Master Agreement dated November 16, 1999 between Realtech and IG2, both parties
agreed to arbitration in the event of any potential disputes. The Demand further
asserts that Realtech has provided work and services to us in the unpaid amount
of $198,000, and that we and IG2 further breached the agreement by hiring John
Honovich, a former Realtech employee. Realtech seeks in excess of $243,849.50 in
damages. Realtech included us in an arbitration based on the idea that IG2 is
"our wholly owned subsidiary" and not on the basis of the agreement. On December
1, 2000, we served a Notice of Petition and a Petition seeking a stay of
arbitration on our behalf on the grounds that IG2 is not a signatory to any
arbitration agreements between Realtech and us. Realtech served reply papers, as
well as a cross motion compelling us to arbitrate on December 14, 2000. On
January 12, 2001, we filed an Order to Show Cause, to which Realtech answered.
On January 29, 2001, the court ordered the Arbitration stayed as to us, and
denied Realtech's arbitration claim. Since IG2 has been sold, there has been no
further action on this matter.
MCI International, Inc. v. Schiano Bros. Inc.; Schiano Bros. Inc. (Third Party
Plaintiff) v. Computer Business Sciences Inc. (Third Party Defendant).
On August 28, 2000, Schiano Bros. Inc. ("Schiano") filed a third party lawsuit
against Computer Business Sciences Inc. ("CBS") in the Supreme Court of the
State of New York, Kings County. The suit alleged that phone services provided
to the Dominican Republic through MCI International, Inc. ("MCI") were
wrongfully attributed to Schiano and should have been attributed to CBS. In
addition, an intentional tort claim was also filed against CBS. The suit seeks
$150,000 in damages. We filed an Answer on September 20, 2000, as well as a
Demand for a Third Party Bill of Particulars on the plaintiff MCI, and Discovery
and Inspection Demands on all parties. Plaintiff responded only with a set of
invoices, to which we requested a more thorough inquiry. On December 10, 2000,
Schiano served a Bill of Particular and Interrogatory Demands upon us, as well
as Notices for Discovery and Inspection. A Preliminary Conference Order was
scheduled for March 3, 2001.
The order maintained that there were no agreements made between us and Schiano,
or between us and MCI; the sole basis for Schiano's claim is a verbal/oral
agreement upon facts that do not exist. This matter no longer involves us and is
only against CBS, which is no longer affiliated with us.
Dale Harris & Fouad Tobagi v. Computer Business Sciences, Inc., et al.
33
On June 6, 2000 plaintiffs filed a lawsuit against CBS in the amount of
$1,000,000 in the Northern District of California, San Francisco division.
Plaintiffs allege that they were convinced to join the advisory board of CBS in
return for: (i) a seat on the Technical Advisory Board; (ii) stock options;
(iii) a signing bonus; and (iv) a consulting agreement. Plaintiffs further
allege that CBS used their names to further our image and received nothing in
return. Plaintiffs filed an amended complaint on October 16, 2000, and we
subsequently filed a Motion to Dismiss and Transfer Venue on November 6, 2000.
Plaintiffs opposed the motion to dismiss, to which we replied on September 8,
2000. The Motion was granted as to Rule 10-5b for failure to state a claim,
granted as to Lack of Personal Jurisdiction over Mr. Cohen, Mr. Bendell and Ms.
Peacock, and denied as to all other claims. The parties have recently settled
this action for a cash payment of $52,500.
Goldfarb v. Robert LeRea, Doron Cohen, Bruce Bendell, Kimberly Peacock and The
The Major Automotive Companies, Inc. f/k/a Fidelity Holdings, Inc.
On or about February 21, 2002, an action was commenced against us, Robert LeRea,
Doron Cohen, Bruce Bendell, Kimberly Peacock in the Southern District of New
York. It is alleged that: (i) plaintiffs had an agreement that if they promoted
our stock, they would be compensated; (ii) plaintiff gave a bridge loan to us at
our request and the loan was allegedly done by way of the purchase of our
shares; (iii) defendants violated Rule 10(b)(5) of the Exchange Act by failing
to repay a bridge loan made by plaintiffs to defendant; and (iv) that defendants
converted 50,000 shares of IG2, Inc. stock.
Defendants time to answer or otherwise oppose has been extended to May 8, 2002.
No investigation has been done and no opinion can be rendered as to the validity
of the $8,000,000 in damages claimed. We believe that these allegations have no
merit and intend to vigorously defend this suit.
International Securities Corp. v. Fidelity Holdings, Inc.
On or about March 2001, an action was commenced against us in the Supreme Court
of the state of New York, New York County. This action alleged that
International Securities Corp. ("ISC") is owed commissions for money it secured
for us in connection with a private placement of our securities. ISC served a
motion for Summary Judgment, which has not yet been heard by the Court. The
total claimed in the lawsuit is $180,000.00. We believe that any money owed has
already been paid and intend to vigorously defend this suit.
34
Dr. Roland Nassim v. Computer Business Sciences, Inc. and Fidelity Holdings,
Inc.
On April 12 2001, Dr. Roland Nassim commenced a lawsuit against CBS and us in
the Supreme Court, New York County. The basis of the lawsuit is for breach of
contract of an agreement entered into on December 1, 1999. The agreement was
part of a buyout of CBS of Dr. Nassim's telephony business to various countries.
The purchase price was approximately $500,000 in our stock. It is Dr. Nassim's
position that the stock was only worth $27,000. In January 2002, we reached a
settlement with Dr. Nassim and have issued 225,000 shares of our stock in his
name as full settlement. Our attorney is holding such shares in escrow pending
the preparation and signing of definitive settlement documents.
Ronald K. Premo v. Fidelity Holdings, Inc.
In May 2001, Ronald Premo, a former officer of one of our technology
subsidiaries filed suit in Connecticut Supreme Court seeking employment related
damages in excess of $300,000. In October 2001, through an arbitration
35
proceeding, we reached a settlement agreement with Mr. Premo by which he will be
paid an aggregate of $72,079 over ten months plus 15,000 shares of our common
stock. The stock has been issued and, to date, we have paid approximately
$21,000 of the total $72,000 due.
Strong River Investments, Inc. and Montrose Investments Ltd. v. Fidelity
Holdings, Inc.
By Summons and Notice of Motion for Summary Judgment In Lieu of Complaint dated
April 19, 2001 we were named as the defendant in two actions titled Strong River
Investments, Inc. v. Fidelity Holdings, Inc. and Montrose Investments Ltd. v.
Fidelity Holdings, Inc., both brought in the Supreme Court of the State of New
York, New York County, Index No.'s 601963/01 and 601964/01, respectively. In
these actions, Strong River Investments, Inc. and Montrose Investments Ltd.
(collectively, the "Defendants"), have alleged that we defaulted on certain
promissory notes granted to the Defendants. Each of the Defendants are seeking
damages in the sum of $833,334 plus interest, and reasonable attorney's fees.
The action was settled in August 2001 for a series of payments in the total sum
of $700,000.00. By December 31, 2001, the last payment was made, releases were
obtained and the judgment satisfied.
James R. Wallick V. Bruce Bendell, Individually And In His Capacity As An
Officer, Director And Majority Shareholder Of The Defendant Corporations,
Fidelity Holdings, Inc., et al.
On September 25, 2001, Mr. Wallick, a former director and officer, filed a
lawsuit against us in the United States District Court of New Jersey. In this
action, Mr. Wallick has alleged that the Defendants breached an oral, written
and implied-in-fact employment agreement with Mr. Wallick, acted in bad faith in
connection with the employment agreement, intentionally and negligently
misrepresented promises relating to Mr. Wallick's employment and intentionally
and tortiously interfered with the contractual and employment relationship of
Mr. Wallick. Mr. Wallick is seeking, among other things, compensatory and
punitive damages for the alleged violations in the amount of $540,000. The
parties recently entered mediation concerning this action.
Various claims against our subsidiaries.
Various claims and lawsuits arising in the normal course of business are pending
against our subsidiaries. The results of such litigation are not expected to
have a material or adverse effect on our combined financial position or results
of operations.
36
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 13, 2001, we held our Annual Meeting of Shareholders. Proxies were
solicited by us pursuant to Regulation 14A under the Exchange Act, as amended.
As of October 24, 2001, the record date for the Annual Meeting, there were
approximately 7,590,222 shares of common stock outstanding and entitled to vote,
of which 5,904,598 shares of common stock were present in person or by proxy and
voted at the meeting and 100,000 shares of 1997 Major Series of Convertible
Preferred Stock outstanding and entitled to an aggregate of 90,000 votes, all of
which were present in person or by proxy and voted at the meeting. At the Annual
Meeting, our shareholders approved the following proposals:
1. To elect two Class I Directors, Bruce Bendell and Steven Nawi, for
terms ending in 2004.
FOR ABSTAIN AGAINST NOT VOTED
Bruce Bendell 5,730,014 48,187 1 126,396
Steven Nawi 5,730,018 48,187 1 126,392
2. To approve an amendment to our 1999 Stock Option Plan to increase
the number of shares reserved for issuance under such plan by 750,000 shares to
1,110,000 shares.
For.................... 2,920,894
Against................ 182,839
Abstain................ 611
Not Voted.............. 2,800,254
3. To approve and adopt a 2001 Outside Director Stock Plan.
For.................... 2,921,425
Against................ 179,453
Abstain................ 3,426
Not Voted.............. 2,800,294
4. To ratify the appointment of BDO Seidman LLP as our independent
auditors for the year 2001.
For.................... 5,786,064
Against................ 23,484
Abstain................ 5,050
Not Voted.............. 0
37
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock trades on the NASDAQ National Market. The quarter-end high and
low bid price of our common stock were (as reported by the Nasdaq National
Market), which quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not reflect actual transactions and which have
been adjusted, as necessary, to reflect a reverse 1-for-5 stock split effected
in May, 2001:
Quarter Ended High Bid Low Bid
March 31, 2002 $ 0.90 $ 0.45
December 31, 2001 $ 2.090 $ .610
September 30, 2001 $ 3.333 $ 1.720
June 30, 2001 $ 3.020 $ 1.720
March 31, 2001 $ 5.156 $ 1.563
December 31, 2000 $ 5.000 $ .625
September 30, 2000 $ 10.315 $ 4.375
June 30, 2000 $100.315 $ 6.250
March 31, 2000 $118.125 $50.625
Shareholders
As of April 11, 2002 there were approximately 4,021 holders of record of our
common stock.
Dividends
We have never declared cash dividends on any class of our securities and have no
present intention to declare any dividends on any class of our securities in the
future.
Recent Sales of Unregistered Securities
The securities described below were sold by us during 2001 without being
registered under the Securities Act. All such sales made in reliance on Section
4(2) and/or Rule 506 promulgated thereunder of the Securities Act were, to the
best of our knowledge, made to investors that, either alone or together with a
representative that assisted such investor in connection with the applicable
investment, had such sufficient knowledge and experience in financial and
business matters to be capable of evaluating the merits and risks connected with
the applicable investment.
1. In July 2001, we issued 900 shares of common stock to Tomasz Mludzik,
at a per share price of $2.09, as employment compensation.
2. In August 2001, we issued 58,800 shares of common stock to Robert
Rimberg, at a per share price of $2.08, as payment for legal services.
3. In November 2001, we issued 232,600 shares of common stock to Robert
Rimberg, Esq., for distribution out of escrow to members of the Nissko
group at a per share price of $0.68, pursuant to a contractual
arrangement,
38
4. In February 2002, upon conversion of 100,000 shares of 1997 Major
Preferred Stock, we issued 1,333,333 shares of common stock to Bruce
Bendell.
5. In April 2002, we issued 900 shares of common stock to David Edelstein,
at a per share price of $0.68, as compensation for services through
April 30, 2001 as an outside member of our Board of Directors.
6. In April 2002, we issued 900 shares of common stock to Dennis Roth, at
a per share price of $0.68, as compensation for services through April
30, 2001 as an outside member of our Board of Directors.
7. In April 2002, we issued 900 shares of common stock to Jeffrey Weiner,
at a per share price of $0.68, as compensation for services through
April 30, 2001 as an outside member of our Board of Directors.
39
ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below for, and as of the end of, each of the years
in the five-year period ended December 31, 2001, are derived from our audited
financial statements. The data set forth below should be read in connection
with, and are qualified by reference to, "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our financial statements
and the related notes included elsewhere in this Form 10-K.
AS AT AND FOR THE YEARS ENDED DECEMBER 31,:
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(RESTATED) (RESTATED) (RESTATED) (RESTATED)
Revenues $375,114,505 $322,142,231 $209,531,993 $ 98,578,970 $ 953,033
Income (loss) from continuing operations 2,089,524 1,302,247 815,955 1,052,897 (383,261)
Income (loss) from discontinued operations 590,000 (22,427,322) (4,006,103) (473,161) 752,400
Net income (loss) 2,679,524 (21,125,075) (3,190,148) 579,736 369,139
Income per common share-continuing
operations
Basic: $ 0.32 $ 0.26 $ 0.19 $ 0.32 $ (0.13)
Diluted: 0.24 0.19 0.19 0.26 (0.13)
Income (loss) from discontinued operations
Basic: 0.09 (4.40) (0.95) (0.14) 0.26
Diluted: 0.07 (4.40) (0.95) (0.14) 0.22
Net income (loss) per common share
Basic: 0.41 (4.14) (0.76) 0.18 0.13
Diluted: 0.31 (4.14) (0.76) 0.14 0.11
Average number of shares used in computation:
Basic 6,558,356 5,101,829 4,210,837 3,301,557 2,904,458
Diluted 8,662,979 6,791,104 4,210,837 4,041,407 3,397,746
BALANCE SHEET DATA:
Total assets $ 81,847,947 $ 86,781,397 $ 68,319,331 $ 49,426,735 $ 9,401,343
Long-term liabilities, less current
Portion 9,853,587 10,411,463 7,416,784 7,953,278 427,387
Total stockholders' equity 17,948,321 15,599,970 28,917,595 16,453,516 6,524,735
See Notes 1, 10, 15, and 16 to Consolidated Financial Statements for
discussions of business acquisitions and divestitures, restatements,
stockholders' equity, earnings (loss) per share, restructuring and impairment
charges, discontinued operations and their effects on comparability of year-
to-year data. See "Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters" for a discussion of our dividend policy.
40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the operations, financial condition, liquidity and
capital resources of we and our subsidiaries should be read in conjunction with
our audited Consolidated Financial Statements and related notes thereto included
elsewhere herein.
This annual report contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results could differ significantly from the results discussed in the
forward-looking statements.
THE COMPANY
On May 14, 1998, The The Major Automotive Companies, Inc. (f/k/a Fidelity
Holdings, Inc.), a holding company involved in the acquisition and development
of synergistic technological and telecommunications businesses and the regional
consolidation of the retail automotive industry, acquired, from a related
party, the Major Automotive Group of dealerships ("Major Auto") and related
real property and leases. We have historically operated in two divisions:
Automotive and Technology.
On November 3, 2000, our Board of Directors determined to sell our
non-automotive operations, including our Technology division, by the most
appropriate economically viable means, in order to maximize shareholders' value
from those operations and to maintain the Company's focus on the regional
consolidation of retail automotive dealerships. Accordingly, all non-automotive
operations have been classified collectively as "Discontinued Operations."
Continuing operations are represented by our automotive dealerships activities,
including our Major Auto subsidiary and other dealerships, as well as our
automotive leasing subsidiary, Major Fleet and Leasing, Inc. ("Major Fleet").
The year 2001 marked a milestone in our history. It was our first full year of
operating solely as an automotive company. We completed the divestiture of all
of our non-automotive operations and continued to expand our dealership revenues
and profits. We had record revenues and gross profits and despite significant
one-time charges that we incurred in connection with the settlements of past
litigation, we increased our operating profit significantly.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in conformity with accounting
principles generally accepted in the United States. Such principles require that
we make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of income and expenses
during the reporting period. Operating results in the future could vary from the
amounts derived from those estimates and assumptions. We have identified the
policies below that are critical to our business operations and the
understanding of our results of operations and involve significant estimates.
For detailed discussion of other significant accounting policies see Note 1,
Nature of Business and Summary of Significant Accounting Policies, of the Notes
to Consolidated Financial Statements.
Inventory. Our inventory policy determines the valuation of inventory, which is
a significant component of our consolidated balance sheets. Our inventory
consists primarily of retail vehicles held for sale valued at the lower of cost
or market with new vehicles valued on the first-in, first-out basis and used
vehicles and vehicles held for lease with cost determined using the specific
identification method, net of reserves. Cost includes the actual price paid for
each vehicle plus reconditioning and transportation expenses. We establish
reserves based on vehicle inventory aging and management's estimate of market
values. While we believe that our estimates of market value are
41
appropriate, we are subject to the risk that our inventory may be overvalued
from time to time primarily with respect to used vehicles, which could require
additional reserves to be recorded.
Long-lived Assets. Our policies related to long-lived assets, such as on-going
client relationships, goodwill and property and equipment, which constitute a
significant component of our consolidated balance sheets, require that we
evaluate such assets for impairment when events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable through
the estimated undiscounted future cash flows resulting from the use of those
assets. If any impairment is found to exist, the related assets will be written
down to fair value. Additionally, these policies affect the amount and timing of
future amortization. Intangible assets consist primarily of the cost of
businesses acquired in excess of the fair value of net assets acquired. The cost
in excess of the fair value of net assets of businesses acquired is amortized on
a straight-line basis from five to forty years. In accordance with Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
and Statements of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), goodwill and intangible assets deemed to have
indefinite lives are no longer amortized but, instead are subject to impairment
tests at least annually. We will apply the new rules on accounting for goodwill
and other intangible assets beginning in the first quarter of 2002. During 2002,
we will perform the required impairment tests of goodwill and indefinite lived
intangible assets as of January 1, 2002. We will not be able to determine the
ultimate impact of SFAS 142 on our consolidated financial statements until such
time as we apply its provisions. We are subject to financial statement risk to
the extent that intangible assets become impaired due to decreases in the fair
market value of the related underlying business.
COMMITMENTS AND CONTINGENCIES
As further discussed in Note 12, Commitments and Contingencies, of Notes to
Consolidated Financial Statements, we are involved, and will continue to be
involved, in a number of legal proceedings arising out of the conduct of our
business, including litigation with customers, current and former business
associates, employment-related lawsuits and class actions. We intend to
vigorously defend ourselves and assert available defenses with respect to each
of these matters. Where necessary, we have accrued our estimate of the probable
costs for the resolution of these proceedings based on consultation with outside
counsel, assuming various strategies. Further, we have certain insurance
coverage and rights of indemnification with respect to certain aspects of these
matters. However, a settlement or an adverse resolution of one or more of these
matters may result in the payment of significant costs and damages, which could
have a material adverse effect on our business, financial condition, results of
operations, cash flows and prospects.
Revenue Recognition. The majority of our revenue is from the sales of new and
used vehicles, including any commissions from related vehicle financings. We
recognize revenue upon delivery of the vehicle to the customer. At time of
delivery, all financing arrangements between and among the parties have been
concluded. Commission revenue on warranty and insurance products sold in
connection with vehicle sales is recognized upon sale. Additionally, we record
income from direct financing leases based on a constant periodic rate of return
on the net investment in the lease. Income earned from operating lease
agreements is recorded evenly over the term of the lease.
Income Taxes. Our income tax policy requires that we compute the provision for
income taxes on the pretax income (loss) based on the current law. We provide
for deferred income taxes to show the effect of tax consequences in future years
of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates. We use valuation allowances to reduce the value of deferred
tax assets when we believe that their recovery is in doubt.
RESULTS OF CONTINUING OPERATIONS - YEAR ENDED DECEMBER 31, 2001 AND YEAR ENDED
DECEMBER 31, 2000
42
Revenues. Revenues for the year ended December 31, 2001 increased to
approximately $375.1 million, which is $53.0 million, or 16.5%, more than the
prior year's revenues of $322.1 million. Such increase was solely attributable
to the revenues of our automotive dealership operations, which were
approximately $374.6 million for the 2001 year, an increase of $53.1 million, or
16.5%, over the prior year's revenue of $321.5 million. Of this increase,
approximately $48.2 million relates to revenues generated by four dealerships we
acquired between September 1999 and December 2000. The other primary reason for
the significant growth in revenues was the substantial increase in unit sales.
New car unit sales increased by 451 units, or 8.4% in 2001 from 2000, while used
car unit sales increased 1,038 units, or 7.8%, in the 2001 year over the prior
year. Management believes that the increase in unit sales is primarily
attributable to our automotive dealership operations' successful efforts in
selling used vehicles at its expansive facility in Long Island City, New York
and the development of our used vehicle operations in Hempstead, Long Island. An
average of 1,194 used vehicles, retail and wholesale, were sold during each of
the months in the 2001 year, compared with an average of 1,108 used vehicles per
month during the prior year, an increase of 7.7%. Our automotive dealership
operations' sales efforts included extensive Internet promotions, local
advertising in all media and the branding of our used car operation as "Major
World." Management believes that market acceptance of its Major World brand was
a strong contributor to the 2001 sales volume performance. Additionally, the
average sales price per vehicle, for new vehicles, decreased by approximately
$78 (0.3%), per vehicle in 2001 as compared with 2000, while the average sales
price in 2001 for used vehicles, retail and wholesale, increased by
approximately $1,387 (10.4%) from the year 2000.
New vehicle sales revenue was approximately $143.1 million in 2001, an increase
of $10.6 million or 8.0% from 2000 new vehicle sales revenue of $132.5 million.
All of this increase is attributable to sales from our dealerships located in
Hempstead, Long Island, which were acquired in 2000.
Used vehicle sales revenue was $211.8 million in 2001 and $178.1 million in
2000, an increase of approximately $33.7 million or 18.9%. The most significant
contribution to this increase was made by our Chevrolet dealership in Long
Island City, NY and, to a lesser extent, our Mazda dealership in Hempstead, Long
Island. These changes in sales volume of used vehicles is attributable, in part,
to our successful efforts in obtaining non-recourse financing for prospective
buyers who may have had difficulties obtaining financing elsewhere and also
selling higher priced luxury quality used cars.
The results of the terrorist attack on September 11, 2001, had only a small
negative impact on revenues for the year ended 2001.
Cost of sales. The cost of sales increase of $40.8 million, or 15.0%, to $313.0
million in the year 2001 from $272.2 million in the year ended December 31,
2000, is solely attributable to our automotive dealership operations. The
percentage increase is slightly more than the revenues percentage increase and
reflects an increase of $1,615 or 7.7% in the average cost of new vehicles and
an decrease of $925 or 8.4% in the average unit cost of used vehicles.
Gross profit. Our automotive dealership operations generated almost all of the
total gross profit of $61.9 million for the year ended December 31, 2001. The
gross profit for automotive dealerships in 2001 was $61.4 million compared with
the 2000 amount of $49.2 million, an increase of $12.2 million or 24.7%. The
four dealerships we acquired between September 1999 and December 2000 generated
approximately $5.1 million or 41.1% of this total increase.
The balance of the gross profits increase was primarily attributable to (i) the
increase in units sold and (ii) the change in revenue percentage mix. Automotive
dealership revenues went from 40.8% of total revenues generated by new vehicle
sales and 54.9% generated by used vehicles sales in 2000 to 38.3% of total
revenues generated by new vehicle sales and 56.7% generated by used vehicle
sales in 2001. For the industry as a whole, the average percentage
43
of new and used vehicles' revenue as a percentage of total dealership revenue is
6.0% and 11.0% respectively. Our dealerships' overall gross profit as a
percentage of sales was 16.4%, compared with the industry average of 13.1%. Our
gross profit percentage on new vehicles of 8.5% is above the industry average of
6.0%, while our gross profit percentage on used vehicle sales of 19.5% is
significantly over the industry average used vehicle gross profit of 11.0%.
Management believes that our product mix, i.e. our concentration on the more
profitable used vehicle segment, our ability to buy quality used vehicles at
favorable prices and our ability to find competitive financing sources for our
customers are the significant factors in our profitability.
Operating expenses. In the year ended December 31, 2001, operating expenses
increased approximately $53.1 million to approximately $369.7 million, from
$316.6 million in 2000. The most significant component of this increase is the
cost of vehicles sold which represents $40.9 million of the increase. This is
reflective of the significant increase in sales during 2001. The balance of the
increase, $12.2 million, is significantly attributable to the costs associated
with increased sales efforts and results, principally, advertising.
Interest expense. Interest expense had a net decrease of approximately $156,000
to approximately $2.5 million in 2001 from interest expense of almost $2.7
million incurred in 2000. This is primarily related to the decrease in floor
plan interest based on the lower levels of automotive dealership operation's
inventories and lower interest rates during 2001 as compared with 2000.
Income tax expense. Local income tax expense of approximately $50,000 for the
year ended December 31, 2001 was calculated on pre-tax income from continuing
operations. In 2001, we recorded tax benefit of $341,000 from our continuing
operations. In 2001 and 2000, we recorded tax benefits of $590,000 and
$500,000, respectively, in connection with our discontinued operations.
Discontinued operations. Because all anticipated expenses associated with the
non-automotive components of our business had been estimated and accrued in
2000, no expenses incurred in connection with those operations has been charged
to expense in 2001. The aggregate amount of such loss from discontinued
operations, net of taxes, was $22.4 million in 2000. Such loss in 2000 includes,
net of taxes, the actual operating costs of those operations of approximately
$6.8 million, plus a one-time, non-cash, charge of approximately $13.6 million
to write-down the assets associated with those operations to their estimated net
realizable value and a charge of $2.0 million to accrue an estimate of operating
and other costs to be incurred until the divestiture has been completed.
RESULTS OF CONTINUING OPERATIONS - YEAR ENDED DECEMBER 31, 2000 AND YEAR ENDED
DECEMBER 31, 1999
Revenues. Revenues for the year ended December 31, 2000 increased to
approximately $322.1 million, which is $112.6 million, or 53.7%, more than the
prior year's revenues of $209.5 million. Such increase was solely attributable
to the revenues of our automotive dealership operations, which were
approximately $321.5 million for the 2000 year, an increase of $112.7 million,
or 54.0%, over the prior year's revenue of $208.8 million. Of this increase,
approximately $43.6 million relates to revenues generated by four dealerships we
acquired between September 1999 and December 2000. The other primary reason for
the significant growth in revenues was the substantial increase in unit sales.
New car unit sales increased by 1,653 units, or 44.5% in 2000 from 1999, while
used car unit sales increased 5,595 units, or 72.7%, in the 2000 year over the
prior year. On a same-store basis, i.e., dealerships that were owned for the
entire twelve months in both the 2000 and 1999 years, the increase in new
vehicles sold was 662, or 18.2%, while used vehicles sold, retail and wholesale,
increased by 4,019 units or 53.4%. Management believes that the increase in unit
sales is primarily attributable to our automotive dealership operations'
successful efforts in selling used vehicles at its expansive facility in Long
Island City, New York and to a lesser extent the development of its used vehicle
operation in Northern New Jersey. An average of 1,108 used vehicles, retail and
wholesale, were sold during each of the months in the 2000 year, compared with
an average of 641 used
44
vehicles per month during the prior year. Our automotive dealership operations'
sales efforts included extensive Internet promotions, local advertising in all
media and the branding of our used car operation as "Major World." Management
believes that market acceptance of its Major World brand was a strong
contributor to the 2000 sales volume performance. Additionally, the average
sales price per vehicle, for new vehicles, increased by approximately $744
(3.1%), per vehicle in 2000 as compared with 1999, while the average sales price
in 2000 for used vehicles, retail and wholesale, decreased by approximately $672
(4.8%) from the year 1999.
New vehicle sales revenue was approximately $132.5 million in 2000, an increase
of $43.6 million or 49.0% from 1999 new vehicle sales revenue of $88.9 million.
Approximately $18.9 million of this increase was represented by sales from
dealerships that were owned for twelve months in each of the years.
Used vehicle sales revenue was $178.1 million in 2000 and $108.3 million in
1999, an increase of approximately $69.8 million or 64.5%. On a same-store
basis, the increase in used vehicle sales revenue in 2000 over 1999 was
approximately $54.3 million, or 51.2%. These changes in sales volume of used
vehicles is attributable, in part, to our successful efforts in obtaining
non-recourse financing for prospective buyers who may have had difficulties
obtaining financing elsewhere and also selling higher priced luxury quality used
cars.
Cost of sales. The cost of sales increase of $96.1 million, or 54.5 %, to $272.2
million in the year 2000 from $176.1 million in the year ended December 31,
1999, is solely attributable to our automotive dealership operations. The
percentage increase is slightly more than the revenues percentage increase and
reflects an increase of almost $981 or 4.5% in the average cost of new vehicles
and an decrease of $503 or 4.4% in the average unit cost of used vehicles.
Gross profit. Our automotive dealership operations generated almost all of the
total gross profit of $49.9 million for the year ended December 31, 2000. The
gross profit for automotive dealerships in 2000 was $49.2 million compared with
the 1999 amount of $32.2 million, an increase of $17.0 million or 52.8%. The
four dealerships we acquired between September 1999 and December 2000 generated
approximately $6.0 million or 35.3% of this total increase. Additionally, we
changed our method of accounting for our new vehicle inventory from the last-in,
first-out method ("LIFO") to the first-in, first-out method. This resulted in a
positive gross profit effect of approximately $300,000 in 2000. We retroactively
restated the 1999 and 1998 inventory to conform with the current year's
presentation. This resulted in increased gross profits of approximately $400,000
in 1999 and $50,000 in 1998.
The balance of the gross profits increase was primarily attributable to (i) the
increase in units sold and (ii) the change in revenue percentage mix. Automotive
dealership revenues went from 42.9% of total revenues generated by new vehicle
sales and 52.2% generated by used vehicles sales in 1999 to 40.8% of total
revenues generated by new vehicle sales and 54.9% generated by used vehicle
sales in 2000. For the industry as a whole, the average percentage of new and
used vehicles' revenue as a percentage of total dealership revenue is 60.1% and
28.6% respectively. Our dealerships' overall gross profit as a percentage of
sales was 15.0%, compared with the industry average of 12.7%. Our gross profit
percentage on new vehicles of 8.2% is above the industry average of 6.1%, while
our gross profit percentage on used vehicle sales of 18.1% is significantly over
the industry average used vehicle gross profit of 10.9%. Management believes
that our product mix, i.e. our concentration on the more profitable used vehicle
segment, is the significant factor in our profitability.
Operating expenses. In the year ended December 31, 2000, operating expenses
increased approximately $14.6 million to approximately $44.5 million, from $29.9
million in 1999. The most significant component of this increase is the start-up
and integration expenses associated with the new dealerships we acquired since
September 1999. These dealerships accounted for approximately $8.2 million of
such increase. The balance of the increase is significantly attributable to the
costs associated with increased sales efforts and results, principally,
advertising and compensation of the previously existing dealerships.
45
\Interest expense. Interest expense had a net increase of approximately $900,000
to approximately $2.6 million in 2000 from interest expense of $1.7 million
incurred in 1999. This is primarily related to the increase in floor plan
interest based on the higher levels of automotive dealership operation's
inventories and higher interest rates during 2000 as compared with 1999.
Income tax expense. Local income tax expense of approximately $100,000 for the
year ended December 31, 2000 was calculated on pre-tax income from continuing
operations. The Company has provided for tax expense on the pre-tax income from
its continuing operations for the year and recorded a tax benefit of
approximately $500,000 in total, in connection with its discontinued operations.
Discontinued operations. The non-automotive components of our business that our
Board of Directors has determined to divest have generated a substantial loss.
The aggregate amount of such loss from discontinued operations, net of taxes, in
2000 was approximately $22.4 million, compared with a loss from discontinued
operations of $4.0 million in 1999. Such loss includes, net of taxes, the actual
operating costs of those operations of approximately $6.8 million, plus a
one-time, non-cash, charge of approximately $13.6 million to write-down the
assets associated with those operations to their estimated net realizable value
and a charge of $2.0 million to accrue an estimate of operating and other costs
to be incurred until the divestiture has been completed.
ASSETS, LIQUIDITY AND CAPITAL RESOURCES - DECEMBER 31, 2001
At December 31, 2001, our total assets were approximately $81.8 million, a
decrease of approximately $4.9 million from December 31, 2000. This net decrease
is primarily related to the significant decrease in inventories of $14.8 million
and the decrease in assets held for sale of $1.0 million, as partially offset by
a $1.5 million increase in cash and equivalents and a $7.7 million increase in
our accounts receivable. The decrease in inventory is primarily attributable to
Management's decision to reduce inventory related costs by maintaining lower,
but appropriate, levels of inventory. The increase in accounts receivable is
attributable to an increase of $4.5 million in Major's fleet accounts receivable
and the increased sales volume in 2001.
Our primary source of liquidity for the year ended December 31, 2001 was $5.4
million from our operating activities. This was the result of cash generated
through our net profit of $2.7 million, non-cash charges of $1.5 million and a
net decrease in current assets of $6.4 million (primarily from a decrease in
inventories of $14.8 million and an increase in accounts receivable of $7.7
million) as offset by a net decrease in liabilities of $5.2 million (primarily
from a decrease in floor plan notes payable of $11.2 million and an increase in
accounts payable and accrued expenses aggregating $6.0 million.
Net cash provided was partially offset by $3.5 million of cash used in financing
activities, primarily $1.1 million, $2.0 million and $.4 million, from purchase
of treasury stock, payment of notes and payment and issuance of long-term debt,
respectively.
The Company used $.4 million in investment activities, primarily the purchase of
property and equipment, during the year ended December 31, 2001.
The foregoing activities, i.e. financing, operating and investing, resulted in a
net cash increase of $1.5 million for the year ended December 31, 2001.
In September 2001, Chrysler Financial Company, LLC ("CFC"), one of our primary
floor plan credit sources for approximately $30 million for the financing of our
vehicle inventory, notified the Company that CFC had re-evaluated its credit and
lending relationship with us and was requiring us to seek a replacement lending
institution to refinance and replace all existing CFC credit facilities. In
March 2002 we closed a floor plan financing arrangement with General Motors
Acceptance Corporation ("GMAC") for GMAC to provide the floor plan credit for
the financing of our Chevrolet dealership's new and used vehicle inventory. This
is the flagship dealership of the Company's operations and accounted for more
than 35% of the Company's new vehicle revenues and more than
46
80% of its consolidated used vehicle revenues in the year 2001. Also in March
2002, we entered into a credit agreement with HSBC Bank, USA ("HSBC") pursuant
to which HSBC is providing the floor plan credit for the financing of our
Chrysler/Jeep, Dodge and Kia dealerships' new and used vehicle inventory. As a
result, of the GMAC and HSBC credit facilities we completed the replacement of
financing for all of the dealerships that were previously financed by CFC.
Additionally, in March 2002, we signed a commitment letter with Nissan Motor
Acceptance Corporation ("NMAC") pursuant to which NMAC will replace the existing
floor plan credit for the financing of our Nissan dealership's new and used
vehicle inventory. The commitment from NMAC is subject to normal closing
conditions.
The terms of each of these new floor plan lines, including interest rates, are
more favorable than those of each of the lines they replace. Bruce Bendell,
Chairman of the Company, has agreed, temporarily, to guarantee these
obligations. The Company has agreed to compensate Mr. Bendell for the fair
market value of such credit enhancement.
We believe that the cash generated from existing operations, together with cash
on hand, available credit from our current lenders, including banks and floor
planning, will be sufficient to finance our current operations and internal
growth for at least the next twenty-four months. However, if we elect to expand
our dealership network through acquisitions, we will require additional
financing. There can be no assurance that, for such growth, funding will be
available. We are exploring financing alternatives with respect to our projected
cash requirements.
[greater than] [less than]
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS:
LONG TERM DEBT 10,765,808 912,221 4,333,985 949,240 4,570,362
OPERATING LEASE OBLIGATION 5,527,840 1,126,750 1,816,000 1,183,000 1,402,090
OPERATING LEASE OBLIGATION 3,087,612 -- 3,087,612
------------------------------------------------------------------
19,381,260 2,038,971 9,237,597 2,132,240 5,972,452
==================================================================
47
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY RISK
We have discontinued our non-automotive operations, which increased the
development of technology products in the United States, Canada and Israel.
Although we sell some vehicles in the former Soviet republics, substantially all
our revenues come from sales of vehicles in the United States. Consequently,
foreign sales constitute a minimal amount of our revenues. Even so, our
financial results could be affected by changes in foreign currency exchange
rates or weak economic conditions in foreign markets. Because substantially all
our revenues are currently denominated in U.S. dollars, a strengthening of the
dollar could make our vehicles less competitive in foreign markets. Due to the
nature of our investments and operations, we believe that there is not a
material risk exposure.
INTEREST RATE RISK
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since all of our investments are in short-term
instruments, including money market funds. Our interest rate expense is also
sensitive to changes in the general level of U.S. interest rates because the
interest rate charged varies with the prime rate. Due to the nature of our
operations, we believe that there is not a material risk exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this Item 8 are set forth in Item 14 of
this Form 10-K. All information which has been omitted is either inapplicable or
not required.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During fiscal year 2001 there were no changes in or disagreements with our
independent accountant on accounting or financial disclosure.
48
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of April 11, 2002, our directors and executive officers were as follows:
NAME AGE POSITION
Bruce Bendell .......... 47 Chairman of the Board, President and Chief
Executive Officer
Richard L. Feinstein .... 58 Senior Vice-President, Finance and Chief
Financial Officer
David Edelstein ......... 48 Director
Steven Nawi ............ 54 Director
Jeffrey Weiner .......... 44 Director
The following is a brief description of the professional experience and
background of our directors and executive officers:
Bruce Bendell. Mr. Bendell has served as our Chairman of the Board since our
formation in November 1995 and as our President and Chief Operating Officer
since September 2001. Mr. Bendell served as our Chief Executive Officer from May
1998 until February 2000, as our President from May 14, 1998 to December 1998,
and as our Chief Executive Officer since July 2000. Mr. Bendell has also served
as the Chief Executive Officer and Chairman of our former subsidiary IG2, Inc.
since its inception to March 2000 and as the President and a Director of Major
Auto and its affiliates since December 1985. Mr. Bendell also serves on the
board of E-Star Holdings, Inc., a publicly held company.
David Edelstein. Mr. Edelstein has served as our Director since May 1998. Mr.
Edelstein has been in the real estate development business since 1979. Currently
he is the Managing Member of Sutton East Associates LLC, a real estate
development limited liability company and is involved in several sizable real
estate projects in New York and Florida.
Richard L. Feinstein. Mr. Feinstein has served as our Senior Vice President-
Finance and Chief Financial Officer since December 1997. From 1994 to December
1997, Mr. Feinstein maintained his own financial and management consulting
practice. From 1989 to 1994, Mr. Feinstein served as Managing Director and Chief
Financial Officer of Employee Benefit Services, Inc. From 1978 to 1989, Mr.
Feinstein was a partner in KPMG Peat Marwick and a predecessor firm.
Steven Nawi. Mr. Nawi has served as our Director since December 2001. Mr. Nawi
has served as the President of Nawi Leasing, Inc., a leasing company, since
1978. Mr. Nawi also serves as the President of Fort Lee Road Company, Inc., a
real estate holding company, since 1986, as President of Major Automotive, Inc.,
a unrelated daily car-rental operations company, since January 2000, and as
President of N.A.W.I. Enterprises, a financial lending company, since January
2000.
Jeffrey Weiner. Mr. Weiner has served as our Director since May 1998. Mr. Weiner
is a certified public accountant and has been with the accounting firm of Marcum
& Kliegman LLP, where he is currently Managing Partner, since 1981.
49
The following person, although not an executive officers or director, is
regarded by management as a key employee:
Harold Bendell. Mr. Bendell, age 53, has served as a senior executive of Major
Dealer Group since December 1985. He, together with his brother, Bruce Bendell,
is responsible for the day-to-day operations of the Major Dealer Group.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers and directors, and
persons who own more than ten percent of a registered class of our equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "SEC"). Officers, directors and greater
than ten percent stockholders are required by SEC regulations to furnish us with
copies of all Section 16(a) forms they file.
Based solely on our review of the copies of such forms received by us, or
written representations from certain reporting persons, we believe that during
2001, Steven Nawi is the only reporting person to have made late filings under
Section 16(a). Mr. Nawi filed a Form 3 on December 26, 2001 to report his
election as our director and his initial beneficial ownership of our common
stock. This disclosure was required to be reported on a Form 3 within ten (10)
days of his election as a director (i.e., by December 23, 2001).
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth information for each of our fiscal years ended
December 31, 2001, 2000 and 1999 concerning compensation of (i) all individuals
serving as our Chief Executive Officer during the fiscal year ended December 31,
2001 and (ii) each other of our executive officers whose total annual salary and
bonus equaled or exceeded $100,000 in the fiscal year ended December 31, 2001
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- ------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS (#)
- --------------------------- ---- -------- ---------- ------- ------------
Bruce Bendell (1)............................. 2001 $369,837 $ 756,665 0 0
Chairman of the Board and Chief
Executive Officer 2000 $236,426 0 0 400,000
1999 $278,000 $1,800,000 0 0
James Wallick (2)............................. 2001 $ 83,333 $ 41,667 19,449
President and Chief Operating Officer
2000 $200,000 $ 492,251 19,100 200,000
1999 $ 50,000 0 0 0
Richard L. Feinstein (3)...................... 2001 $171,890 $ 25,000 $ 6,324
Senior Vice President, Finance and
Chief Financial Officer 2000 $165,654 0 $ 6,324 15,000
1999 $170,715 $ 70,000 $ 6,324 112,500
50
(1) In December 1999, we incurred a liability for a one-time charge of $1.8
million to Mr. Bendell for reimbursement of certain expenses and a
bonus. In May 2001, the Compensation Committee of our Board of
Directors approved an adjustment to Mr. Bendell's compensation package
that included an increase in his base salary to $500,000 per year for
the period July 1, 2001 to June 30. 2004 and, effective April 1, 2001 a
bonus equal to 10% of the net income attributable to our automotive
operations after all expenses, including bonus amounts paid to other
employees. The amounts shown for the year 2001 reflect those terms.
(2) The amount reported for 1999 represents amounts paid Mr. Wallick in
that year from the date of his employment. For 2000, the amount
reported under Bonus represents an aggregate cash bonus of $250,000,
plus the issuance of 22,500 shares of our common stock valued at
$242,251 at the date of issuance. The amount reported under Other
Annual Compensation represents an automobile and related insurance
allowance of $2,161 per month. For 2001, the amounts shown represent
Mr. Wallick's salary compensation and guaranteed bonus that were paid
through June 30, 2001, the date of his termination as an employee. The
amount reported under Other Annual Compensation represents an
automobile and related insurance allowance aggregating $2,161 per month
paid through September 2001. Mr. Wallick resigned from the Board of
Directors on March 25, 2002.
(3) The amount reported under Bonus reflects the value of shares issued to
Mr. Feinstein in January 1999 and a cash bonus in 2001.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information regarding stock options
granted to the Named Executive Officers during 2001. We have never granted any
stock appreciation rights.
POTENTIAL
INDIVIDUAL GRANTS (1) REALIZABLE
PERCENT OF VALUE AT
NUMBER OF TOTAL ASSUMED ANNUAL
SECURITIES OPTIONS RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE OPTION TERM (3)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ---------------
NAME GRANTED 2000 (2) SHARE ($) DATE (5) 5% 10%
- ---- ---------- ------------ --------- ---------- ------ ------
James Wallick 4,500 (4) N/A $.75 12/13/2011 $5,498 $8,754
(1) Each option represents the right to purchase one share of common stock.
The options shown in this table were all granted under our 2001 Outside
Director Stock Option Plan (the "2001 Plan").
(2) In the year ended December 31, 2001, we granted options only to
non-employee members of our Board of Directors to purchase an aggregate
of 22,500 shares of our common stock. Inasmuch as Mr. Wallick was no
longer an employee at the time such options were granted, his grant was
based on his service as an Outside Director.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the full option term of
ten years. The 5% and 10% assumed annual rates of compounded stock
price appreciation are mandated by the rules of the Securities and
Exchange Commission and do not represent our estimate or projection of
future common stock price growth. These amounts represent certain
assumed rates of appreciation in the value of our common stock from the
fair market value on the date of grant. Actual gains, if any, on stock
option exercises are dependent on the future performance of the common
stock and overall stock market conditions. The amounts reflected in the
table may not necessarily be achieved.
(4) The options vested immediately upon their grant.
(5) The 2001 Plan provides that if an optionee's status as an Outside
Director terminates, the optionee may exercise the option only within
three months following the date of termination, which, in the case of
Mr. Wallick, was March 25, 2002.
51
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
No options were exercised by any of the Named Executive Officers during the
fiscal year ended December 31, 2001. There were no unexercised "in-the-money"
options held by any Named Executive Officers as of December 31, 2001.
COMPENSATION OF DIRECTORS
Non-employee Directors each received 900 shares of our Common Stock and options
to purchase 5,400 shares of Common Stock in 2001 under our various stock plans.
We reimburse directors for their expenses of attending meetings of the Board of
Directors.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
As of November 7, 1995, our date of incorporation, we entered into a Consulting
Agreement with Bruce Bendell, our Chairman, pursuant to which he serves as a
business, management and financial consultant to us. Mr. Bendell received an
annual consulting fee as determined by our Board of Directors from time to time,
but not less than $150,000. From the expiration of the agreement until June 30,
2001, Mr. Bendell had been serving at will. On May 15, 2001, the Compensation
Committee of the Board of Directors of the Company approved an increase in the
annual base salary of Bruce Bendell to $500,000 for the period July 1, 2001 to
June 30, 2004. Additional approval was given to a bonus plan under which Mr.
Bendell receives a quarterly bonus equal to 10% of the net income of the
Company's automotive operations after all expenses, including any other bonuses
paid or accrued. This bonus plan was approved retroactively to April 1, 2001.
Accordingly, the Company has recorded additional compensation expense of
$756,665 for this bonus. In the event that Mr. Bendell's employment is
terminated prior to June 30, 2004, he will continue to receive his base salary
and a guaranteed annual bonus of $250,000 per year until that date.
On October 19, 1999, we entered into a memorandum of understanding with James
Wallick, our former President and Chief Operating Officer, pursuant to which he
was to serve as our Executive Vice-President for a term of three years, at an
annual base salary of $200,000. The annual salary was subject to a $100,000
incentive pursuant to commissions to be mutually agreed upon. Mr. Wallick was
also granted a signing bonus consisting of 4,500 shares of our common stock. In
addition, Mr. Wallick was entitled to various fringe benefits and was entitled
to participate in any incentive, stock option, deferred compensation or pension
plans established by our Board of Directors. Effective June 30, 2001, Mr.
Wallick was terminated from his executive positions but remained on Board of
Directors. On September 25, 2001, Mr. Wallick filed suit against us in the
United States District Court of New Jersey entitled James R. Wallick v. Bruce
Bendell, individually and in his capacity as an Officer, Director and Majority
Shareholder of the defendant Corporations, Fidelity Holdings, Inc., The The
Major Automotive Companies, Inc. Major Chevrolet, Major Motors of Hempstead,
Inc., d/b/a/ Mazda of Hempstead, Compass Dodge, Compass Lincoln-
52
Mercury, ABC Companies I-V, fictitious name, actual names unknown, and John
Does, I-X, fictitious names, actual names unknown, individually and in their
official capacity (collectively, the Defendants"). In this action, Mr. Wallick
has alleged that the Defendants breached an oral, written and implied-in-fact
employment agreement with Mr. Wallick, acted in bad faith in connection with the
employment agreement, intentionally and negligently misrepresented promises
relating to Mr. Wallick's employment and intentionally and tortiously interfered
with the contractual and employment relationship of Mr. Wallick. Mr. Wallick is
seeking, among other things, compensatory and punitive damages for the alleged
violations. The parties recently entered mediation concerning this action.
Moreover, On March 25, 2002, Mr. Wallick resigned from our Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of our Board of Directors consists of Messrs.
Edelstein and Weiner, neither of whom has been an officer or employee at any
time since our inception. None of our executive officers serve as a member of
the Board of Directors or Compensation Committee of any entity that has one or
more executive officers serving as a member of our Board of Directors or
Compensation Committee. Prior to the formation of the Compensation Committee,
the Board of Directors as a whole made decisions relating to the compensation of
our executive officers.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
The Compensation Committee of the Board of Directors is responsible for
establishing, monitoring, and implementing the policies of governing the
compensation of the Company's executives. The Compensation Committee believes
that the compensation programs for our executive officers should reflect our
performance and the value created for our stockholders. In addition, the
compensation programs should support our short-term and long-term strategic
goals and values and should reward individual contribution to our success. The
Compensation Committee, which is comprised entirely of independent, outside
members of our Board of Directors, has furnished the following report on
executive compensation.
GENERAL COMPENSATION POLICY. The Compensation Committee's policy is to provide
our executive officers with compensation opportunities that are based upon their
personal performance, our financial performance and their contribution to that
performance and which are competitive enough to attract and retain highly
skilled individuals. Each executive officer's compensation package is comprised
of a base salary, bonus and long-term incentive awards. We review compensation
levels of other companies in its industry to ensure that our executive
compensation is appropriate in light of industry practices.
BASE SALARY. Salaries for executive officers for 2001 were generally determined
by the Board of Directors on an individual basis, taking into account individual
experience and performance and our specific needs. For 2002, the Compensation
Committee will review the base salaries of the executive officers by evaluating
each executive's scope of responsibility, performance, prior experience and
salary history, as well as the salaries for similar positions at comparable
companies.
BONUS. We award bonuses as a reward for performance based principally on our
overall financial results and or achievements of specified business objectives.
We believe that bonuses properly motivate the executive officers to perform to
the greatest extent of their abilities to generate the highest attainable
profits for us. In 2001, bonuses of $756,665, $41,667 and $25,000 were paid to
Bruce Bendell, James Wallick and Richard Feinstein, respectively.
LONG TERM INCENTIVE AWARDS. The Compensation Committee believes that
equity-based compensation in the form of stock options links the interests of
executives with the long-term interests of our stockholders and encourages
executives to remain in our employ. We grant stock options in accordance with
our various stock option plans. Grants are awarded based on a number of factors,
including the individual's level of responsibility, the amount and
53
term of options already held by the individual, the individual's contributions
to the achievement of our financial and strategic objectives, and industry
practices and norms.
COMPENSATION OF CHIEF EXECUTIVE OFFICER. Mr. Bendell, Chairman of the Board of
Directors and our President, Chief Executive Officer for 2001, was paid a base
salary of $369,837 for the year ended December 31, 2001. On May 15, 2001, the
Compensation Committee approved an increase in the annual base salary of Mr.
Bendell to $500,000 for the period July 1, 2001 to June 30, 2004. See
"Employment Contracts, Termination of Employment and Change-In-Control
Arrangements."
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m). Section 162(m) of the
Internal Revenue Code, enacted in 1993, generally disallows a tax deduction to
publicly held companies for compensation exceeding $1 million paid to certain of
the Company's executive officers. The limitation applies only to compensation
that is not considered to be performance-based. The non-performance based
compensation paid to our executive officers in 1999 did not exceed the $1
million limit per officer and the Compensation Committee does not anticipate
that the non-performance based compensation to be paid to our executive officers
in 2000, if any, will exceed that limit. Our Stock Option Plans are structured
so that any compensation deemed paid to an executive officer in connection with
the exercise of option grants made under that plan will qualify as
performance-based compensation which will not be subject to the $1 million
limitation. The Compensation Committee currently intends to limit the dollar
amount of all other compensation payable to our executive officers to no more
than $1 million. The Compensation Committee is aware of the limitations imposed
by Section 162(m), and the exemptions available therefrom, and will address the
issue of deductibility when and if circumstances warrant.
SUBMITTED BY THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS.
STOCK PRICE PERFORMANCE GRAPH
Our Common Stock commenced trading on the Nasdaq Small Cap Market on October 7,
1998 and on the Nasdaq National Market under the symbol "FDHG" on August 3,
1999. Our symbol was changed to "MAJR" on May 2, 2001.
The stock price performance graph below compares the cumulative total
stockholder return on our Common Stock with the Total Return Index for Nasdaq
Stock Market U.S. Companies and the Nasdaq Non-Financial Index for the period
commencing on May 2, 1996 and ending December 31, 2000. The graph assumes that
$100.00 was invested in the Common Stock and in each index on May 2, 1996. The
total return for the Common Stock and the indices used assumes the reinvestment
of dividends, even though dividends have not been declared on the Common Stock.
The information contained in the graph does not reflect present performance of
our stock.
The information contained in the performance graph shall not be deemed
"soliciting material" or to be "filed" with the Securities and Exchange
Commission nor shall such information be deemed incorporated by reference into
any future filing under the Securities Act or the Exchange Act, except to the
extent that we specifically incorporate it by reference into such filing.
54
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG THE MAJOR AUTOMOTIVE COMPANIES, INC.,
THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ NON-FINANCIAL INDEX
[LINE GRAPH]
* $100 Invested on 12/31/96 in stock or index-including reinvestment of
dividends. Fiscal year ending December 31.
Cumulative Total Return
----------------------------------------------
12/96 12/97 12/98 12/99 12/00 12/01
------ ------ ------ ------ ------ ------
THE MAJOR AUTOMOTIVE
COMPANIES, INC. 100.00 100.00 94.44 631.27 23.45 8.00
NASDAQ STOCK MARKET (U.S.) 100.00 122.48 172.68 320.89 193.01 153.15
NASDAQ NON-FINANCIAL 100.00 117.06 171.83 336.88 196.36 150.08
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Nevada Revised Statute, as amended, a director, officer, employee or
agent of a Nevada corporation may be entitled to indemnification by the
corporation under certain circumstances against expenses, judgments, fines and
amounts paid in settlement of claims brought against them by a third person or
by or in right of the corporation.
We are obligated under our Articles of Incorporation to indemnify any of our
present or former directors who served at our request as a director, officer or
member of another organization against expenses, judgments, fines and amounts
paid in settlement of claims brought against them by a third person or by or in
right of the corporation if such director acted in good faith or in a manner
such director reasonably believed to be in, or not opposed to, our best
interests and, with respect to any criminal action or proceeding, if such
director had no reason to believe his or her conduct was unlawful. However with
respect to any action by or in the right of the Company, the Articles of
Incorporation prohibit indemnification in respect of any claim, issue or matter
as to which such director is adjudged liable for negligence or misconduct in the
performance is his or her duties to us, unless otherwise ordered by the relevant
court. Our Articles of Incorporation also permit us to indemnify other persons
except against gross negligence or willful misconduct.
We are obligated under our bylaws to indemnify our directors, officers and other
persons who have acted as our representatives at our request to the fullest
extent permitted by applicable law as in effect from time to time, except for
costs, expenses or payments in relation to any matter as to which such officer,
director or representative is finally
55
adjudged derelict in the performance of his or her duties, unless we have
received an opinion from independent counsel that such person was not so
derelict.
Our indemnification obligations are broad enough to permit indemnification with
respect to liabilities arising under the Securities Act. Insofar as we may
otherwise be permitted to indemnify our directors, officers and controlling
persons against liabilities arising under the Securities Act or otherwise, we
have been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
The Nevada Revised Statute, as amended, also permits a corporation to limit the
personal liability of its officers and directors for monetary damages resulting
from a breach of their fiduciary duty to the corporation and its stockholders.
Our Articles of Incorporation limit director liability to the maximum extent
permitted by the Nevada Revised Statute, which presently permits limitation of
director liability except (i) for a director's acts or omissions that involve
intentional misconduct, fraud or a knowing violation of law and (ii) for a
director's willful or grossly negligent violation of a Nevada statutory
provision that imposes personal liability on directors for improper
distributions to stockholders. As a result of the inclusion in our Articles of
Incorporation of this provision, our stockholders may be unable to recover
monetary damages against directors as a result of their breach of their
fiduciary duty to us and our stockholders. This provision does not, however,
affect the availability of equitable remedies, such as injunctions or rescission
based upon a breach of fiduciary duty by a director.
We maintain a $5 million liability insurance policy for the benefit of our
officers and directors.
56
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables sets forth information with respect to the beneficial
ownership of each class of our securities as of April 11, 2002, respectively, by
(i) each of our directors, (ii) each of our executive officers, (iii) all of our
directors and executive officers as a group and (iv) each person known to us to
own more than 5% of any class of our securities:
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF
CLASS (1)
Executive Officers and Directors:
Bruce Bendell..................................... 4,121,727 (2) 43.7%
David Edelstein................................... 33,080 (3)(4) *
Richard L. Feinstein.............................. 46,100 (5) *
Steven Nawi....................................... 5,300 (6) *
Jeffrey Weiner.................................... 96,590 (7) 1.0%
All directors and executive officers as a group... 4,302,797(8)(9) 45.0%
Other 5% Stockholders:
Doron Cohen....................................... 511,892 (10) 5.5%
47 Parker Boulevard
Monsey, New York 10952
* Represents less than 1% of the outstanding shares of Common Stock.
(1) Based on 9,330,371 shares of Common Stock outstanding on April 11,
2002.
(2) Includes: (i) 5 shares of Common Stock owned by Mr. Bendell's wife and
the following shares of Common Stock which Mr. Bendell has the right to
acquire within 60 days: 22,500 shares of Common Stock which Mr. Bendell
has the right to acquire upon the exercise of warrants; and (ii)
options for 80,000 shares of Common Stock which are immediately
exercisable.
(3) Includes options for 30,200 shares of Common Stock which are
immediately exercisable.
(4) Includes 1,980 shares of Common Stock owned by Mr. Edelstein's
children.
(5) Includes options for 25,000 shares of Common Stock which are
immediately exercisable.
(6) Includes options for 4,500 shares of Common Stock which are immediately
exercisable.
(7) Includes options for 80,200 shares of common stock which are
immediately exercisable and 900 shares of common stock owned by Mr.
Weiner's wife.
(8) Includes (i) 4,885 shares of common stock owned by immediate family
members of directors and executive officers as a group, (ii) 22,500
shares of common stock that the directors and executive officers as a
group have the right to acquire within 60 days and (iii) options for
220,400 shares of common stock which are immediately exercisable.
(9) The address for each executive officer and director is c/o The Major
Automotive Companies, Inc., 43-40 Northern Boulevard, Long Island City,
NY 11101.
57
(10) Based solely on a Schedule 13G/A filed on February 1, 2001. Pursuant to
a Separation and Release Agreement dated August 8, 2000, the shares
will be voted in accordance with the recommendation of the majority of
the non-employee directors of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have retained the accounting firm of Marcum & Kliegman LLP to provide certain
accounting and tax services for us and our subsidiary Major Fleet. In 2001, we
paid Marcum & Kliegman LLP $170,277 for its services. Mr. Weiner, one of our
directors, is Managing Partner of Marcum & Kliegman LLP.
Our Chairman, Bruce Bendell, and his brother, Harold Bendell, have interests in
several non-affiliated auto dealerships, including Five Towns Nissan, Bronx
Automotive Group, HB Automotive, and Major of Pennsylvania for which we purchase
cars and provide other services, and from which we buy vehicles. We charge a fee
to offset any expenses incurred in providing our services. The volume of such
transactions is immaterial to our operations; however, at December 31, 2001,
these affiliated dealerships were indebted to us in an aggregate amount of
approximately $2,874,240.
During the year 2001, we received $2.4 million from Nawi Leasing, Inc.,
primarily for the purchase of used vehicles from us. Steven Nawi, a member of
our board of directors, is President of Nawi Leasing, Inc.
ITEM. 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT NUMBER DESCRIPTION PAGE
3.1* Articles of Incorporation of Fidelity
Holdings, Inc., ("Company") incorporated by
reference to Exhibit 3.1 of Company's
Registration Statement on Form 10-SB, as
amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
3.2* Articles of Incorporation of Computer
Business Sciences, Inc., incorporated by
reference to Exhibit 3.2 of Company's
Registration Statement on Form 10-SB, as
amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
3.3* Articles of Incorporation of 786710
(Ontario) Limited, incorporated by reference
to Exhibit 3.3 of Company's Registration
Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission
on March 7, 1997. N/A
3.4* Articles of Incorporation of Premo-Plast,
Inc., incorporated by reference to Exhibit
3.4 of Company's Registration Statement on
Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March
7, 1997. N/A
3.5* Articles of Incorporation of C.B.S. Computer
Business Sciences Ltd., incorporated by
reference to Exhibit 3.5 of Company's
Registration Statement on Form 10-SB, as
amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
3.6* Articles of Incorporation of Major Fleet &
Leasing Corp., incorporated by reference to
Exhibit 3.6 of Company's Registration
Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission
on March 7, 1997. N/A
58
3.7* Articles of Incorporation of Reynard Service
Bureau, Inc., incorporated by reference to
Exhibit 3.7 of Company's Registration
Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission
on March 7, 1997. N/A
3.8* Articles of Incorporation of Major
Acceptance Corp., incorporated by reference
to Exhibit 3.8 of Company's Registration
Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission
on March 7, 1997. N/A
3.9* By-Laws of the Company incorporated by
reference to Exhibit 3.9 of Company's
Registration Statement on Form 10-SB, as
amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
3.10************** Certificate of Amendment to Articles of
Incorporation of the Company filed on
December 12, 2000. -
4.1* Certificate of Designation for the Company's
1996-MAJOR Series of Convertible Preferred
Stock, incorporated by reference to Exhibit
4.1 of Company's Registration Statement on
Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March
7, 1997. N/A
4.1(i)** Form of Amended and Restated Certificate of
Designation for the Company's 1996-MAJOR
Series of Convertible Preferred Stock. N/A
4.2* Warrant Agreement for Nissko Warrants,
incorporated by reference to Exhibit 4.2 of
Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
4.3* Warrant Agreement for Major Fleet Warrants,
incorporated by reference to Exhibit 4.3 of
Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
4.3(i)** Amended and Restated Warrant Agreement,
dated October 11, 1997 between the Company,
Bruce Bendell and Harold Bendell. N/A
4.4* Warrant Agreement for Progressive Polymerics
International, Inc. Warrants, incorporated
by reference to Exhibit 4.4 of Company's
Registration Statement on Form 10-SB, as
amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
4.5** Form of Certificate of Designation for the
Company's 1997A-Major Automotive Group
Series of Preferred Stock. N/A
4.6** Form of Certificate of Designation for the
Company's 1997 Major Series of Convertible
Preferred Stock. N/A
4.7** Form of Registration Rights Agreement
between the Company and Bruce Bendell. N/A
4.8** Stock Pledge and Security Agreement, dated
March 26, 1996, between Doron Cohen, Bruce
Bendell, Avraham Nissanian, Yossi Koren, Sam
Livian and Robert Rimberg. N/A
59
4.9** Form of Registration Rights Agreement
between the Company, Castle Trust and
Management Services Limited and Bruce
Bendell. N/A
4.10** Form of the Company's 10% Convertible
Subordinated Debenture due 1999. N/A
4.11**** Certificate of Designation for the Company's
1997-Major Series of Convertible Preferred
Stock. N/A
4.11****** Form of Warrant. N/A
4.12****** Form of CBS Warrant. N/A
4.13****** Form of Debenture. N/A
4.14******* Form of Closing Warrant. N/A
4.15******* Form of Adjustable Warrant. N/A
4.16******** Form of Closing Warrant. N/A
4.17******** Form of Adjustable Warrant. N/A
4.18********* Form of Closing Warrant. N/A
4.19********* Form of Adjustable Warrant. N/A
10.1* Employment Agreement, dated November 7,
1995, between the Company and Doron Cohen,
incorporated by reference to Exhibit 10.1 of
Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
10.1(i)** Amendment No. 1 to Employment Agreement,
dated as of November 7, 1995 between the
Company and Doron Cohen. N/A
10.2* Consulting Agreement, dated November 7,
1995, between the Company and Bruce Bendell,
incorporated by reference to Exhibit 10.2 of
Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
10.2(i)** Amendment No. 1 to Consulting Agreement,
dated as of November 7, 1995 between
Fidelity Holdings, Inc. and Bruce Bendell. N/A
10.3* Agreement for Purchase of Patents, dated
November 14, 1995, between the Company and
Progressive Polymerics, Inc., incorporated
by reference to Exhibit 10.3 of the
Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
10.3(i)* First Amendment, dated September 30, 1996,
to Agreement for Purchase of Patents, dated
November 14, 1995, incorporated by reference
to Exhibit 10.4 of Company's Registration
Statement on Form 10-SB as amended, filed
with the Securities and Exchange Commission
on March 7, 1997. N/A
60
10.5* Agreement, dated March 25, 1996, between
Nissko Telecom, Ltd. and Computer Business
Sciences, Inc., incorporated by reference to
Exhibit 10.5 of Company's Registration
Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission
on March 7, 1997. N/A
10.6* Asset Purchase Agreement, dated April 18,
1996, between the Company and Zvi and Sarah
Barak, incorporated by reference to Exhibit
10.6 of Company's Registration Statement on
Form 10-SB, as amended, filed with the
Securities and Exchange Commission on March
7, 1997. N/A
10.6(i)** Amendment to Asset Purchase Agreement dated
August 7, 1997. N/A
10.7* Employment Agreement dated April 18, 1996
between the Company and Dr. Zvi Barak,
incorporated by reference to Exhibit 10.7 of
Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
10.8* Employment Agreement dated October 18, 1996
between Computer Business Sciences, Inc. and
Paul Vesel, incorporated by reference to
Exhibit 10.8 of Company's Registration
Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission
on March 7, 1997. N/A
10.9* Indemnification Agreement dated November 7,
1995 between the Company and Doron Cohen,
incorporated by reference to Exhibit 10.9 of
Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
10.10* Indemnification Agreement dated November 7,
1995 between the Company and Bruce Bendell,
incorporated by reference to Exhibit 10.10
of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
10.11* Indemnification Agreement dated December 6,
1995 between the Company and Richard C. Fox,
incorporated by reference to Exhibit 10.11
of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
10.12* Indemnification Agreement dated March 28,
1996 between the Company and Dr. Barak,
incorporated by reference to Exhibit 10.12
of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
10.13* Indemnification Agreement dated March 28,
1996 between the Company and Yossi Koren,
incorporated by reference to Exhibit 10.13
of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
10.14* Plan of Reorganization for acquisition of
Major Fleet & Leasing Corp. dated August 23,
1996 between the Company, Bruce Bendell and
Harold Bendell, incorporated by reference to
Exhibit 10.17 of Company's Registration
Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission
on March 7, 1997. N/A
61
10.15* Patent Purchase Agreement dated December 30,
1996 between Premo-Plast, Inc. and John
Pinciaro, incorporated by reference to
Exhibit 10.16 of Company's Registration
Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission
on March 7, 1997. N/A
10.16* Employment Agreement dated December 30, 1996
between Premo-Plast, Inc. and John Pinciaro,
incorporated by reference to Exhibit 10.17
of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
10.17* Employment Agreement dated January 27, 1997
between the Company and Ronald K. Premo,
incorporated by reference to Exhibit 10.18
of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
10.18* Plan and Agreement of Merger, dated April
21, 1997, the Company, Major Automotive
Group, Inc., Major Acquisition Corp. and
Bruce Bendell, incorporated by reference to
Exhibit 10.19 of Company's Registration
Statement on Form 10-SB, as amended, filed
with the Securities and Exchange Commission
on March 7, 1997. N/A
10.18(i)** Amendment to Plan and Agreement of Merger,
dated August 1, 1997, between Fidelity
Holdings, Inc., Major Automotive Group,
Inc., Major Acquisition Corp. and Bruce
Bendell. N/A
10.18(ii)** Amendment to Plan and Agreement of Merger,
dated August 26, 1997, between Fidelity
Holdings, Inc., Major Automotive Group,
Inc., Major Acquisition Corp. and Bruce
Bendell. N/A
10.18(iii)** Amendment to Plan and Agreement of Merger,
dated November 20, 1997, between Fidelity
Holdings, Inc., Major Automotive Group,
Inc., Major Acquisition Corp. and Bruce
Bendell. N/A
10.18(iv)**** Amendment to Plan and Agreement of Merger,
dated March 20, 1998, between Fidelity
Holdings, Inc., Major Automotive Group,
Inc., Major Acquisition Corp., and Bruce
Bendell. N/A
10.19* Stock Purchase Agreement with Escrow
Agreement attached, incorporated by
reference to Exhibit 10.20 of Company's
Registration Statement on Form 10-SB, as
amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.20* Management Agreement, incorporated by
reference to Exhibit 10.21 of Company's
Registration Statement on Form 10-SB, as
amended, filed with the Securities and
Exchange Commission on March 7, 1997. N/A
10.21* Employment Agreement with Moise Benedid,
incorporated by reference to Exhibit 10.22
of Company's Registration Statement on Form
10-SB, as amended, filed with the Securities
and Exchange Commission on March 7, 1997. N/A
62
10.22** Partnership Agreement between Nissko Telecom
Associates and the Company. N/A
10.23** Memorandum of Understanding, dated September
9, 1997, by and among Computer Business
Sciences, Inc., Nissko Telecom Ltd., the
Company and Robert L. Rimberg. N/A
10.24** Letter of Intent, dated June 6, 1997,
between the Company and SouthWall Capital
Corp. (formerly known as Sun Coast Capital
Corp.) N/A
10.25** Letter of Intent, dated September 1997,
between the Company, Lichtenberg Robbins
Buick, Inc. and Lichtenberg Motors Inc. N/A
10.26** Consulting Agreement, dated February 18,
1997, with Ronald Shapss Corporate Services,
Inc. N/A
10.27** Value Added Reseller Agreement between Summa
Four, Inc. and Computer Business Sciences,
Inc., as Reseller. N/A
10.28** Lease Agreement, dated March 1996, between
80-02 Leasehold Company, as Owners and the
Company, as Tenant. N/A
10.29** Master Lease Agreement, dated December 26,
1996, between Major Fleet & Leasing Corp.,
as Lessor, and Nissko Telecom, Ltd., as
Lessee. N/A
10.30** Sublease Agreement, dated March 1995,
between Speedy R.A.C., Inc., as Sublessor,
and Major Subaru Inc., as Sublessee. N/A
10.31** Lease Agreement, dated November 1, 1991,
between Gloria Hinsch, as Landlord, and
Major Chrysler-Plymouth, Inc., as Tenant. N/A
10.32** Store Lease Agreement, dated June 10, 1992,
between Bill K. Kartsonis, as Owner, and
Major Automotive Group, as Tenant. N/A
10.33** Lease Agreement, dated June 3, 1994, between
General Motors Corporation, as Lessor, and
Major Chevrolet, Inc., as Lessee. N/A
10.34** Lease Agreement, dated August 1990, between
Bruce Bendell and Harold Bendell, as
Landlord and Major Chrysler-Plymouth, Inc.,
as Tenant. N/A
10.34(i)** Extension of Lease Agreement, dated August
14, 1997, between Bruce Bendell and Harold
Bendell, as Landlord and Major Dodge, Inc.
(formerly known as Major Chrysler-Plymouth,
Inc.), as Tenant. N/A
10.34(ii)** Extension of Lease Agreement, dated December
16, 1997, between Bruce Bendell and Harold
Bendell, as Landlord and Major Dodge
(formerly known as Major Chrysler-Plymouth,
Inc.), as Tenant. N/A
10.35** Lease Agreement, dated February 1995,
between Bendell Realty, L.L.C., as Landlord,
and Major Chrysler-Plymouth Jeep Eagle,
Inc., as Tenant. N/A
10.35(i)** Extension of Lease Agreement, dated August
14, 1997, between Bendell Realty, L.L.C., as
Landlord and Major Chrysler-Plymouth Jeep
Eagle, Inc., as Tenant. N/A
63
10.35(ii)** Extension of Lease Agreement, dated December
16, 1997, between Bendell Realty, L.L.C., as
Landlord and Major Chrysler-Plymouth Jeep
Eagle, Inc., as Tenant. N/A
10.36** Lease Agreement, dated February 1996,
between Prajs Drimmer Associates, as
Landlord, and Barak Technology Inc., as
Tenant. N/A
10.37** Sublease Agreement, dated January 8, 1997,
between Newsday, Inc., as Sublessor, and
Major Fleet & Leasing Corp., as Sublessee. N/A
10.37(i)** Consent to Sublease Agreement, dated January
16, 1997, between 80-02 Leasehold Company,
Newsday Inc. and Major Fleet and Leasing
Corp. N/A
10.38** General Security Agreement between Major
Fleet & Leasing Corp., as Debtor, and Marine
Midland Bank, as Secured Party. N/A
10.39** Retail and Wholesale Dealer's Agreement,
dated March 30, 1995, between Marine Midland
Bank, as Bank, and Major Fleet & Leasing
Corp., as Dealer. N/A
10.40** Wholesale Lease Financing Line of Credit
between General Electric Capital
Corporation, as Lender, and Major Fleet &
Leasing Corp., as Borrower. N/A
10.41** Chrysler Leasing System License Agreement
between Chrysler Motors Corporation, as
Licensor, and Major Fleet & Leasing Corp.,
as Licensee. N/A
10.42** GMAC Retail Plan Agreement between General
Motors Acceptance Corp. and Major Fleet &
Leasing Corp., as Dealer. N/A
10.43** Fidelity Holdings, Inc. 1996 Employees'
Performance Recognition Plan. N/A
10.44** Secured Promissory Note, dated December 31,
1996, between Doron Cohen, as Maker, and
Fidelity Holdings, Inc., as Holder. N/A
10.45** Dealer Master Agent Agreement and License,
dated February 1996, between Computer
Business Sciences, Inc. and Progressive
Polymerics International, Inc., as Master
Agent. N/A
10.46** Dealer Master Agent Agreement and License,
dated February 1996, between Computer
Business Sciences, Inc. and Cellular Credit
Corp. of America, Inc., as Master Agent. N/A
10.47** Dealer Master Agent Agreement and License,
dated February 1996, between Computer
Business Sciences, Inc. and America's New
Beginning, Inc., as Master Agent. N/A
10.48** Dealer Master Agent Agreement and License,
dated February 1996, between Computer
Business Sciences, Inc. and Korean Telecom,
as Master Agent. N/A
64
10.49** Dealer Master Agent Agreement and License,
dated February 1996, between Computer
Business Sciences, Inc. and Philcom
Telecommunications, as Master Agent. N/A
10.50** Management Agreement, dated August 23, 1996,
between Major Fleet, Bruce Bendell and
Harold Bendell. N/A
10.51** Wholesale Security Agreement, dated April
26, 1990, between General Motors Acceptance
Corporation ("GMAC") and Major Fleet. N/A
10.51(i)** Amendment, dated February 14, 1991, to
Wholesale Security Agreement between GMAC
and Major Fleet. N/A
10.52** Direct Leasing Plan Dealer Agreement, dated
July 24, 1986, between GMAC and Major Fleet. N/A
10.53** Retail Lease Service Plan Agreement, dated
April 3, 1987, between GMAC and Major Fleet. N/A
10.54** Contribution Agreement dated as of October
6, 1997 between the Company, Bruce Bendell
and Doron Cohen. N/A
10.55** Letter of Commitment dated March 16, 1998
from Falcon Financial, LLC to Major Auto
Acquisition, Inc. N/A
10.56**** Security Agreement, dated May 14, 1998, made
by Major Acquisition Corp., Major Automotive
Realty Corp., and Falcon Financial, LLC. N/A
10.57**** Guarantee, dated as of May 14, 1998, made by
Fidelity Holdings, Inc. in favor of Falcon
Financial, LLC. N/A
10.58**** Amended and restated secured promissory
note, dated May 14, 1998 and between Major
Acquisition Corp. and Falcon Financial, LLC. N/A
10.59*** Consulting Agreement among Fidelity
Holdings, Inc., Major Automotive Group, Inc.
and Clemont Investors Ltd., dated October 1,
1998. N/A
10.60****** Placement Agent Agreement, dated as of
January 25, 1999, between Fidelity Holdings,
Inc. and The Zanett Securities Corporation,
Claudio Guazzoni, David McCarthy, and Tony
Milbank. N/A
10.61****** Securities Purchase Agreement dated as of
January 25, 1999, by and among Fidelity
Holdings, Inc., Computer Business Sciences,
Inc., Zanett Lombardier, Ltd., Goldman Sachs
Performance Partners, L.P., Goldman Sachs
Performance Partners, (Offshore) L.P., David
McCarthy and Bruno Guazzoni. N/A
10.62****** Registration Rights Agreement dated as of
January 25, 1999, by and among Fidelity
Holdings, Inc., Zanett Lombardier, Ltd.,
Goldman Sachs Performance Partners, L.P.,
Goldman Sachs Performance Partners,
(Offshore) L.P., David McCarthy and Bruno
Guazzoni. N/A
10.63******* Letter Agreement, dated as of June 24,1999,
by and among Fidelity Holdings, Inc. and
Strong River Investments, Inc., Bay Harbor
Investments, Inc. and Augusta Street LLC. N/A
65
10.64******* Securities Purchase Agreement dated as of
June 24, 1999, by and among Fidelity
Holdings, Inc. and Strong River Investments,
Inc., Bay Harbor Investments, Inc. and
Augusta Street LLC. N/A
10.65******* Registration Rights Agreement dated as of
June 24, 1999, by and among Fidelity
Holdings, Inc. and Strong River Investments,
Inc., Bay Harbor Investments, Inc. and
Augusta Street LLC. N/A
10.66******** Securities Purchase Agreement dated as of
December 8, 1999, by and among Fidelity
Holdings, Inc. and Strong River Investments,
Inc., Montrose Investments Ltd. and Augusta
Street LLC. N/A
10.67********* Registration Rights Agreement dated as of
December 8, 1999, by and among Fidelity
Holdings, Inc. and Strong River Investments,
Inc., Montrose Investments Ltd. and Augusta
Street LLC. N/A
10.68********* Securities Purchase Agreement dated as of
February 8, 2000, by and among Fidelity
Holdings, Inc. and Strong River Investments,
Inc., Montrose Investments Ltd. and Augusta
Street LLC. N/A
10.69********* Registration Rights Agreement dated as of
February 8, 2000, by and among Fidelity
Holdings, Inc. and Strong River Investments,
Inc., Montrose Investments Ltd. and Augusta
Street LLC. N/A
10.70********** Merger Agreement dated January 18, 2000 by
and among Fidelity Holdings, Inc., Cars
Acquisition, Inc., CarsTV.com, Inc., and
Jack H. Singer. N/A
10.71********** Transfer Restriction and Optional Conversion
Agreement dated January 18, 2000 by and
among Fidelity Holdings, Inc., Jack H.
Singer and certain other individual
investors. N/A
10.72********** Escrow Agreement dated January 18, 2000 by
and among Fidelity Holdings, Inc., Cars
Acquisition, Inc., CarsTV.com, Inc., and
Jack H. Singer, certain other individual
investors and Littman Krooks Roth & Ball
P.C., as escrow agent. N/A
10.73********** Securities Purchase Agreement dated as of
March 14, 2000, by and between Fidelity
Holdings, Inc. and Strong River Investments,
Inc. N/A
10.74********** Registration Rights Agreement dated as of
March 14, 2000, by and between Fidelity
Holdings, Inc. and Strong River Investments,
Inc. N/A
10.75********** Lease Agreement dated as of January 28,
2000, by 80-02 Leasehold Company, L.P. and
Mid-Atlantic Telecommunications, Inc. N/A
10.76********** Repurchase of Nissko Master Rights Agreement
among Computer Business Sciences Inc, Nisko
L.P. and shareholders of Nissko Telecom Ltd
dated November 30, 1999. N/A
66
10.77*********** Separation and Release Agreement dated as of
August 8, 2000, entered into by and among
Fidelity Holdings, Inc. and Doron Cohen. N/A
10.78************ Redemption Agreement dated as of September
8, 2000, entered into by and among Fidelity
Holdings, Inc., Strong River Investments,
Inc. and Montrose Investments Ltd. N/A
10.79************ Redemption Agreement dated as of September
8, 2000, entered into between Fidelity
Holdings, Inc. and Augusta Street LLC. N/A
10.80************* Senior Secured Promissory Note due December
11, 2002 dated December 11, 2000. N/A
10.81************* Security and Pledge Agreement dated
December 11, 2000 between Fidelity Holdings,
Inc. and M&K Equities, Ltd. N/A
10.82************** Asset Purchase Agreement Asset dated as of
February 12, 2001 between Internet
Creations, Inc. (d/b/a Internet Connections)
and Access Technology, Inc. -
10.83************** Stock Purchase Agreement dated of March
27, 2001 by and among Global Communications
of NY, Inc., Fidelity Holdings, Inc. and
IG2, Inc. -
10.84************** Senior Secured Promissory Note due March
27, 2006 dated March 27, 2001. -
10.85************** Separation and Release Agreement dated
March 27, 2001 entered into by and between
Fidelity Holdings, Inc. and Kimberly
Peacock. -
10.86************** Letter dated November 21, 2000 regarding
Promissory Notes in favor of Strong River
Investments, Inc. and Montrose Investments
Ltd. -
10.87*************** Stock Purchase Agreement by and among Global
Communications of NY, Inc., the Major
Automotive Companies, Inc. and ICS Globe,
Inc. dated July 31, 2001. -
10.88*************** Senior Secured Promissory Note due December
31, 2003 dated July 31, 2001.
10.89**************** 2001 Outside Director Stock Plan -
10.90 Wholesale Security Agreement dated March 12,
2002 between General Motors Acceptance
Corporation and Major Chevrolet, Inc.
10.91 Letter from HSBC Bank, USA dated March 20,
2002 regarding floor plan lines.
11.1 Statement re: computation of per share
earnings. -
16.1***** Letter from Peter C. Cosmas Co., CPAs, dated
February 9, 1999. N/A
67
21.1 List of Subsidiaries of the Company. -
23.1 Consent of BDO Seidman, LLP, Independent
Accountants. -
* Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's registration
statement on Form 10-SB (File No. 0-29182).
** Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's annual report
on Form 10-KSB for the year ended December
31, 1997 (File No. 0-29182)
*** Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's quarterly
report on Form 10-QSB for the quarter ended
September 30, 1998 (File No. 0-29182).
**** Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's current report
on Form 8-K, dated May 14, 1998. (File No.
0-29182).
***** Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's current report
on form 8-K, dated February 5, 1999. (File
No. 0-29182).
****** Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's current report
on form 8-K, dated January 26, 1999. (File
No. 0-29182).
******* Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's current report
on form 8-K, dated July 3, 1999. (File No.
0-29182).
******** Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's current report
on form 8-K, dated December 10, 1999. (File
No. 0-29182).
********* Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's current report
on form 8-K, dated February 16, 2000 (File
No. 0-29182).
********** Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's annual report
on Form 10-KSB for the year ended December
31, 1999 (File No. 0-29182).
*********** Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's current report
on form 10-Q, dated August 21, 2000 (File
No. 0-29182).
************ Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's current report
on form 8-K, dated September 22, 2000 (File
No. 0-29182).
68
************* Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's current report
on form 8-K, dated December 21, 2000 (File
No. 0-29182).
************** Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's current report
on Form 10-K, dated April 17, 2001 (File No.
0-29182).
*************** Previously filed with the Commission as
Exhibits to, and incorporated herein by
reference from, the Company's current report
on Form 10-Q, dated August 20, 2001 (File
No. 0-29182).
**************** Previously filed with the Commission as an
Exhibit to, and incorporated herein by
reference from, the Company's definitive
proxy statement on Schedule 14A, dated
October 24, 2001 (File No. 0-29182).
[RF TO PROVIDE EXHIBITS FROM FLOOR FINANCING]
(b) Reports on Form 8-K
On May 4, 2001, we filed a Report on Form 8-K reporting, effective May 1, 2001,
the changed of our name to The The Major Automotive Companies, Inc. and our
trading symbol on the Nasdaq National Stock Market from FDHG to MAJR.
Additionally, we reported, effective May 2, 2001, a one (1) for five (5) reverse
stock split of our common stock, $.01 par value per share.
On June 8, 2001, we filed a Report on Form 8-K reporting an issuance to Bruce
Bendell of shares of our Common stock, pursuant to his election to convert
400,000 of his 500,000 shares of our 1997-Major Series of Convertible Preferred
Stock.
On August 14, 2001, we filed a Report on Form 8-K reporting the issuance of a
press release announcing that Bruce Bendell entered into a definitive agreement
with Marshall Cogan pursuant to which Mr. Cogan agreed to acquire approximately
two-thirds of Mr. Bendell's equity position in the Company.
On September 28, 2001, we filed a Report on Form 8-K reporting the issuance of a
press release announcing that James Wallick would no longer serve as our
President and Chief Operating Officer and the filing by Mr. Wallick of a lawsuit
against us in the United States District Court of New Jersey.
On October 24, 2001, we filed a Report on Form 8-K reporting the issuance of a
press release announcing the termination by Mr. Cogan of the proposed
acquisition of approximately two-thirds of Bruce Bendell's equity position in
the Company. We also reported the issuance of a press release announcing that
our primary floor plan credit source for the financing of our vehicle inventory,
re-evaluated its credit and lending relationship with us and required that we
seek a replacement lending institution.
69
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The The Major Automotive Companies, Inc.
Dated: April 16, 2002 /s/ Bruce Bendell
---------------------------------------
Bruce Bendell,
President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
/s/ Bruce Bendell President, Chief Executive April 16, 2002
- ------------------------ Officer and Director
Bruce Bendell
/s/ Richard L. Feinstein Senior VP, Finance and April 16, 2002
- ------------------------ Chief Financial Officer
Richard L. Feinstein
/s/ David Edelstein Director April 16, 2002
- ------------------------
David Edelstein
/s/Steven Nawi Director April 16, 2002
- ------------------------
Steven Nawi
/s/ Jeffrey Weiner Director April 16, 2002
- ------------------------
Jeffrey Weiner
70
THE MAJOR AUTOMOTIVE COMPANIES, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
THE MAJOR AUTOMOTIVE COMPANIES, INC.
- --------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
F-1
THE MAJOR AUTOMOTIVE COMPANIES, INC.
CONTENTS
- ------------------------------------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets as of December 31, 2001 and 2000 F-4
Statements of operations for the years ended December 31, 2001, 2000 and 1999 F-5
Statements of stockholders' equity for the years ended December 31, 2001, 2000 and 1999 F-6 - F-7
Statements of cash flows for the years ended December 31, 2001, 2000 and 1999 F-8 - F-10
Notes to consolidated financial statements F-11 - F-57
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
The Major Automotive Companies, Inc.
Long Island City, New York
We have audited the consolidated balance sheets of The Major Automotive
Companies, Inc. (formerly Fidelity Holdings, Inc.) and subsidiaries as of
December 31, 2001 and 2000, and the related consolidated statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Major Automotive
Companies, Inc. and subsidiaries at December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America.
April 12, 2002
BDO Seidman, LLP
New York, New York
F-3
THE MAJOR AUTOMOTIVE COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
December 31, 2001 2000
- -----------------------------------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash and cash equivalents $ 4,294,826 $ 2,786,312
Net investment in direct financing leases, current 135,122 289,010
Accounts receivable, net of allowance for doubtful accounts of
$700,000 and $200,000 15,744,096 8,078,111
Inventories 32,673,901 47,465,261
Other current assets 1,962,671 1,964,954
Net assets held for sale -- 1,000,000
- -----------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 54,810,616 61,583,648
NET INVESTMENT IN DIRECT FINANCING LEASES, NET OF CURRENT PORTION 191,053 205,992
PROPERTY AND EQUIPMENT, NET 8,901,218 8,754,983
DEFERRED INCOME TAXES 1,576,000 645,000
GOODWILL 13,589,000 13,909,058
DUE FROM OFFICER 1,113,979 347,765
NOTES RECEIVABLE 700,000 --
OTHER ASSETS 966,081 1,334,951
- -----------------------------------------------------------------------------------------------------------
$ 81,847,947 $ 86,781,397
===========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable - floor plan $ 33,963,903 $ 45,214,444
Notes payable - other -- 1,250,001
Line of credit 500,000 500,000
Accounts payable 9,318,409 4,940,132
Accrued expenses 5,469,192 4,222,609
Current maturities of long-term debt 912,221 866,120
Customer deposits 724,671 701,963
Other current liabilities 32,470 --
- -----------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 50,920,866 57,695,269
LONG-TERM DEBT, LESS CURRENT MATURITIES 9,853,587 10,411,443
OBLIGATIONS UNDER CAPITAL LEASES 3,111,643 3,011,821
OTHER 13,530 62,894
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 63,899,626 71,181,427
- -----------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value - 2,000,000 shares authorized;
100,000 and 500,000 shares issued and outstanding 1,000 5,000
Common stock, $.01 par value - 50,000,000 shares authorized;
7,994,338 and 5,217,140 and shares issued and outstanding in
2001 and 2000, respectively 79,943 52,173
Unearned stock-based compensation (115,946) (284,391)
Additional paid-in capital 39,964,363 39,418,957
Treasury stock, at cost (1,963,764) (894,970)
Deficit (20,017,275) (22,696,799)
- -----------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 17,948,321 15,599,970
- -----------------------------------------------------------------------------------------------------------
$ 81,847,947 $ 86,781,397
===========================================================================================================
See accompanying notes to consolidated financial statements.
F-4
THE MAJOR AUTOMOTIVE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------------
REVENUES:
Sales $ 375,114,505 $ 322,142,231 $ 209,531,993
Cost of sales 313,209,234 272,246,635 176,121,370
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 61,905,271 49,895,596 33,410,623
OPERATING EXPENSES 56,516,246 44,348,909 29,957,748
INTEREST EXPENSE, NET OF INTEREST INCOME 2,504,608 2,660,638 1,746,920
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE LITIGATION COSTS, INCOME TAX EXPENSE
AND LOSS FROM DISCONTINUED OPERATIONS 2,884,417 2,886,049 1,705,955
LITIGATION COSTS 1,085,893 199,802 --
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND INCOME
(LOSS) FROM DISCONTINUED OPERATIONS 1,798,524 2,686,247 1,705,955
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE (BENEFIT) (291,000) 1,384,000 890,000
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 2,089,524 1,302,247 815,955
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (NET OF INCOME TAX BENEFIT) 590,000 (22,427,322) (4,006,103)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 2,679,524 $ (21,125,075) $ (3,190,148)
==================================================================================================================================
Income per common share - continuing operations:
Basic $ 0.32 $ 0.26 $ 0.19
Diluted $ 0.24 $ 0.19 $ 0.19
==================================================================================================================================
Income (loss) per common share - discontinued operations:
Basic $ 0.09 $ (4.40) $ (0.95)
Diluted $ 0.07 $ (4.40) $ (0.95)
==================================================================================================================================
Net income (loss) per common share:
Basic $ 0.41 $ (4.14) $ (0.76)
Diluted $ 0.31 $ (4.14) $ (0.76)
==================================================================================================================================
Average number of shares used in computation:
Basic 6,558,356 5,101,829 4,210,837
Diluted 8,662,976 6,791,104 4,210,837
==================================================================================================================================
See accompanying notes to consolidated financial statements.
F-5
THE MAJOR AUTOMOTIVE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Years ended December 31, 2001, 2000 and 1999
- -------------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock Treasury stock
--------------------- -------------------- -------------------
Shares Amount Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 1,150,000 $ 11,500 8,036,514 $ 80,365 -- --
Net loss -- -- -- -- -- --
Currency translation adjustment -- -- -- -- -- --
Issuance of common stock for:
Services and business combinations -- -- 247,587 2,476 -- --
Stock compensation, net of deferred amounts -- -- 180,486 1,805 -- --
Issuance of common stock in connection with
private placements -- -- 533,066 5,331 -- --
Conversion of preferred stock (650,000) (6,500) 2,185,222 21,852 -- --
Conversion of 10% and 12% debentures -- -- 514,972 5,150 -- --
Purchase of treasury stock -- -- -- -- 20,980 (263,580)
Original issue discount of 12% debentures (stock
and warrants) -- -- -- -- -- --
Three-for-two stock split effected in the form of
a 150% dividend -- -- 4,321,949 43,219 -- --
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 (CARRIED FORWARD) 500,000 $ 5,000 16,019,796 $160,198 20,980 $(263,580)
=========================================================================================================================
Cumulative
currency Unearned Total
Additional translation stock-based stockholders'
paid-in capital Deficit adjustment compensation equity
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 14,799,800 $ 1,618,424) $(4,977) $ -- $ 16,505,112
Net loss -- (3,190,148) -- -- (3,190,148)
Currency translation adjustment -- -- (1,227) -- (1,227)
Issuance of common stock for:
Services and business combinations 4,282,539 -- -- -- 4,285,015
Stock compensation, net of deferred amounts 673,228 -- -- -- 675,033
Issuance of common stock in connection with
private placements 8,873,837 -- -- -- 8,879,168
Conversion of preferred stock (15,352) -- -- -- --
Conversion of 10% and 12% debentures 1,045,572 -- -- -- 1,050,722
Purchase of treasury stock -- -- -- -- (263,580)
Original issue discount of 12% debentures (stock
and warrants) 977,500 -- -- -- 977,500
Three-for-two stock split effected in the form of
a 150% dividend (43,219) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 (CARRIED FORWARD) $ 30,593,905 $(1,571,724) (6,204) -- $ 28,917,595
===============================================================================================================================
See accompanying notes to consolidated financial statements.
F-6
THE MAJOR AUTOMOTIVE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Years ended December 31, 2001, 2000 and 1999
- ------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock Treasury stock
---------------- --------------------- -------------------
Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 500,000 $5,000 16,019,796 $160,198 20,980 $(263,580)
Net loss -- -- -- -- -- --
Currency translation adjustment -- -- -- -- -- --
Issuance of common stock for:
Services -- -- 21,770 218 -- --
Business combinations -- -- 678,102 6,781 -- --
Exercise of warrants -- -- 574,648 5,747 -- --
Stock compensation, net of deferred amounts -- -- 71,230 712 -- --
Issuance of common stock in connection with
private placements -- -- 316,667 3,167 -- --
Redemption of warrants in connection with private
placements -- -- 393,587 3,936 -- --
Purchase of treasury stock -- -- -- -- 130,947 (631,390)
Original issue discount -- -- -- -- -- --
Three-for-two stock split effected in the form of
a 150% dividend -- -- 8,009,898 80,100 10,490 --
- ------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 (CARRIED FORWARD) 500,000 $5,000 26,085,698 $260,859 162,417 $(894,970)
==================================================================================================================
Cumulative
currency Unearned Total
Additional translation stock-based stockholders'
paid-in capital Deficit adjustment compensation equity
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 30,593,905 $ (1,571,724) $(6,204) $ -- $ 28,917,595
Net loss -- (21,125,075) -- -- (21,125,075)
Currency translation adjustment -- -- 6,204 -- 6,204
Issuance of common stock for:
Services 209,276 -- -- -- 209,494
Business combinations 8,106,466 -- -- -- 8,113,247
Exercise of warrants 739,342 -- -- -- 745,089
Stock compensation, net of deferred amounts 854,566 -- -- (284,391) 570,887
Issuance of common stock in connection with
private placements 4,691,832 -- -- -- 4,694,999
Redemption of warrants in connection with private
placements (6,000,016) -- -- -- (5,996,080)
Purchase of treasury stock -- -- -- -- (631,390)
Original issue discount 95,000 -- -- -- 95,000
Three-for-two stock split effected in the form of
a 150% dividend (80,100) -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 (CARRIED FORWARD) $ 39,210,271 $(22,696,799) -- $(284,391) $ 15,599,970
=================================================================================================================================
See accompanying notes to consolidated financial statements.
F-7
THE MAJOR AUTOMOTIVE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Years ended December 31, 2001, 2000 and 1999
- ------------------------------------------------------------------------------------------------------------------------------
Preferred stock Common stock Treasury stock
------------------ ----------------------- ----------------------
Shares Amount Shares Amount Shares Amount
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 (BROUGHT FORWARD) 500,000 $ 5,000 26,085,698 $ 260,859 162,417 $ (894,970)
Net income -- -- -- -- -- --
One-for-five reverse split -- -- (20,868,558) (208,686) (129,934) --
Issuance of common stock for:
Services -- -- 98,800 989 -- --
Business combinations -- -- 427,120 4,271 -- --
Litigation -- -- 472,600 4,723 -- --
Stock compensation, net of deferred amounts -- -- 900 9 -- --
Redemption of warrants in connection with private
placements -- -- -- -- -- --
Purchase of treasury stock -- -- -- -- 194,708 (1,068,794)
Conversion from preferred (400,000) (4,000) 1,777,778 17,778 -- --
Stock options granted -- -- -- -- -- --
Amortization of deferred income -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 100,000 $ 1,000 7,994,338 $ 79,943 227,191 $(1,963,764)
==============================================================================================================================
Cumulative
currency Unearned Total
Additional translation stock-based stockholders'
paid-in capital Deficit adjustment compensation equity
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 (BROUGHT FORWARD) $ 39,210,271 $(22,696,799) $- $(284,391) $ 15,599,970
Net income -- 2,679,524 - -- 2,679,524
One-for-five reverse split 208,686 -- - -- --
Issuance of common stock for:
Services 200,516 -- - -- 201,505
Business combinations (4,271) -- - -- --
Litigation 250,932 -- - -- 255,655
Stock compensation, net of deferred amounts 2,007 -- - -- 2,016
Redemption of warrants in connection with private
placements (150,000) -- - -- (150,000)
Purchase of treasury stock -- -- - -- (1,068,794)
Conversion from preferred (13,778) -- - -- --
Stock options granted 260,000 -- -- 260,000
Amortization of deferred income -- -- - 168,445 168,445
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ 39,964,363 $(20,017,275) $- $(115,946) $ 17,948,321
=================================================================================================================================
See accompanying notes to consolidated financial statements.
F-8
THE MAJOR AUTOMOTIVE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,679,524 $(21,125,075) $(3,190,148)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Amortization of intangible assets 679,000 655,000 518,417
Depreciation 190,313 436,787 647,268
Noncash financing costs -- -- 977,500
Stock-based compensation 430,461 570,887 2,100,770
Discontinued operations -- 19,217,915 --
Stock issuance for services 201,505 209,494 --
(Increase) decrease in assets:
Net investment in direct financing leases 168,867 424,526 363,913
Accounts receivable (7,665,985) (2,742,427) (1,062,700)
Inventories 14,791,360 (15,348,990) (5,901,352)
Customer deposits 22,708 (98,099) (130,256)
Other assets (875,723) (3,220,549) (1,482,487)
Increase (decrease) in liabilities:
Accounts payable 4,783,932 (1,709,224) 4,434,377
Accrued expenses 1,216,583 2,286,126 (1,303,941)
Floor plan notes payable (11,250,541) 16,643,439 3,870,401
Deferred revenue -- -- 38,937
Due to affiliate -- -- (1,066,797)
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 5,372,004 (3,800,190) (1,186,098)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (296,548) (305,230) (918,485)
Business combinations (70,000) (1,393,411) (1,022,753)
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (366,548) (1,698,641) (1,941,238)
- --------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit -- 500,000 (450,000)
Proceeds from long-term debt 3,429,499 2,000,000 --
Payments of long-term debt (3,841,432) (397,371) (628,192)
Proceeds from issuance of common stock and exercise of warrants,
net of expenses -- 5,440,088 9,284,168
Redemption of adjustable warrants -- (4,746,079) --
Decrease in notes payable (1,250,001) -- --
Proceeds from convertible debentures -- -- 405,000
Loans to officers (766,214) (347,765) 147,451
Purchase of treasury stock (1,068,794) (631,390) (263,580)
Decrease in due from shareholders -- (157,794) 288,036
- --------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (3,496,942) 1,659,689 8,776,883
- --------------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH -- -- (1,227)
- --------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,508,514 (3,839,142) 5,648,320
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,786,312 6,625,454 977,134
- --------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,294,826 $ 2,786,312 $ 6,625,454
================================================================================================================================
See accompanying notes to consolidated financial statements.
F-9
THE MAJOR AUTOMOTIVE COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $2,504,608 $2,660,638 $1,966,053
Income taxes 50,000 -- 1,250,329
Noncash financing activities
Notes issued for redemption of warrants 150,000 1,250,000 --
Common stock issued as stock compensation 430,461 854,566 675,000
Common stock issued for business combinations and services 457,160 8,322,000 4,285,000
Debt issued in connection with business combinations -- 1,500,000 7,500,000
Capital lease obligations -- 3,000,000 --
Original issue discount -- 95,000 977,000
====================================================================================================================
See accompanying notes to consolidated financial statements.
F-10
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
The Major Automotive Companies, Inc. (the "Company" or "Fidelity"),
formerly known as Fidelity Holdings Inc., was incorporated under the
laws of the State of Nevada on November 7, 1995. The Company is
structured as a holding company that has an automotive division and
had a technology division that included computer telephony,
telecommunication operations and plastics and utility operations. On
November 3, 2000, the Board of Directors determined to divest the
Company's non-automotive division (see Note 16). As a result of
treating the divestiture as discontinued operations, the Company
operates in one segment.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of The Major Automotive Companies, Inc. and its
wholly-owned subsidiaries. All significant intercompany accounts,
transactions and profits have been eliminated.
(c) Earnings (Loss) per Share
The Company has presented basic and diluted earnings (loss) per
share, where applicable. Basic earnings (loss) per share excludes
potential dilution and is calculated by dividing income (loss)
available to common stockholders by the weighted average number of
outstanding common shares. Diluted earnings per share incorporates
the potential dilutions from all potential dilutive securities that
would have reduced earnings per share.
A reconciliation of shares used in calculating basic and diluted earnings per
share is as follows:
Years Ended December 31,
2001 2000 1999
---- ---- ----
Basic 6,558,356 5,101,829 4,210,837
Effect of assumed conversions of
options, preferred stock and warrants 2,104,620 1,689,275 --
--------- --------- ---------
Diluted 8,662,976 6,791,104 4,210,837
========= ========= =========
Options to purchase approximately 456,925 and 171,310 shares of common stock at
prices ranging from $2.35 to $80.00 and $57.50 to $80.00 that were outstanding
during 2001 and 2000, respectively, were not included in the computation of
diluted earnings per share for each of the respective years, because the
options' exercise price exceeded the fair market value of the Company's common
stock. In 1999, all exercises of options and warrants and conversion of
preferred would have been anti-dilutive and were, therefore, excluded from the
calculation.
(d) Cash Equivalents
Cash equivalents consist of highly liquid investments, principally a
money market account with a maturity of three months or less at the
time of purchase. Cash equivalents are stated at cost which
approximates market value.
F-11
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(e) Inventories
New vehicle inventories are valued at the lower of cost or market,
with cost determined on a specific identification basis. Used
vehicles and vehicles held for lease inventories are valued at the
lower of cost or market, with cost determined on a specific
identification basis. Parts and accessories inventories are also
valued at the lower of cost or market, with cost determined on the
first-in, first-out method.
(f) Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization of property and equipment are computed using the
straight-line method over the estimated useful lives of the assets,
ranging from three to forty years. Depreciation of leased equipment
is calculated on the cost of the equipment, less an estimated
residual value, on the straight-line method over the term of the
lease. Maintenance and repairs are charged to operations as
incurred. When property and equipment are sold or otherwise disposed
of, the asset cost and accumulated depreciation are removed from the
accounts, and the resulting gain or loss, if any, is included in the
results of operations.
(g) Revenue Recognition
Revenues and costs are recognized upon delivery of the vehicle to
the customer. At time of delivery, all financing arrangements
between and among the parties have been concluded. The Company
records income from direct financing leases based on a constant
periodic rate of return on the net investment in the lease. Income
earned from operating lease agreements is recorded evenly over the
term of the lease.
F-12
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(h) Comprehensive Income (Loss)
The Company has no comprehensive income or loss.
(i) Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of
the financial statements and the reported amounts of income and
expenses during the reporting periods. Operating results in the
future could vary from the amounts derived from management's
estimates and assumptions.
(j) Goodwill
The excess of costs over fair value of net assets of businesses
acquired is amortized on a straight-line basis from five to forty
years. Amortization expense was $679,000, $655,000 and $518,417 for
the years ended 2001, 2000 and 1999, respectively.
(k) Long-lived Assets
Long-lived assets, such as ongoing client relationships, goodwill
and property and equipment, are evaluated for impairment when events
or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable through the estimated undiscounted
future cash flows resulting from the use of these assets. When any
such impairment exists, the related assets will be written down to
fair value. In connection with the discontinued operations, in 2000
the Company took an impairment charge of approximately $13.6 million
(see Note 16).
F-13
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(l) Fair Value Disclosures
The carrying amounts reported in the consolidated balance sheet for
cash and cash equivalents, notes and accounts receivable,
inventories, accounts payable, and notes payable-floor plan
approximate fair value because of the immediate or short-term
maturity of these financial instruments.
The fair value of long-term debt, approximates book value, estimated
based on current rates offered to the Company for similar debt.
(m) Income Taxes
The provision for income taxes is computed on the pretax income
(loss) based on the current tax law. Deferred income taxes are
recognized for the tax consequences in future years of differences
between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and
statutory tax rates. Valuation allowances are recorded when
recoverability of the deferred tax asset is in doubt.
(n) Stock-Based Compensation
The Company accounts for its stock option awards to employees under
the intrinsic value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees." Under the intrinsic value based method,
compensation cost is the excess, if any, of the quoted market price
of the stock at grant date or other measurement date over the amount
an employee must pay to acquire the stock. The Company makes pro
forma disclosures of net income and earnings per share as if the
fair value based method of accounting had been applied as required
by Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation."
F-14
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(o) Effect of Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 141, "Business Combinations," which supersedes APB
Opinion No. 16, "Business Combinations." SFAS No. 141 eliminates the
pooling-of-interests method of accounting for business combinations
and modifies the application of the purchase accounting method. The
elimination of the pooling-of-interests method is effective for
transactions initiated after June 30, 2001. The remaining provisions
of SFAS No.141 will be effective for transactions accounted for
using the purchase method that are completed after June 30, 2001.
The provisions of SFAS No. 141 do not have any impact on the
Company's consolidated financial statements as of December 31, 2001.
In July 2001, the FASB also issued SFAS No. 142, "Goodwill and
Intangible Assets," which supersedes APB Opinion No. 17, "Intangible
Assets." SFAS No. 142 eliminates the current requirement to amortize
goodwill and indefinite-lived intangible assets, addresses the
amortization of intangible assets with a defined life and addresses
the impairment testing and recognition for goodwill and intangible
assets. SFAS No. 142 will apply to goodwill and intangible assets
arising from transactions completed before and after the statement's
effective date. SFAS No. 142 is effective for fiscal 2002. The
Company's previous business combinations were accounted for using
the purchase method. As of December 31, 2001, the net carrying
amount of goodwill is $13,589,000. Amortization expense during the
year ended December 31, 2001 was $679,000. Effective January 1,
2002, such amortization ceased, as companies were required to adopt
the new rules on that date. Currently, the Company is assessing, but
has not yet determined, how the adoption of SFAS No. 142 will impact
its financial position and results of operations.
F-15
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for
fiscal periods beginning after December 15, 2001 and interim periods
within those fiscal years. SFAS No. 144 establishes an accounting
model for impairment or disposal of long-lived assets to be disposed
of by sale. The Company is currently evaluating the potential
impact, if any, that the adoption of SFAS No. 144 may have on its
financial position and results of operations. By the end of the
first quarter of calendar year 2002, the Company will, as required,
begin to perform an impairment analysis of intangible assets.
(p) Stock Split
The Company's Board of Directors declared a reverse one-for-five
common stock split during the second quarter of 2001. The reverse
split resulted in a decrease of 20,868,558 shares of common stock.
All references to numbers of shares and prices per share have been
restated retroactively to reflect the reverse split.
(q) Reclassification
Certain reclassifications were made to the prior years to conform
with the current year's presentation.
2. NOTE RECEIVABLE - OFFICER/ STOCKHOLDER
The Company held a note from an officer/stockholder in the amount of
$1,113,979 at December 31, 2001. The note is non-interest bearing and
is classified as long-term.
F-16
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
3. NET INVESTMENT IN DIRECT FINANCING LEASES
Components of the net investment in direct financing leases are as
follows:
December 31, 2001 2000
- -------------------------------------------------------------------------------
Total minimum lease payments to be received $ 353,893 $ 433,692
Estimated residual value of leased property 49,291 102,755
Unearned income (77,009) (41,445)
- --------------------------------------------------------------------------------
326,175 495,002
Less: Current portion (135,122) (289,010)
- --------------------------------------------------------------------------------
Net investment in direct financing leases, net
of current portion $ 191,053 $ 205,992
================================================================================
Future minimum lease payments receivable at December 31, 2001 are as
follows:
Year ending December 31, Amount
- ----------------------------------------------------
2002 $170,317
2003 103,556
2004 80,020
- ----------------------------------------------------
Total $353,893
====================================================
4. INVENTORIES
Inventories consist of the following:
December 31, 2001 2000
- --------------------------------------------------------------------------------
New automobiles $12,488,449 $17,784,121
New trucks and vans 7,282,158 13,600,234
Used automobiles, trucks and vans 11,137,581 14,207,376
Parts and accessories 1,676,534 1,768,694
Other 89,179 104,836
- --------------------------------------------------------------------------------
$32,673,901 $47,465,261
================================================================================
F-17
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31, 2001 2000 Lives
- ------------------------------------------------------------------------------------------
Land $ 3,858,000 $ 3,858,000 -
Building 3,386,526 3,293,000 40 years
Leasehold improvements 1,505,485 1,302,111 15 years
Furniture and fixtures 1,679,166 1,224,039 3-7 years
Equipment 692,065 1,493,092 3-7 years
- ------------------------------------------------------------------------------------------
11,121,242 11,170,242
Less: Accumulated depreciation and
amortization (2,220,024) (2,415,259)
- ------------------------------------------------------------------------------------------
$ 8,901,218 $ 8,754,983
==========================================================================================
6. INCOME TAXES
The Company accounts for income taxes using the asset and liability method
whereby deferred assets and liabilities are recorded for differences
between the book and tax carrying amounts of balance sheet items. Deferred
liabilities or assets at the end of each period are determined using the
tax rate expected to be in effect when the taxes are actually paid or
recovered. The measurement of deferred tax assets is reduced, if
necessary, by a valuation allowance for any tax benefits that are not
expected to be realized. The effects of changes in tax rates and laws on
deferred tax assets and liabilities are reflected in net income in the
period in which such changes are enacted.
The provision (benefit) for taxes on income, including amounts relating to
the loss from discontinued operations of $(590,000), $1,804,000 and
$1,802,000 in 2001, 2000 and 1999, respectively, is as follows:
Year ended December 31, 2001 2000 1999
- --------------------------------------------------------------------------------
Federal:
Current $ - $ - $ 134,000
Deferred (867,000) (442,000) -
State:
Current 50,000 100,000 67,000
Deferred (64,000) (78,000) (125,000)
- --------------------------------------------------------------------------------
Total (881,000) $(420,000) $(192,000)
================================================================================
F-18
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The reconciliation between the amount computed by applying the Federal
statutory rate to income (loss) from continuing and discontinued
operations before income taxes and the actual income tax expense was as
follows:
Year ended December 31, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Amount using the statutory Federal tax rate $ 611,000 $(7,325,000) $(1,270,000)
Losses of discontinued operations (590,000) 970,000 -
State and Local income taxes, net of Federal tax benefit (9,000) (900,000) (724,000)
Non-Deductible goodwill 162,000 310,000 534,000
Non-Deductible reserves and accruals - - 522,000
Change in valuation allowance on deferred tax asset (1,071,000) - -
Discontinued operations asset writedown - 6,528,000 -
Other, net 16,000 (3,000) 199,000
- ------------------------------------------------------------------------------------------------------
Benefit for taxes on income $ (881,000) $ (420,000) $ (192,000)
======================================================================================================
The components of the net deferred tax assets and liabilities were as
follows:
2001 2000
Current deferred assets:
Net operating loss carryforwards $ 230,000 $ 1,205,000
Reserves and accruals not deductible until paid $ 1,655,000 $ 820,000
Less valuation allowance $ (309,000) $(1,360,000)
-------------------------------------------------------------------------------------
Total current deferred tax assets $1,576,000 $ 645,000
-------------------------------------------------------------------------------------
At December 31, 2001, the Company had available domestic net operating
loss carryforwards primarily related to continuing operations of
approximately $563,000 which begin to expire in the year 2011. The
Company believes that valuation allowances to offset portions of deferred
tax assets are unnecessary since the realization of such deferred tax
assets will be probable given the profitability of such continuing
operations.
In addition, the Company does not expect to be able to utilize the
benefits from any of the operating loss carryforwards resulting from the
discontinued operations.
7. SECURED LINES OF CREDIT AND FLOOR PLAN NOTES PAYABLE
Secured Lines of Credit
The Company has two lines of credit ("Lines") with a bank for a total of
$1,500,000. The interest rate is a variable rate based on the bank's prime
rate of interest. Interest is payable monthly.
F-19
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Lines are collateralized by a first security interest in and UCC
filing on all assets of The Major Automotive Companies, Inc. and the
personal guarantees of two stockholders, each of whom will be limited to
50% of the total obligation to the Bank.
As of December 31, 2001 and 2000, the outstanding balance on the lines was
$500,000.
Floor Plan Notes Payable
The Company finances the majority of its inventory primarily through
secured revolving floor plan financing arrangements with various lenders.
The Company makes monthly interest payments on the amount financed, but is
required to make loan principal repayments following the sale of the
related new and used vehicles. Outstanding borrowings under floor plan
financing arrangements amounted to $33,963,903 and $45,214,444 at December
31, 2001 and 2000, respectively. The floor plan arrangements grant a
security interest in the vehicles financed as well as the related sales
proceeds. Interest rates on the floor plan agreements are variable and
increase or decrease based on movement in LIBOR or prime borrowing rates.
Floor plan interest for the years ended December 31, 2001, 2000 and 1999
was $1,340,489, $1,858,632 and $796,810, respectively. Interest rates in
effect in the year 2001 ranged between 4.35% and 8.0%. At December 31,
2001, committed capacity of the facilities was approximately $50 million.
See Note 18.
8. CONVERTIBLE SUBORDINATED DEBENTURES
During April 1998, the Company issued $600,000 of 10% convertible
subordinated debentures, due June 1999 with interest payable
semi-annually. During April 1999, the debentures were converted into
91,800 shares of common stock at a price of $9.80 per share.
F-20
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In January 1999, the Company and its subsidiary, Computer Business
Sciences, Inc. ("CBS") entered into a Securities Purchase Agreement with
certain purchasers named therein (the "Purchasers"), pursuant to which the
Company and CBS agreed to sell up to 2,750 units (the "Units"), each Unit
consisting of (i) a 12% Convertible Debenture of the Company in the
principal amount of $1,000, convertible on certain terms and conditions
into shares of the Company's common stock, par value $0.01 per share (the
"Common Stock"), (ii) 16.3636 shares of Common Stock, (iii) warrants (the
"Warrants") to acquire 37.4997 shares of Common Stock at $9.30 per share
and (iv) warrants (the "CBS Warrants") to acquire 5.0909 shares of common
stock at $0.001 per share, of CBS (the "CBS Shares"). The Company closed
on $2.75 million and issued to Purchasers, in the aggregate, Debentures in
the face amount of $2.75 million, 45,000 shares of Common Stock, Warrants
to acquire 103,125 shares of Common Stock and CBS Warrants to acquire
70,000 CBS Shares. The Debentures resulted in an original issue discount
of $977,000. The Securities Purchase Agreement allows for two more series
of issuances with similar terms. In connection with the placement of the
Debentures, the Company paid to Zanett Securities Corporation, the
placement agent for the transaction (the "Placement Agent"), a fee and
nonaccountable expense allowance of 6.9%, and the Company also issued to
the Placement Agent and its assignees, 22,500 shares of the Company's
Common Stock, 30,000 shares of CBS Common Stock and Warrants to purchase
an aggregate of 51,562 shares of Common Stock at an exercise price equal
to $9.35 per share.
In 1999, eighty-five percent of the convertible debentures were redeemed
for cash, while the remaining fifteen percent were converted into 48,292
shares of common stock.
The Company recorded an extraordinary loss of $733,125 as a result of the
early redemption of the $2.75 million debentures which is included in loss
from discontinued operations for the year ended December 31, 1999. The
loss consisted of unamortized original issue discount.
F-21
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. LONG-TERM DEBT
Various lenders advance funds to the Company's leasing subsidiary in the
form of notes payable to finance leased vehicles. Interest on each note is
charged depending on the prime rate in effect at the time the vehicle is
leased and remains constant over the term of the lease. Applicable rates
at December 31, 2001 ranged between 4.75% and 8.5%. Equal monthly
installments are paid over the term of the lease (which can range from 12
to 60 months), together with a final balloon payment, if applicable. These
loans are collateralized by the vehicles.
On May 14, 1998, the Company borrowed $7.5 million from Falcon Financial,
LLC (an unrelated party) to finance the Major Auto Acquisition (see Note
10). The term of the loan is for fifteen years with interest at 10.18%.
Payments of principal and interest of $81,423 are due monthly.
On August 8, 2000, Doron Cohen, former President, CEO and a Director of
the Company, signed a Separation and Release Agreement (the "Agreement").
Assuming compliance with its provisions, the Agreement provides for
periodic payments to and a forgiveness of indebtedness from Mr. Cohen in
an aggregate amount of $1,710,067. The total amount of the payments is
$662,000 and the potential forgiveness of Mr. Cohen's indebtedness to the
Company aggregates $1,048,067. The payments began in August 2001. Based on
the report of an independent appraiser, the Company has recorded a
deferred charge of $840,000 (included in other assets) as the value of the
noncompete and other provisions of the Agreement, which relates to
continuing operations of the Company. This amount is being amortized over
twenty-four months starting August 2000. Accordingly, $420,800 and
$175,000, representing one year and five months of amortization,
respectively, has been charged in the years ended December 31, 2001 and
2000.
F-22
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Additionally, the Company has accrued the liability for the remaining
payments due to Mr. Cohen and has provided a valuation allowance for the
difference between the loan receivable from Mr. Cohen and the aggregate
amount of the deferred charge. Accordingly, the Company has expensed a
total of $829,096 in 2000, representing the difference between the
aggregate potential of payments and forgiveness provided for in the
Agreement and the non-compete amount determined by the independent
appraiser. This expense is directly attributable to the value of Mr.
Cohen's noncompete provisions related to the Company's technology
operations. As such, it was included in the estimated loss from
discontinued operations in 2000.
F-23
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On December 11, 2000, the Company issued to M&K Equities, Ltd. ("M&K"), an
affiliate of a Director of the Company, a senior subordinated promissory
note in the principal amount of $2,000,000 in exchange for a $2,000,000
loan from M&K. The terms of the note require payment of the $2,000,000
principal on December 11, 2002. The date of such repayment has been
extended to January 2, 2003. The note requires monthly interest
payments at a rate of 10% per annum. In order to induce M&K to make the
loan, the Company granted to them a lien on, and a security interest in,
all of its non-technology assets, subject to prior senior liens. The
Director also received options under the 1999 Employee Stock Option Plan
to purchase 250,000 shares of the Company's common stock at an exercise
price of $0.47 per share. The fair value ascribed to the options was
approximately $95,000 based on the Black-Scholes option-pricing model;
such amount was recorded as a deferred charge and as additional paid-in
capital of stockholders' equity. The amount of the deferred charge is
being amortized ratably over the term of the note. Accordingly, the
Company charged $47,500 to operations in 2001, leaving a balance of
$47,500 at December 31, 2001.
Long-term debt consists of the following:
December 31, 2001 2000
- --------------------------------------------------------------------------------
Leasing notes payable $ 538,642 $ 486,004
Falcon loan payable 6,606,467 6,894,860
Note payable to former president 278,001 410,500
M&K note payable 2,000,000 2,000,000
World Omni note payable (see Note 10) 1,306,672 1,474,252
Other 36,026 11,947
- --------------------------------------------------------------------------------
10,765,808 11,277,563
Less: Current portion 912,221 866,120
- --------------------------------------------------------------------------------
$ 9,853,587 $10,411,443
================================================================================
F-24
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Maturities are as follows:
December 31,
- --------------------------------------------------------------------------------
2002 $ 912,221
2003 1,817,142
2004 516,843
2005 468,967
2006 480,273
Thereafter 6,570,362
- --------------------------------------------------------------------------------
$10,765,808
================================================================================
10. BUSINESS COMBINATIONS
On April 21, 1997, the Company, through a wholly-owned subsidiary, Major
Acquisition Corp., entered into a merger agreement with Major Automotive
Group Inc. ("Major Auto") and its sole stockholder, Bruce Bendell, the
Company's President, Chief Executive Officer and Chairman. Pursuant to the
Merger Agreement, Bruce Bendell contributed to Major Auto all of his
shares of common stock of Major Chevrolet Inc., Major Subaru Inc., Major
Dodge Inc. and Major Chrysler, Plymouth, Jeep Eagle Inc. Major Acquisition
Corp. then acquired from Bruce Bendell all of the issued and outstanding
shares of common stock of Major Auto in exchange for shares of a new class
of the Company's preferred stock. Major Acquisition Corp. purchased the
remaining 50% of the issued and outstanding shares of common stock of
Major Dodge Inc. and Major Chrysler, Plymouth, Jeep Eagle Inc. from Harold
Bendell, Bruce Bendell's brother, for $4 million in cash pursuant to a
stock purchase agreement. In addition, Major Acquisition Corp. acquired
two related real estate components (the "Major Real Estate", defined
hereinafter) from Bruce Bendell and Harold Bendell (collectively "the
Bendells") for $3 million.
F-25
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The preferred stock issued to Bruce Bendell is designated as the
"1997-MAJOR Series of Convertible Preferred Stock." It had voting rights
and was convertible into the Company's common stock (the "Common Stock").
The minimum number of shares of Common Stock into which the new class is
convertible is 810,000 shares. By February 28, 2002, Mr. Bendell has
converted all of the shares of this preferred stock into 3,471,111 shares
of Common Stock. (See Note 15.) The foregoing acquisitions from Major Auto
and Harold Bendell are collectively referred to herein as the "Major Auto
Acquisition."
To finance the cash portion of the Major Auto Acquisition, aggregating $7
million ($4 million for Harold Bendell and $3 million to purchase the
Major Real Estate), Major Acquisition Corp. borrowed $7.5 million from
Falcon Financial, LLC pursuant to a loan and security agreement dated May
14, 1998, for a 15-year term with interest equal to 10.18% (see Note 9).
Prepayment is not permitted for the first five years, after which
prepayment may be made, in full only, along with the payment of a premium.
The collateral securing the loan transaction includes the Major Real
Estate and, subject to the interests of any current or prospective "floor
plan or cap loan lender," the assets of Major Acquisition Corp. Major
Acquisition Corp. is required to comply with certain financial covenants
related to net worth and cash flow. In addition, the Company provided an
unconditional guarantee of the loan pursuant to a guarantee agreement
dated May 14, 1998. This acquisition was treated as a purchase by Major
Acquisition Corp.
On April 23, 1999, the Company acquired certain assets of Universal Kia
for approximately $140,000 in cash. The Company accounted for this
acquisition as a purchase, and the excess cost over the fair market value
of the tangible net assets acquired was $140,000 and was allocated to
goodwill (Note 1). Results of operations have been included in the
Company's consolidated financial statements since the purchase date.
F-26
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On September 9, 1999, the Company acquired all of the issued and
outstanding shares of common stock of Compass Lincoln Mercury, Inc. and
Compass Dodge, Inc. for approximately $434,000 in cash and 13,723 shares
of the Company's restricted common stock having a fair market value of
approximately $715,000. The Company accounted for this acquisition as a
purchase, and the excess cost over the fair market value of the net
tangible assets acquired was approximately $882,000 and was allocated to
goodwill (Note 1). Results of operations have been included as of
September 9, 1999. The Company waited for approval from the factory in
connection with the Compass Dodge purchase and has included $300,000 of
the purchase price in other assets at December 31, 1999.
In November 1999, the Company's former subsidiary, IG2 entered into an
agreement (the "Nissko Agreement") with certain persons (the "Nissko
Group") and Nissko Telecom Ltd. to purchase their interest in a joint
venture which is a master agent to provide certain telephone services. In
connection with this transaction, the Company placed 236,400 shares of its
common stock in escrow to guarantee the value of IG2 stock. By November
30, 2001, all such shares were issued to satisfy the Company's obligations
thereunder. In addition, 60,000 restricted shares of the Company's common
stock have been reserved to cover personal guarantees of the Nissko Group.
F-27
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On February 23, 2000, in exchange for 115,172 shares of its common stock
valued at $6,975,480, the Company acquired CarsTV.com. This company is a
Richmond, Virginia based regional, full-service Internet service provider
and digital subscriber line ("DSL") provider, as well as a content
supplier for the cable industry focused on the automotive industry. The
acquisition was treated as a purchase and the excess cost over the net
assets acquired was approximately $7,108,000, and was allocated to
goodwill, of which the unamortized balance has been charged to
discontinued operations (see Note 16). Accordingly, the results of
operations of CarsTV.com have been included as of February 23, 2000 and
included in discontinued operations. Pursuant to the Merger Agreement, if
IG2 undergoes an initial public offering ("IPO"), as defined in the
agreement, the selling shareholders of CarsTV.com have the option to
convert up to 287,931 common shares of the Company's common stock into
IPO common stock, at a conversion price as defined in the agreement.
On August 9, 2000, the Company purchased assets of Compass Dodge for
approximately $402,000, of which $385,000 was in cash and 12,500 shares of
the Company's common stock having a fair market value of approximately
$17,000. The Company accounted for this acquisition as a purchase, and the
excess cost over the fair market value of the net tangible assets acquired
was approximately $299,000 and was allocated to goodwill. Results of
operations have been included in the Company's consolidated financial
statements since the purchase date.
F-28
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On September 7, 2000, the Company acquired substantially all of the assets
of the Hempstead Nissan automobile dealership, a full-service retail new
and used vehicle dealership based on Long Island in New York, for
approximately $6.9 million, which included assumption of certain
liabilities. The purchase price was allocated to the assets acquired based
on their estimated fair values, of which $5.0 million was allocated to
inventories and property and equipment. The excess of the purchase price
over the fair value of net assets acquired (goodwill) was approximately
$1.8 million and is being amortized over 15 years. The acquisition was
financed through available cash and a note of $1.5 million issued to World
Omni. The acquisition was accounted for as a purchase. Results of
operations have been included in the Company's consolidated financial
statements since the purchase date.
On April 12, 2000, the Company acquired substantially all of the assets of
the Hempstead Mazda automobile dealership, a full-service retail new and
used vehicle dealership based on Long Island in New York, for
approximately $1,351,000 which included assumption of certain liabilities.
The Company paid $210,000 in cash and 17,442 shares of its common stock
valued at $1,080,000. The purchase price was allocated to the assets
acquired based on their estimated fair values of which $167,000 was
allocated to inventories and property and equipment. The excess of the
purchase price over the fair value of net assets acquired (goodwill) was
approximately $1,175,000 and is being amortized over 15 years. The
acquisition was accounted for as a purchase. The agreement provided for an
option that could be exercised by either party for 18,947 shares at $19
per share. On July 26, 2000, the Company exercised the option and bought
the 18,947 shares at $19 per share for $359,993. The agreement also
F-29
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
called for a make whole provision based upon a formula determined by the
fair value of the Company's stock on the anniversary date of April 11,
2001. As of that date, the Company issued 427,100 additional shares of
common stock. The issuance of these shares was recorded at par value since
the purchase price originally reflected the transaction value.
In April 2001, the Company acquired a Daewoo franchise and certain assets
from Daewoo Motors of America. The purchase price of $100,000 was paid on
April 19, 2001.
In May, 2001, the Company acquired a Suzuki franchise and certain Suzuki
vehicles and parts from Hempstead F.S. Motors, Ltd. and a
debtor-in-possession. The purchase price of $309,877 out of a total
deposit of $500,000 for this and other potential, but subsequently
abandoned, acquisitions, was paid on May 4, 2001. The balance of the
deposit is being held in escrow pending resolution of certain issues
relating to the closing.
11. GOVERNMENTAL REGULATIONS
Substantially all of the Company's facilities are subject to Federal,
state and local regulations relating to the discharge of materials into
the environment. Compliance with these provisions has not had, nor does
the Company expect such compliance to have, any material effect on the
financial condition or results of operations of the Company. Management
believes that its current practices and procedures for the control and
disposition of such wastes comply with applicable Federal and state
requirements.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases real property under various operating leases, most of
which have terms from 1 to 6 years.
Future net minimum lease payments under noncancelable operating lease
agreements as of December 31, 2001 are as follows:
December 31,
- --------------------------------------------------------------------------------
2002 $ 1,126,750
2003 1,045,500
2004 770,500
2005 617,500
2006 565,500
Thereafter 1,402,090
- --------------------------------------------------------------------------------
$ 5,527,840
================================================================================
Rent expense was $1,974,000, $1,841,000 and $1,450,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.
F-30
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Capital Leases
In connection with the acquisition of Hempstead Nissan (see Note 10), the
Company was assigned a lease agreement for facilities used for operations
of the dealership. The lease agreement provided for the transfer of
ownership at the option of the Company at the end of the lease term for $3
million. The Company also has capital equipment leases. The net book value
of all assets under capital leases at December 31, 2001 is approximately
$2.8 million. The Company has exercised its option to purchase these
facilities. The closing of the transaction is not expected to occur until
the first quarter of 2003. Accordingly, this lease has been recorded as
long term.
The future net minimum lease payments under capital leases are as follows:
Fiscal year ending December 31,
--------------------------------------------------------------------------
2002 $3,235,674
Less: Amount representing interest 124,031
--------------------------------------------------------------------------
Present value of net minimum lease payments $3,111,643
==========================================================================
F-31
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
LEGAL PROCEEDINGS
In re: Fidelity Holdings Securities Litigation.
This class action, pending in the United States District Court for the
Eastern District of New York, is purportedly brought on behalf of all
persons who acquired shares of Company common stock between June 24, 1999
and April 17, 2000. Named as defendants along with the Company are Doron
Cohen, Richard L. Feinstein and Bruce Bendell.
In August 2001, the lead plaintiffs in this class action served a
Consolidated and Amended Class Action Complaint. This Complaint alleges,
among other things, that plaintiffs and other members of the putative
class were damaged when they acquired shares of Company common stock
because defendants allegedly issued materially false and misleading
statements and failed to disclose material information which purportedly
cause such stock to trade at artificially inflated prices during the class
period. The Complaint alleges violations of Sections 10(b) and 20(a) of
the Exchange Act and Rule 10b-5 promulgated thereunder. The allegedly
misstated and omitted information concerns primarily the prospects for the
Company's technology business. The complaint seeks, among other things,
damages in an unspecified amount.
In September 2001, the Company moved to dismiss the Complaint for failure
to state a claim upon which relief can be granted and for failure to plead
with the legally-required factual particularity.
In October 2001, the Company reached an agreement with lead plaintiffs to
settle this action for $4.45 million, subject to the consent thereto by
the Company's insurance company and court approval. To date, the Company's
insurance company has not consented to this settlement nor has it been
approved by the court.
F-32
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Stephen B. Wechsler, et al. v. Fidelity Holdings, Inc., et al.
On December 26, 2000, an action was commenced against the Company in the
United States District Court for the Eastern District of New York. This
action was brought on behalf of certain persons who acquired an unstated
number of shares of Company common stock between December 1999 and May
2000. The Company is named as a defendant in this case, along with Doron
Cohen, Richard L. Feinstein and Bruce Bendell.
On December 26, 2000, plaintiffs filed a Second Amended Complaint, which
alleges, among other things, that the plaintiffs sustained damages when
they acquired shares of Company common stock because the Company allegedly
issued materially false and misleading statements and failed to disclose
material information which purportedly caused such stock to trade at
artificially inflated prices. The Second Amended Complaint alleges
violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
promulgated thereunder. The allegedly misstated and omitted information
concerns the Company's reported income for the first three quarters of
1999 and the prospects for its technology business. The Second Amended
Complaint seeks, among other things, damages "in an amount, not less than"
one million dollars.
On February 16, 2001, the Company and Messrs. Bendell and Feinstein filed
a motion to dismiss the Second Amended Complaint for failure to plead with
the legally-required factual particularity. (The Company understands that
Mr. Cohen has not been served with process in this action.) In October
2001, the Company agreed with the plaintiffs to settle this action for
$120,000. The settlement is subject to the consent thereto by the insurer
on the Company's D&O policy covering the time period within which this
action was filed, which consent has not yet been obtained.
F-33
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Daniel Tepper v. Fidelity Holdings, Inc; Fidelity Holdings, Inc. (Third
Party Plaintiff) v. InvestAmerica, et al.
In and around August 2001, Daniel Tepper ("Tepper") commenced a suit
against the above individuals for several causes of action. Voluntarily,
however, the majority of the claims were withdrawn and only four causes of
action remain: (i) violation of Article 8 of the Uniform Commercial Code,
(ii) conversion, (iii) breach of fiduciary duty; and (iv) negligence. The
facts underlying these claims are that the Company failed to remove
restrictive legends that appeared on Tepper's stock certificates. These
claims were litigated in Nevada and Tepper secured a verdict in the sum of
$522,000 (compensatory damages of $300,000, and attorney's fees of
$222,000) against the Company. It is the Company's position that any claim
by Tepper was resolved by the Nevada action under the doctrines of Res
Judicata and Collateral Estoppel, and that once the Nevada Judgment is
paid it will extinguish all claims. Currently, there is a motion to
dismiss pending. Until there is a ruling on the outstanding motion, no
forecast of liability can be given.
Ronald Shapss Corporate Services, Inc. v. Fidelity Holdings, Inc.
On June 11, 1999, Ronald Shapss Corporate Services, Inc. commenced an
action against the Company in the Supreme Court of the State of New York.
The venue for the action was in Rockland County. The original complaint
asserted causes of action based on claims of breach of contract and
conversion. The plaintiff contends that the Company wrongfully refused to
allow the exercise of options for 50,000 shares of common stock at $4.50
per share. The plaintiff also alleged an anticipatory breach of
plaintiff's right to exercise an option to purchase an additional 100,000
shares for $1,000 and to receive and exercise options to purchase 100,000
more shares for $4.50 per share. The plaintiff alleged it sustained
damages in the sum of $7,386,500 for breach of an agreement between the
parties and sought an additional sum of $5,000,000 in punitive damages on
the conversion claim.
F-34
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Subsequently, in November 2001, the parties settled the action. Pursuant
to a settlement agreement, the plaintiff received 175,000 shares of common
stock and may be entitled to receive an additional 50,000 shares based on
future market value of common stock.
Fidelity Holdings, Inc., IG2 and 786710 Ontario, Ltd. v. Michael Marom and
M.M. Telecom, Corp.
The Company, IG2 and 786710 Ontario, Ltd. are plaintiffs in a legal action
against Michael Marom and M.M. Telecom, Corp. in the Supreme Court of the
State of New York, County of Queens, Index No. 25678/96. The Company filed
a complaint on December 23, 1996 against the defendants alleging: (i)
breach of a letter agreement between the parties; (ii) tortuous
interference with business opportunities; and (iii) slander. Defendants
filed an answer with counterclaims, which included, inter alia: (i) fraud;
(ii) breach of contract; (iii) tortuous interference with business
opportunities; and (iv) tortuous interference with contract. Both parties
have completed discovery and the collective Plaintiffs, including the
Company, have made a motion for summary judgment against Defendants
seeking to have Defendants' counterclaims dismissed entirely and with
prejudice. In the event such counterclaims are dismissed, the Plaintiffs
will only be able to proceed on their causes of action against Defendants.
This motion is currently pending before the court. Management of the
Company believes that the Company has substantial defenses to the asserted
claims and intends to vigorously defend this suit.
F-35
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Realtech Systems Corporation v. IG2, Inc. & Fidelity Holdings, Inc.
On or about November 9, 2000, Realtech Systems Corporation ("Realtech")
served the Company as well as IG2 a Demand for Arbitration before the
Commercial Arbitration tribunal of the American Arbitration Association
relating to work and services allegedly provided by Realtech to IG2. The
Demand asserted that pursuant to a Master Agreement dated November 16,
1999 between Realtech and IG2, both parties agreed to arbitration in the
event of any potential disputes. The Demand further asserts that Realtech
has provided work and services to the Company in the unpaid amount of
$198,000, and that the Company and IG2 further breached the agreement by
hiring John Honovich, a former Realtech employee. Realtech seeks in excess
of $243,850 in damages. Realtech included the Company in an arbitration
based on the idea that IG2 is "our wholly owned subsidiary" and not on the
basis of the agreement. On December 1, 2000, the Company served a Notice
of Petition and a Petition seeking a stay of arbitration on its behalf on
the grounds that IG2 is not a signatory to any arbitration agreements
between Realtech and the Company. Realtech served reply papers, as well as
a cross motion compelling the Company to arbitrate on December 14, 2000.
On January 12, 2001, the Company filed an Order to Show Cause, to which
Realtech answered. On January 29, 2001, the court ordered the Arbitration
stayed as to the Company, and denied Realtech's arbitration claim. Since
IG2 has been sold, there has been no further action on this matter.
F-36
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
MCI International, Inc. v. Schiano Bros. Inc.; Schiano Bros. Inc. (Third
Party Plaintiff) v. Computer Business Sciences Inc. (Third Party
Defendant).
On August 28, 2000, Schiano Bros. Inc. ("Schiano") filed a third party
lawsuit against Computer Business Sciences Inc. ("CBS") in the Supreme
Court of the State of New York, Kings County. The suit alleged that phone
services provided to the Dominican Republic through MCI International,
Inc. ("MCI") were wrongfully attributed to Schiano and should have been
attributed to CBS. In addition, an intentional tort claim was also filed
against CBS. The suit seeks $150,000 in damages. The Company filed an
Answer on September 20, 2000, as well as a Demand for a Third Party Bill
of Particulars on the plaintiff MCI, and Discovery and Inspection Demands
on all parties. Plaintiff responded only with a set of invoices, to which
the Company requested a more thorough inquiry. On December 10, 2000,
Schiano served a Bill of Particular and Interrogatory Demands upon the
Company, as well as Notices for Discovery and Inspection. A Preliminary
Conference Order was scheduled for March 3, 2001.
There were no agreements made between the Company and Schiano, or between
the Company and MCI; the sole basis for Schiano's claim is a verbal/oral
agreement upon facts that do not exist. This matter no longer involves the
Company and is only against CBS which is no longer affiliated with the
Company.
F-37
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
F-38
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Dale Harris & Fouad Tobagi v. Computer Business Sciences, Inc., et al.
On June 6, 2000 plaintiffs filed a lawsuit against CBS in the amount of
$1,000,000 in the Northern District of California, San Francisco division.
Plaintiffs allege that they were convinced to join the advisory board of
CBS in return for: (i) a seat on the Technical Advisory Board; (ii) stock
options; (iii) a signing bonus; and (iv) a consulting agreement.
Plaintiffs further allege that CBS used their names to further its image
and received nothing in return. Plaintiffs filed an amended complaint on
October 16, 2000, and the Company subsequently filed a Motion to Dismiss
and Transfer Venue on November 6, 2000. Plaintiffs opposed the motion to
dismiss, to which the Company replied on September 8, 2000. The Motion was
granted as to Rule 10-5b for failure to state a claim, granted as to Lack
of Personal Jurisdiction over Mr. Cohen, Mr. Bendell and Ms. Peacock, and
denied as to all other claims. The parties have recently settled this
action for a cash payment of $52,500.
F-39
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Goldfarb v. Robert LeRea, Doron Cohen, Bruce Bendell, Kimberly Peacock and
The The Major Automotive Companies, Inc. f/k/a Fidelity Holdings, Inc.
On or about February 21, 2002, an action was commenced against the
Company, Robert LeRea, Doron Cohen, Bruce Bendell and Kimberly Peacock in
the Southern District of New York. It is alleged that: (i) plaintiffs had
an agreement that if they promoted Company stock, they would be
compensated; (ii) plaintiff gave a bridge loan to the Company at its
request and the loan was allegedly done by way of the purchase Company
shares; (iii) defendants violated Rule 10(b)(5) of the Exchange Act by
failing to repay a bridge loan made by plaintiffs to defendant; and (iv)
that defendants converted 50,000 shares of IG2, Inc. stock.
The defendants' time to answer or otherwise oppose has been extended to
May 8, 2002. No investigation has been done and no opinion can be rendered
as to the validity of the $8,000,000 in damages claimed. Management of the
Company believes that that these allegations have no merit and intend to
vigorously defend this suit.
International Securities Corp. v. Fidelity Holdings, Inc.
On or about March 2001, an action was commenced against the Company in the
Supreme Court of the State of New York, New York County. This action
alleged that International Securities Corp. ("ISC") is owed commissions
for money it secured for the Company in connection with a private
placement of Company securities. ISC served a motion for Summary Judgment,
which has not yet been heard by the Court. The total claimed in the
lawsuit is $180,000. Management of the Company believes that any money
owed has already been paid and intends to vigorously defend this suit.
F-40
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Dr. Roland Nassim v. Computer Business Sciences, Inc. and Fidelity
Holdings, Inc.
On April 12, 2001, Dr. Roland Nassim commenced a lawsuit against CBS and
the Company in the Supreme Court, New York County. The basis of the
lawsuit is for breach of contract of an agreement entered into on December
1, 1999. The agreement was part of a buyout of CBS of Dr. Nassim's
telephony business to various countries. The purchase price was
approximately $500,000 in Company stock. It is Dr. Nassim's position that
the stock was only worth $27,000. In January 2002, the Company reached an
agreement with Dr. Nassim and has issued 225,000 shares of its stock in
his name as full settlement. The Company's attorney is holding such shares
in escrow pending the preparation and signing of definitive documents.
Ronald K. Premo v. Fidelity Holdings, Inc.
In May 2001, Ronald Premo, a former officer of one of the Company's
technology subsidiaries, filed suit in Connecticut Supreme Court seeking
employment related damages in excess of $300,000. In October 2001, through
an arbitration proceeding, the Company reached a settlement agreement with
Mr. Premo by which he will be paid an aggregate of $72,079 over ten months
plus 15,000 shares of Company common stock. The stock has been issued and,
to date, the Company has paid approximately $21,000 of the total $72,000
due.
F-41
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Strong River Investments, Inc. and Montrose Investments Ltd. v. Fidelity
Holdings, Inc.
By Summons and Notice of Motion for Summary Judgment In Lieu of Complaint
dated April 19, 2001, the Company was named as the defendant in two
actions titled Strong River Investments, Inc. v. Fidelity Holdings, Inc.
and Montrose Investments Ltd. v. Fidelity Holdings, Inc., both brought in
the Supreme Court of the State of New York, New York County, Index No.'s
601963/01 and 601964/01, respectively. In these actions, Strong River
Investments, Inc. and Montrose Investments Ltd. (collectively, the
"Defendants"), have alleged that the Company defaulted on certain
promissory notes granted to the Defendants. Each of the Defendants are
seeking damages in the sum of $833,334 plus interest, and reasonable
attorney's fees. The action was settled in August 2001 for a series of
payments in the total sum of $700,000. By December 31, 2001, the last
payment was made, release was obtained and the judgment satisfied.
James R. Wallick v. Bruce Bendell, Individually and in his Capacity as an
Officer, Director and Majority Shareholder of the Defendant
Corporations, Fidelity Holdings, Inc., et al.
On September 25, 2001, Mr. Wallick filed a lawsuit against the Company in
the United States District Court of New Jersey. In this action, Mr.
Wallick has alleged that the Defendants breached an oral, written and
implied-in-fact employment agreement with Mr. Wallick, acted in bad faith
in connection with the employment agreement, intentionally and negligently
misrepresented promises relating to Mr. Wallick's employment and
intentionally and tortuously interfered with the contractual and
employment relationship of Mr. Wallick. Mr. Wallick is seeking, among
other things, compensatory and punitive damages for the alleged violations
in the amount of $540,000. The parties recently entered mediation
concerning this action.
F-42
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Various Claims Against Subsidiaries
Various claims and lawsuits arising in the normal course of business are
pending against the Company. Management believes that they have
substantial defenses on the asserted claims and intend to vigorously
defend the active suits; judgments against the Company with respect to the
active actions could have a material adverse effect on the Company's
financial condition. The Company has accrued the actual or estimated
amounts of all litigation settlements, adjudications or pending
settlements.
Officer's Compensation
On May 15, 2001, the Compensation Committee of the Board of Directors of
the Company approved an increase in the annual base salary of Bruce
Bendell to $500,000 for the period July 1, 2001 to June 30, 2004.
Additional approval was given to a bonus plan under which Mr. Bendell
receives a quarterly bonus equal to 10% of the net income of the Company's
automotive operations after all expenses, including any other bonuses paid
or accrued. This bonus plan was approved retroactively to April 1, 2001.
Accordingly, the Company has recorded additional compensation expense of
$257,000 for this bonus. In the event that Mr. Bendell's employment is
terminated prior to June 30, 2004, he will continue to receive his base
salary and a guaranteed annual bonus of $250,000 per year until that date.
In 2001 Mr Bendell earned an aggregate of $1,126,502, pursuant to all of
his employment arrangements.
13. RELATED PARTY TRANSACTIONS
Amounts due from affiliates are in the form of sales and advances in the
ordinary course of business. These balances are reflected in accounts
receivable and are non-interest bearing. At December 31, 2001 and 2000,
amounts due from affiliates and officers of $1,860,000 and $1,076,000 are
included in officer and accounts receivable, respectively.
Marcum & Kliegman LLP, an accounting firm of which a director is a member,
charged the Company approximately $120,000, $95,000 and $104,000 in fees
for accounting services for the years ended December 31, 2001, 2000 and
1999, respectively (see Note 9).
During 2000, the Company advanced $347,765 to an officer of the Company
and in 2001 an additional $766,214 was advanced to the same officer. The
advances are noninterest bearing and due on demand.
All sales of used cars to affiliates were made at wholesale cost plus
related fees incurred by Major Auto and therefore resulted in no profit to
Major Auto. Total sales revenue and unit counts were estimated to be less
than 5% of total sales for the years ended December 31, 2001, 2000 and
1999.
F-43
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
14. WARRANTS AND OPTIONS
(a) Warrants
(i) In March 1996, the Company issued to Nissko Telecom, Inc. and
its investors warrants to purchase 450,000 shares of the
Company's common stock at a price of $2.75 per share. In 1997,
warrants to purchase 156,900 shares were exercised, leaving a
balance of 293,100 outstanding. Of this amount, Class B
warrants for 225,000 shares, which were exercisable through
March 19, 1998, were unexercised by that date and, therefore,
lapsed, and warrants to purchase 43,414 shares of the
Company's common stock were exercised in December 1998,
leaving a balance of 37,029 outstanding as of December 31,
2001.
(ii) In addition, the Company issued warrants in 1996 for the
purchase of 45,000 shares at a price of $2.75 per share, in
connection with the management agreement entered into when the
Company acquired Major Fleet & Leasing Corp. As of December
31, 2001, these warrants are still outstanding.
(iii) In connection with the private placement of its common stock,
as described in Note 15, in 2000, the Company issued warrants
for 116,275 shares of its common stock at an exercise price of
$80.00. Such warrants have an exercise period of five years
from date of grant.
F-44
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(b) Stock Options
During November 1999, the Company adopted a Stock Option Plan
(the "Plan") pursuant to which 360,000 shares of common stock are
reserved for issuance upon the exercise of options, designated as
1999 options. At the discretion of the Company's Board of Directors
(the "Board"), or members of any committee the Board has designated,
options may be granted to consultants, non-employee members of the
Board, employees, officers or anyone who performs services for the
Company. The Plan will terminate upon the date on which all shares
of the Plan have been exercised. In December 2001, the Company
amended the Plan to increase the shares reserved for issuance by
750,000 shares to 1,110,000.
Options granted under the Plan expire not more than 10 years from
the date of grant. Generally, options vest in 3 years beginning on
the date of grant.
In consideration for certain consulting services related to the
acquisition of the Major Auto Group, the Company issued options to
purchase 22,500 shares of the Company's common stock for $10.00 per
share (market price), exercisable until May 2002.
During August 1999, the Company granted consultants options to
purchase 750 shares of the Company's common stock at an exercise
price of $36.65. The charge to the Company was immaterial.
F-45
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
During 2000, the Company granted officers, directors and employees
options to purchase shares of the Company's common stock at the
market price on the date of grant. Of these options, an aggregate of
178,000 have an exercise price of $21.875 per share and 50,000 have
an exercise price of $1.75.
In December 2001, the Company adopted the 2001 Outside Director
Stock Plan (the "2001 Plan") pursuant to which 250,000 shares are
reserved for issuance to outside directors of the Company ("Outside
Directors"). The Plan provides that, commencing on the date of the
annual stockholders meeting in 2001 and on each anniversary
thereafter, each Outside Director who served as a member of the
Board of Directors shall automatically be granted an option to
purchase 4,500 shares. The term of the option shall be ten years.
The option shall be immediately exercisable, but only while the
optionee serves as a member of the Board of Directors and for the
months following service. The exercise price shall be equal to the
price for the Company's common stock on the date of the grant. In
December 2001, the Company granted 22,500 shares to Outside
Directors at an exercise price of $0.75. Additionally, the 2001 Plan
calls for grants of 4,500 shares of the Company's common stock to
each Outside Director on April 30 and each anniversary thereafter.
The Company applies APB Opinion 25 and related Interpretations in
accounting for its stock option plan by recording as compensation
expense the excess of the fair market value over the exercise price
per share as of the date of grant.
During 2001, pursuant to a separating agreement, the Company granted
options to an employee of IG2 for 30,000 shares of common stock. The
Company recorded a charge of $260,616 against the reserve
established for discontinued operation and a corresponding increase
in additional paid in capital.
F-46
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
In 2001, the Company issued options for an aggregate of 25,200
shares of common stock to non-employee members of the Board at an
average exercise price of $.81 per share, the market price at the
date of grant.
SFAS No. 123 requires the Company to provide pro forma information
regarding net loss and earnings per share as if compensation cost of
the Company's stock option plan had been determined in accordance
with the fair value based method prescribed in SFAS No. 123. The
Company estimates the fair value of each stock option at the grant
date by using the Black Scholes option-pricing model with the
following weighted average assumptions used for grants during the
years ended December 31, 2001 and 2000.
2001 2000 1999
--------------------------------------------------------------------
Dividend yield 0% 0% 0%
Risk free interest rate 5.7% 5.7% 5%
Expected lives 10 years 5 years 10 years
Volatility 104% 104% 46%
====================================================================
Under the accounting provisions of FASB Statement 123, the Company's
net loss and earnings per share would have been adjusted to the pro
forma amounts indicated below:
Year ended December 31, 2001 2000 1999
--------------------------------------------------------------------
Net income (loss)
As reported $2,679,524 $(21,125,075) $(3,190,148)
Pro forma $2,660,752 (21,739,075) (4,110,143)
Pro forma net loss per
common share
basic $0.41 $(4.26) $(1.00)
diluted $0.31 $(4.26) $(1.00)
====================================================================
F-47
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A summary of the status of the Company's stock option plan as of
December 31, 2001 and changes during the period January 1, 1999
through December 31, 2001 is presented below:
Weighted
Number of Expiration average
shares date exercise price
--------------------------------------------------------------------
Options outstanding at
December 31, 1999 78,150 2002-2009 $33.20
Options granted 228,000 2005 3.95
--------------------------------------------------------------------
Options outstanding at
December 31, 2000 306,150 2002-2009 57.04
Options granted 55,200 2006-2011 6.74
--------------------------------------------------------------------
Options outstanding at
December 31, 2001 361,350 2002-2011 $49.36
====================================================================
Data summarizing year-end options exercisable and weighted average
fair value of options granted during the year ended December 31,
2001 is shown below:
Options exercisable
--------------------------------------------------------------------
Options exercisable at year-end 346,350
Weighted average exercise price $ 9.62
Weighted average fair value of options granted
during the year $ 6.74
Weighted average remaining contractual life 4.5
====================================================================
Weighted average fair value of options granted during the years
ended December 31, 2000 and 1999 was $3.95 and $28.50, respectively.
F-48
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
at December 31, 2001.
Options Outstanding Options Exercisable
--------------------------------------------- -------------------------------
Weighted
Number Average Number
Outstanding at Remaining Weighted Exercisable at Weighted
December 31, Contractual Average December 31, Average
Exercise Price Range 2001 Life Exercise Price 2001 Exercise Price
---------------------------------------------------------------------------------------------------------
$10.00 22,500 0.3 $10.00 22,500 $ 2.00
$55.00-$63.75 33,150 6.8 62.83 33,150 62.83
$12.80 22,500 8.0 12.80 22,500 12.80
$ 3.93 228,000 3.8 3.93 228,000 3.93
$11.72 30,000 4.2 2.34 15,000 2.34
$ .75 22,500 9.5 .75 22,500 .75
---------------------------------------------------------------------------------------------------------
361,350 4.5 9.92 346,350 9.62
=========================================================================================================
F-49
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
15. STOCKHOLDERS' EQUITY
On May 14, 1998, the Company designated 900,000 shares as the 1997 - Major
Series of Convertible Preferred Stock (the "1997 Preferred Stock"). The
shares of the 1997 Preferred Stock had voting rights and voted with the
common stock and not as a separate class. Each share entitled the holder
to 0.9 votes per share reflecting the underlying conversion rate. The
shares of 1997 Preferred Stock were convertible, with each share
converting into four and a half shares of common stock if the market value
was equal to or greater than $6,000,000 for the 810,000 shares of common
stock. If the 810,000 shares of common stock had a market value of less
than $6,000,000, then additional shares of common stock would be issued to
equal a market value of $6,000,000. In the event that a dividend is
declared on the common stock, a dividend of twice the per share dividend
of common stock would be paid on the 1997 Preferred Stock. The 1997
Preferred Stock had a liquidation value of $6,000,000. On the fifth
anniversary, the 1997 Preferred Stock would automatically convert into
shares of common stock. During October 1999 and May 2001, 400,000 shares
and 400,000 shares were converted into 360,000 shares and 1,777,778
shares, respectively, of common stock (after the three-for-two and
one-for-five stock splits). In February 2002, Mr. Bendell converted the
remaining 100,000 shares of 1997 preferred stock into 1,333,333 shares of
common stock.
Common Stock
During 1998, the Company issued 342,223 shares of common stock at
estimated market prices for telephony territories and equipment and
services to unrelated parties. An aggregate of 137,400 shares valued at
$1,494,140 was issued for telephony territories and equipment, while an
aggregate of 204,844 shares valued at $1,911,775 was issued for services.
F-50
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
On June 24, 1999, the Company entered into an agreement with three
investors, pursuant to which the Company 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, warrants and
adjustable warrants. The calculation of amounts due pursuant to the
adjustable warrants issued in the second tranche resulted in a potential
liability to the Company for approximately 4.7 million shares or the
Company could elect to issue only the minimum number of 393,587 shares
plus a cash payment of $6,625,016. The Company entered into a Redemption
Agreement and promissory note with the investors whereby the Company would
issue the minimum number of shares and make cash payments aggregating
$6,000,000 to be paid in installments of varying amounts over time.
Accordingly, the Company issued 393,587 shares of 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. The Company did not make any of these required payments. The terms
of the Redemption Agreement required that the balance be adjusted to
$1,666,667, an increase of $416,667 plus interest and reasonable attorneys
fees. Subsequently, the Company reached agreement with the institutional
investors and settled the matter for a total of $1,400,000. The $266,667
reduction of the liability previously recorded has been adjusted as a
credit to additional paid-in capital in the third quarter of 2001. By
December 31, 2001, the $1,400,000 balance has been fully paid.
F-51
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
16. DISCONTINUED OPERATIONS
On November 3, 2000, the Board of Directors determined to divest the
Company's non-automotive operations within the next twelve months.
Continuing operations are represented by the Company's automotive
dealership activities, including its automotive leasing subsidiary, Major
Fleet and Leasing, Inc. Non-automotive operations are reported as
discontinued operations and the consolidated balance sheets have been
reclassified to segregate the net assets of these businesses. Assets held
for sale included on the Company's consolidated balance sheets at December
31, 2000 and 1999 represent the estimated net realizable value of the
Company's discontinued operations.
A summary of net assets of non-automotive operations as of December 31,
2000 is as follows:
2000
--------------------------------------------------
Current assets $1,800,000
Noncurrent assets 800,000
--------------------------------------------------
Total assets 2,600,000
--------------------------------------------------
Current liabilities 1,300,000
Noncurrent liabilities 300,000
--------------------------------------------------
Total liabilities 1,600,000
--------------------------------------------------
Net assets $1,000,000
==================================================
F-52
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The income (loss) from discontinued operations is comprised of the
following:
Year ended December 31, 2001 2000
--------------------------------------------------------------------------
Loss from discontinued operations $ -- $ 8,613,907
Loss from disposition of discontinued
operations -- 13,617,415(1)
Provision for estimated operating losses
during period of disposition -- 2,000,000
--------------------------------------------------------------------------
-- 24,231,322
Income tax benefit (590,000) (1,804,000)
--------------------------------------------------------------------------
$ 590,000 $(22,427,322)
==========================================================================
(1) The $13.6 million loss from disposition of discontinued operations
consists of the write-off of goodwill charges of $13.5 million and
$0.1 million of other property.
The Company completed the sale of its non-automotive assets during 2001
resulting in the complete divestiture of all non-automotive operations. In
February 2001, The Company completed an asset sale of its Richmond,
Virginia-based Internet Creations, Inc. (d/b/a Internet Connections) to
Access Technology, Inc. The sale price for the assets was $320,000,
$47,000 of which was paid at the closing, and $273,000 of which
was evidenced by a senior secured promissory note.
Effective March 27, 2001, the Company sold its interest in its
telecommunications subsidiary, IG2, Inc., to Global Communications of NY,
Inc. The sale price was $3,000,000, less the assumption of certain of the
Company's liabilities, resulting in a net amount due to the Company of
$1,778,803. Such indebtedness is evidenced by a note payable to the
Company in the principal amount of $1,778,803, bearing interest at 8.5%
and payable in quarterly installments over 48 months, beginning in March
2002. Such payments have been deferred to begin in June 2002.
As of December 31, 2001, the Company had a remaining reserve balance of
$495,213. This amount represents the Company's estimate of potential
expenses to be incurred in connection with its discontinued operations.
F-53
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Effective June 27, 2001, in related transactions, the Company sold its
interest in its Israeli technology subsidiary, C.B.S (Israel), Ltd. and
the assets of its Canadian subsidiary, 786710 Ontario, Ltd., doing
business as Info Systems, to GYT International, Ltd., a Nevis corporation.
The combined sales price in connection with these transactions was
$350,000 for both operations, less the assumption of certain of the
Company's liabilities, resulting in a net amount due to the Company of
$119,500. Such indebtedness is evidenced by a note payable to the Company
in the principal amount of $119,500, bearing interest at 5% and payable in
quarterly installments over 60 months, beginning in June 2002.
Effective July 31, 2001, the Company sold its interest in its telephone
calling card subsidiary, ICS Globe, Inc., to Global Communications of NY,
Inc. The sale price was $250,000, with a down payment of $10,000. The
balance is evidenced by a note payable to the Company in the principal
amount of $240,000, bearing interest at 12% and payable in monthly
installments for sixteen months, beginning in August 2002.
The aggregate sales price of the assets of these discontinued operations
was $3.2 million. The book value of these assets was $1 million. The gains
on the sales of these discontinued operations have been deferred due to a
lack of credit history. Such gains will be reflected when collectibility
is reasonably assured. Accordingly, the Company has reclassified the
balance of $1,000,000 from assets held for sale at December 31, 2000 to
notes receivable at December 31, 2001 and recorded a valuation allowance
of $300,000 to reflect the estimated realizable value of the amounts
expected to be received from the sale of its discontinued operations.
F-54
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
First Second Third Fourth
2001 quarter quarter quarter quarter
-----------------------------------------------------------------------------------
(in thousands except for per share data)
Sales $88,112 $ 102,324 $ 91,250 $ 93,429
-----------------------------------------------------------------------------------
Gross profit 13,924 16,194 16,037 15,750
Operating income (loss)
from continuing
operations 786 (62) 797 569
Income (loss) from discontinued
operations, net of tax
benefits -- -- -- 590
Net income (loss) 786 (62) 797 1,159
Income (loss) from
continuing operations
per share - diluted .11 (.01) .10 .06
Net income (loss) per
share - (diluted) .11 (.01) .10 .13
===================================================================================
First Second Third Fourth
2000 quarter quarter quarter quarter
------------------------------------------------------------------------------------
(in thousands except for per share data)
Sales $67,668 $85,907 $90,241 $78,326
------------------------------------------------------------------------------------
Gross profit $10,968 $13,658 $12,899 $12,370
Operating income (loss)
from continuing
operations 870 1,672 (916) (324)
Income (loss) from discontinued
operations, net of tax
benefits (736) (1,164) (14,472) (6,055)
Net income (loss)-
restated 134 508 (15,388)(1) (6,379)(1)
LIFO adjustment 80 80 80 (240)
Net income (loss) as
reported 54 428 (15,468) (6,139)
Income (loss) from
continuing operations
per share - diluted .15 .30 (.20) (.05)
Net income (loss) per
share diluted .00 .10 (3.00) (.95)
====================================================================================
F-55
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
----------
(1) Third and fourth quarter losses reflect write-down of discontinued
operations (see Note 16).
18. SUBSEQUENT EVENTS
Floor Plan Financing
In September 2001, Chrysler Financial Company, LLC ("CFC"), one of the
Company's primary floor plan credit sources for approximately $30 million
for the financing of the Company's vehicle inventory, notified the Company
that CFC had re-evaluated its credit and lending relationship with the
Company and was requiring the Company to seek a replacement lending
institution to refinance and replace all existing CFC credit facilities.
In March 2002, the Company closed a floor plan financing arrangement with
General Motors Acceptance Corporation ("GMAC") for GMAC to provide the
floor plan credit for the financing of the Company's Chevrolet
dealership's new and used vehicle inventory. This is the flagship
dealership of the Company's operations and accounted for more than 35% of
the Company's new vehicle revenues and more than 80% of its consolidated
used vehicle revenues in the year 2001. Also in March 2002, the Company
entered into a credit agreement with HSBC Bank, USA ("HSBC") pursuant to
which HSBC is providing the floor plan credit for the financing of the
Company's Chrysler/Jeep, Dodge and Kia dealerships' new and used vehicle
inventory. As a result of the GMAC and HSBC credit facilities, the Company
completed the replacement of financing for all of the dealerships that
were previously financed by CFC.
F-56
THE MAJOR AUTOMOTIVE COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Additionally, in March 2002, the Company signed a commitment letter with
Nissan Motor Acceptance Corporation ("NMAC") pursuant to which NMAC will
replace the existing floor plan credit for the financing of the Company's
Nissan dealership's new and used vehicle inventory. The commitment from
NMAC is subject to normal closing conditions.
Bruce Bendell, Chairman of the Company, has agreed, temporarily, to
guarantee these obligations. The Company has agreed to compensate Mr.
Bendell for the fair market value of such credit enhancement.
F-57