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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002 or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ____________________
Commission File Number: 000-29182
THE MAJOR AUTOMOTIVE COMPANIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada 11-3292094
(State or Other Jurisdiction (IRS Employer
of Incorporation or Organization) Identification No.)
43-40 Northern Boulevard
Long Island City, NY 11101
(Address of Principal Executive Offices)
(718) 937-3700
(Registrant's Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by court. Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's common stock outstanding as of August
14, 2002 was 9,568,971 shares.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements ................................................................ 3
Consolidated Balance Sheets ................................................................. 3
Consolidated Statements of Operations ....................................................... 5
Consolidated Statements of Cash Flows ....................................................... 6
Notes to Consolidated Condensed Financial Statements ........................................ 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ......................................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......................... 15
PART II. OTHER INFORMATION ................................................................. 16
Item 1. Legal Proceedings ................................................................... 16
Item 2. Changes in Securities ............................................................... 16
Item 3. Defaults Upon Senior Securities ..................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders ................................. 16
Item 5. Other Information .................................................................. 16
Item 6. Exhibits and Reports on Form 8-K .................................................... 16
Signatures .................................................................................. 17
Exhibit 99.1
Exhibit 99.2
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, December 31,
2002 2001
----------- -----------
(unaudited)
ASSETS
Current Assets
Cash and cash equivalents $1,447,448 $4,294,826
Accounts receivable, net 14,748,765 15,744,096
Inventories 39,965,175 32,673,901
Due from related parties 5,167,884 1,442,097
Other current assets 577,224 520,574
Net investment in direct financing leases, current 160,104 135,122
----------- -----------
Total current assets 62,066,600 54,810,616
Property and equipment, net 5,227,592 8,901,218
Deferred income taxes 1,046,000 1,576,000
Excess of costs over net assets acquired 13,589,000 13,589,000
Notes receivable - officer 1,115,254 1,113,979
Notes receivable 600,000 700,000
Other assets 1,395,120 966,081
Net investment in direct financing leases,
net of current portion 272,609 191,053
----------- -----------
Total assets $85,312,175 $81,847,947
=========== ===========
3
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable - floor plan $35,921,068 $33,963,903
Line of credit 375,000 500,000
Accounts payable 7,999,550 9,318,409
Accrued expenses 11,617,618 5,469,192
Current maturities of long-term debt 3,340,869 912,221
Customer deposits 763,308 724,671
Other current liabilities 32,302 32,470
----------- -----------
Total current liabilities 60,049,715 50,920,866
Long-term debt, less current maturities 6,036,380 9,853,587
Obligations under capital lease -- 3,111,643
Other liabilities 3,651 13,530
----------- -----------
Total liabilities 66,089,746 63,899,626
----------- -----------
Commitments
Stockholders' equity
Preferred stock, $.01 par value- 2,000,000 shares
authorized; 0 and 100,000 shares issued and
outstanding in 2002 and 2001, respectively -- 1,000
Common stock, $.01 par value- 100,000,000 shares
authorized; 9,568,871 and 7,994,338 shares issued and
outstanding in 2002 and 2001, respectively 95,689 79,943
Unearned stock based compensation (75,570) (115,946)
Additional paid in capital 40,123,720 39,964,363
Deficit (18,957,645) (20,017,275)
Treasury stock, at cost; 227,191 in 2002 and 2001 (1,963,764) (1,963,764)
----------- -----------
Total stockholders' equity 19,222,429 17,948,321
----------- -----------
Total liabilities and stockholders' equity $85,312,175 $81,847,947
=========== ===========
4
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended June 30, Three Months Ended June 30,
2002 2001 2002 2001
Sales $194,877,356 $190,436,097 $ 103,531,846 $ 102,323,783
Cost of sales 161,544,736 160,317,906 86,009,454 86,129,991
------------ ------------ ------------- -------------
Gross profit 33,332,620 30,118,191 17,522,392 16,193,792
Operating expenses 30,903,175 26,850,168 16,613,272 14,591,160
Interest expense (income), net 537,816 1,644,306 (50,476) 779,900
------------ ------------ ------------- -------------
Income before income tax expense 1,891,629 1,623,717 959,596 822,732
Income tax expense 832,000 900,000 450,000 885,000
------------ ------------ ------------- -------------
Net income (loss) $ 1,059,629 $ 723,717 $ 509,596 $ (62,268)
============ ============ ============= =============
Income (loss) per common share:
Basic $ 0.12 $ 0.13 $ .06 $ (0.01)
Diluted $ 0.11 $ 0.09 $ .05 $ (0.01)
============ ============ =============== =============
Average number of shares used in computation:
Basic 8,747,873 5,706,734 9,263,607 6,318,597
Diluted 9,336,852 7,667,882 9,346,110 6,318,597
============ ============ ============= =============
5
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(Unaudited)
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,059,630 $ 723,717
Adjustments to reconcile net income
to net cash provided by (used in) operating activities
Amortization of intangible assets -- 301,875
Depreciation 220,875 218,394
Amortization of stock-based compensation 40,376 66,629
Bad debts 100,000 --
(Increase) decrease in assets:
Net investment in direct financing leases (106,538) 291,814
Accounts receivable, net 995,331 (6,329,221)
Inventories (7,291,274) 7,638,953
Due from related parties 3,725,787) 2,109,770
Other assets 716,245 (2,160,370)
Increase (decrease) in liabilities
Accounts payable (1,318,859) 1,255,783
Accrued expenses 6,148,426 1,116,699
Customer deposits 38,637 47,777
Notes payable - floor plan 1,957,165 (4,141,950)
Other liabilities (10,048) 27,678
----------- -----------
NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES (1,175,821) 1,167,548
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (45,080) (90,219)
Business combinations -- (70,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (45,080) (160,219)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of line of credit (125,000) --
Payment of long-term debt (1,388,559) (4,224)
Payment of capital lease obligations (111,643) (369,496)
Purchase of treasury stock -- (818,810)
Loans to officers (1,275) (999,406)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (1,626,477) (2,191,936)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,847,378) (1,184,607)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,294,826 2,786,312
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,447,448 $ 1,601,705
=========== ===========
6
2002 2001
Supplemental Disclosures of Cash Flows Information
Cash paid during the period for:
Interest 537,816 $ 864,406
Income taxes 256,676 30,000
Non-cash financing and investing activities:
Common stock issued for services
-- 79,000
Common stock issued for business combinations
-- 519,000
Notes issued for redemption of warrants
-- 416,667
Reversal of capital lease obligation 3,000,000 --
7
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
June 30, 2002
1. Basis of Presentation
In the opinion of the Company, the accompanying consolidated condensed
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to fairly present the Company's financial
position and its results of operations and cash flows as of the dates and for
the periods indicated.
Certain information and footnote disclosure normally contained in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. These condensed consolidated financial statements
should be read in conjunction with the audited December 31, 2001 consolidated
financial statements and related notes included in the Company's Form 10-K for
the year ended December 31, 2001. The results of operations for the three-month
periods are not necessarily indicative of the operating results for the full
year.
2. Goodwill and Other Intangible Assets - Adoption of Statements Nos. 141 and
142
In January 2002, the Company elected to adopt SFAS No. 141, "Business
Combinations," and No. 142, "Goodwill and Intangible Assets." SFAS No. 141
requires the use of the purchase method of accounting and prohibits the use of
the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. SFAS No. 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. SFAS No. 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of SFAS No. 142, that the Company reclassify, if necessary, the carrying amounts
of intangible assets and goodwill based on the criteria of SFAS No. 141.
SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. By December
31, 2002, the Company is required to determine the implied value of its goodwill
at January 1, 2002 and record any resulting impairment charges as a cumulative
effect of a change in accounting principle. Future impairment losses would be
recorded as operating expenses. In accordance with the provisions of SFAS No.
142, a test of goodwill for impairment was made for the Company by an
independent professional valuation firm. The reported results of such test
indicate that there was no impairment as of January 1, 2002.
The Company's previous business combinations were accounted for using the
purchase method and, as of January 1, 2002, the net carrying amount of goodwill
from prior purchase transactions was approximately $13.6 million. Annual
amortization of this amount, which ceased effective January 1, 2002, amounted to
approximately $0.7 million.
8
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
June 30, 2002
Continued
The effect of adoption of SFAS No. 142 on the reported net income for the prior
periods is as follows:
Six Months Ended June 30, Three Months Ended June 30,
2002 2001 2002 2001
Reported net income (loss) $ 1,059,629 $ 723,717 $ 509,596 $(62,268)
Add back: Amortization of goodwill, net of
tax benefit -- 178,106 -- 83,706
------------- ------------- ----------- --------
Net income, as adjusted $ 1,059,629 $ 901,823 $ 509,596 $ 21,438
============= ============= =========== ========
Basic earnings per share:
Reported net income (loss) $ 0.12 $ 0.13 $ 0.06 $ (0.01)
Amortization of goodwill, net of
tax benefit -- 0.03 -- 0.01
------------- ------------- ----------- --------
Basic earnings per share, as adjusted $ 0.12 $ 0.16 $ 0.06 $ 0.00
============= ============= =========== ========
Diluted earnings per share:
Reported net income (loss) $ 0.11 $ 0.09 $ 0.05 $ (0.01)
Amortization of goodwill, net of
tax benefit -- 0.02 -- 0.01
------------- ------------- ----------- --------
Diluted earnings per share, as adjusted $ 0.11 $ 0.11 $ 0.05 $ 0.00
============= ============= =========== ========
3. Related Party Transactions
Amounts due from related parties result from sales and advances in the
ordinary course of business and are not interest bearing.
In connection with the Company's acquisition of its Nissan dealership in
Hempstead, New York, the Company obtained an option to acquire that dealership's
land and building from the landlord who held the lease on that property. The
Company exercised its option, but was unable to obtain the financing necessary
to effect the purchase. Since the lease expiration was concurrent with the
required property acquisition date and the Company was unsuccessful in obtaining
an extension of the lease term, it became imperative to the Nissan dealership's
operations to maintain its presence at that location.
In order to ensure continuity of the dealership's operations, in a
transaction approved by the Company's Board of Directors, the Company's Chairman
and his brother, Harold Bendell, a key employee of the Company, agreed to
personally acquire the property through a company they formed, 316 North
Franklin LLC, and lease it back to the Company. The result of this transaction
was to eliminate the capitalized lease of approximately $3.6 million and the
related liability of $3.0 million that the Company had recorded in connection
with this property. The difference of $637,000, the book value of the purchase
option, was recorded as a long-term related party receivable, which is included
in other non-current assets. The Company entered into a lease with 316 North
Franklin LLC for five years with a five-year renewal option for approximately
the same monthly rental it was previously paying.
9
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
June 30, 2002
Continued
The Company and the Bendell brothers have agreed that an independent
appraisal will be obtained in order to determine a fair market rent and
the current rent will be adjusted and the lease revised, accordingly, if
necessary. Similarly, the value of the purchase option will be determined and
an adjustment to the related party receivable will be made and a gain will be
recorded at that time if the value of the option at the date of transfer
exceeded its book value of $637,000. The receivable will be repaid, ratably,
through monthly payments over the remaining term of the lease, together with
related interest at a market rate.
In unrelated transactions, in order to obtain floor plan financing at
favorable rates, each of the Bendell brothers has agreed to either guarantee
certain floor plan debt of the Company or provide certain collateral in
connection with the Company's floor plan or other borrowings. The Board of
Directors has agreed to obtain independent valuations of such credit
enhancement and collateral usage and pay each of the Bendells the fair value of
their respective contributions. When such valuations have been completed,
adjustment will be made currently for the cumulative value of such
contributions to date and, prospectively, monthly charges will be recorded to
reflect the on-going values, if necessary.
Additionally, Harold Bendell has acquired the right to an off premises
storage facility that was previously leased by the Company, on a month-to-month
basis, from an independent third party. Accordingly, the Company is now leasing
such space from Mr. Bendell for approximately the same monthly rental it was
paying to the prior landlord.
4. RECENTLY ISSUED ACCOUNTING STANDARDS:
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 ("SFAS 144") Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement supersedes FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, APB Opinion No.
30, Reporting the Results of Operation - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions and ARB No. 51, Consolidated Financial Statements. This
Statement is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The adoption of SFAS 144 has had no
impact on the Company's consolidated financial position or results of
operations.
In April 2002, FASB issued Statement of Financial Accounting Standards
No. 145 Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections ("SFAS 145"). SFAS 145 updates,
clarifies, and simplifies existing accounting pronouncements. The Company is
currently evaluating the provisions of this statement.
In July 2002, FASB issued Statement of Financial Accounting Standards
No. 146 Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"). SFAS 146 address financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS 146 requires that a company recognize a liability
for a cost associated with an exit or disposal activity only when it meets the
definition of liability (i.e., when the liability is incurred). SFAS 146 also
requires that the initial measurement of the liability be at its fair value.
This statement is effective on a prospective basis for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The Company is currently evaluating the provisions of this SFAS
146.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our and our subsidiaries' ("we" or "the
Company") operations, financial condition, liquidity and capital resources
should be read in conjunction with our unaudited Consolidated Financial
Statements and related notes thereto included elsewhere herein.
This discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results could differ significantly from the results discussed in the
forward-looking statements.
THE COMPANY
On May 14, 1998, The Major Automotive Companies, Inc. (f/k/a Fidelity Holdings,
Inc.), then 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 operations, 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. By December 31, 2001, we
divested ourselves of all non-automotive operations. Accordingly, our operations
are comprised of our automotive dealerships' activities, including our Major
Auto subsidiary and other dealerships, as well as our automotive leasing
subsidiary, Major Fleet and Leasing, Inc. ("Major Fleet").
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2002 AND SIX MONTHS ENDED
JUNE 30, 2001
Revenues. Revenues for the six-month period ended June 30, 2002 increased
to approximately $194.9 million, which is $4.5 million, or 2.4%, over the prior
comparable period's revenues of $190.4 million. Such increase was solely
attributable to the revenues of our automotive dealerships' operations. The
primary reason for the significant growth in revenues was increased unit sales.
New vehicle sales decreased by 176 units in the first half of 2002 to 2,864
units from 3,040 units in the first half of 2001, primarily, because of
decreased fleet sales, while used vehicle sales more than offset this decline by
increasing 429 units to 7,488 units in the 2002 first half from 7,059 units,
retail and wholesale, in the prior year's comparable six months. Management
believes that the increase in used vehicle unit sales in the current period is
attributable to our continuing successful efforts in expanding used vehicles
sales at our Long Island City, New York facility. Such used vehicle unit sales
in our primary Long Island City location increased 8.9% from the six month
period in 2001 to the current year's six month period. An average of
approximately 1,248 used vehicles, company-wide, retail and wholesale, were sold
during each of the months in the 2002 period, compared with an average of 1,177
units per month in the 2001 comparable period. Additionally, the average sales
price per used vehicle sold increased by $40 per vehicle in the 2002 first half
compared with the same period the prior year. Management believes that the
increase in used vehicle sales is a direct result of Major Auto's strong sales
efforts, which included extensive television and radio advertising, as well as
local print advertising in general and ethnic markets in a variety of media and
the branding of its used car operation as "Major World." Management believes
that market acceptance of its Major World brand and its ability to sell both
luxury line and entry level used vehicles was a strong contributor to the 2002
sales volume performance.
11
Cost of sales. The cost of sales increase of approximately $1.2 million,
or .75%, to $161.5 million in the first half of 2002 from $160.3 million for the
six months ended June 30, 2001, is solely attributable to our automotive
dealerships' operations. This percentage increase is less than the increased
sales volume percentage in terms of units and reflects an increase of almost
$450 in the average cost of new vehicles and a decrease of approximately $170 in
the average unit cost of used vehicles.
Gross profit. Our automotive dealerships' operations generated all of the
total gross profit of $33.3 million for the six months ended June 30, 2002, an
increase of approximately $3.2 million, or 10.6%, from gross profits of $30.1
million in the prior year's comparable period. The increase in gross profit was
primarily attributable to higher gross profit as a percentage of sales on both
new and used vehicles and, to a lesser extent, higher dollar margins on new and
used vehicles sold in the current period.
Operating expenses. In the six months ended June 30, 2002, operating
expenses increased approximately $4.1 million, or 15.3%, to approximately $30.9
million, from approximately $26.8 million in the prior year's comparable period.
All of this increase is attributable to our automotive dealerships' operations,
The costs associated with increased sales efforts and results, principally,
television and radio advertising and compensation, significantly contributed to
the increase of operating expenses.
Interest expense (income), net. Interest expense had a net decrease of
approximately $1.1 million to approximately $500,000 in the first half of 2002
from interest expense of $1.6 million incurred in the comparable prior period.
This is primarily related to manufacturers' floor plan assistance received, as
well as lower interest rates we have received from our new floor plan sources.
Income tax expense. Income tax expense has been provided based on our
expected annual effective tax rate.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2002 AND THREE MONTHS ENDED
JUNE 30, 2001
Revenues. Revenues for the three-month period ended June 30, 2002
increased to approximately $103.5 million, which is $1.2 million, or 1.2%, over
the prior comparable period's revenues of $102.3 million. Such increase was
solely attributable to the revenues of our automotive dealerships' operations.
The primary reason for the growth in revenues was the increase in used vehicles
sold. While new vehicle unit sales decreased by 260 units in the current
quarter, primarily because of reduced lower margin fleet sales, used vehicle
sales, retail and wholesale, increased 325 units to 4,040 units in the 2002
second quarter from 3,715 units, retail and wholesale, sold in the prior year's
comparable quarter. Revenue per used vehicle sold increased by $285 per vehicle
in the 2002 second quarter as compared with the second quarter of 2001, while
revenue per new vehicle sold increased by approximately $1,938 in the 2002
period from the comparable quarter in the prior year, thus, mitigating, in part,
the decrease in unit sales of new vehicles. Management believes that the
significant increase in used vehicle unit sales is primarily attributable to
Major Auto's sales efforts, which included extensive television and radio
advertising, as well as local print advertising, in both general and ethnic
markets in a variety of media, and the branding of its used car operation as
"Major World." Management believes that market acceptance of its Major World
brand and its ability to sell both luxury line and entry level used vehicles was
a strong contributor to the 2002 sales volume performance.
Cost of sales. The cost of sales decrease of approximately $100,000, or
..1%, to $86.0 million in the second quarter of 2002 from $86.1 million for the
three months ended June 30, 2001 is solely
12
attributable to our automotive dealerships' operations. This decrease reflects
the 260 unit decline in new vehicle sales, partially offset by a $1,600 increase
in the average cost of new vehicles sold and a small increase of $94 in the
average cost of used vehicles sold.
Gross profit. Our automotive dealerships' operations generated the total
gross profit of $17.5 million for the three months ended June 30, 2002, an
increase of $1.3 million, or 8.0%, from gross profits of $16.2 million in the
prior year's comparable quarter. The increase in gross profit was primarily
attributable to the increase in volume of used vehicle sales as well higher
dollar margins of used vehicles sold in the period.
Operating expenses. In the three months ended June 30, 2002, operating
expenses increased approximately $2.0 million, or 13.7%, to approximately $16.6
million, from $14.6 million in the prior year's comparable quarter. All of this
increase is attributable to our automotive dealerships' operations. The costs
associated with increased sales efforts and results, principally, television and
radio advertising and compensation, significantly contributed to the increase of
operating expenses.
Interest expense (income), net. Interest went from a net expense of
approximately $780,000 in the second quarter of 2001 to a net interest income
amount of $50,000 in the second quarter of 2002. This is primarily related to
manufacturers' floor plan assistance received, as well as lower interest rates
we have received from our new floor plan sources.
Income tax expense. Income tax expense has been provided based on our
expected annual effective tax rate.
ASSETS, LIQUIDITY AND CAPITAL RESOURCES - JUNE 30, 2002
At June 30, 2002, our total assets were approximately $85.3 million, an increase
of approximately $3.5 million from December 31, 2001. This net increase is
primarily related to the increase of our inventories by approximately $7.3
million and other current assets by $3.8 million, as partially offset by the
aggregate of the decreases in our cash of $2.8 million, accounts receivable of
$1.0 million and property and equipment of $3.7 million. The decrease in cash
and increases in inventories are directly attributable to the build up in
inventories to support increased sales volume and payment of debt. The decrease
in property and equipment is attributable to the reversal of a capitalized
property lease at our Hempstead, Long Island Nissan dealership. Inasmuch as we
were unable to finance the purchase of the leased property by ourselves, the
option to acquire this property was transferred to a company formed by our
Chairman, Bruce Bendell and his brother, Harold Bendell, a key employee of Major
Auto, in order to preserve the dealership's lease. Upon completion of an
independent appraisal, such company will pay Major Auto the fair value of the
option, ratably, over the life of the lease, which will provide for a rental at
a fair market rate.
The Company's primary source of liquidity for the six months ended June 30, 2002
was $1,059,630 from its income plus non-cash charges of $361,251, aggregating
$1,420,881. This addition to cash from operations was more than offset by the
net additions to assets and liabilities of $2,766,702, consisting of net asset
additions of $9,582,023 (primarily from increases in inventories of $7,291,274
and other assets of $3,179,542, partially offset by decrease in accounts
receivable of $995,331) and net liability additions of $6,815,321 (primarily
from increase in accrued expenses of $6,148,426). The increases in inventories
and floor plan liabilities were significantly attributable to the large volume
of sales in the first half of 2002 and the growth of inventories for anticipated
future sales. The net result of the increase in income plus non-cash charges as
offset by asset and liability changes was a use of cash in operating activities
of $1,175,821.
13
The net use of cash from operating activities of $1,175,821 was further
increased by the cash used in investing activities of $45,080 for the net
additions to property and equipment.
Our financing activities used cash of $1,626,477, which was primarily
attributable to long-term debt payments of $1,388,599.
The foregoing activities, i.e., operating, investing and financing resulted in a
net cash decrease of $2,847,378 for the six months ended June 30, 2002.
We believe that the cash generated from existing operations, together with cash
on hand, available credit from its current lenders, including banks and floor
planning, will be sufficient to finance our current operations and internal
growth for at least the next twenty-four months.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Foreign Currency Risk
Although we sell a limited number of vehicles in the former Soviet Union,
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 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 rates charged vary with the prime rate or LIBOR. Due to the nature of
our investments and operations, we believe that there is not a material risk
exposure.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
The securities described below were sold by us during this quarter without
being registered under the Securities Act. All such sales made in reliance on
Section 4(2) and/or Rule 506 promulgated thereunder of the Securities Act were,
to the best of our knowledge, made to investors that, either alone or together
with a representative that assisted such investor in connection with the
applicable investment, had such sufficient knowledge and experience in financial
and business matters to be capable of evaluating the merits and risks connected
with the applicable investment. All shares and prices have been adjusted to
reflect the reverse stock split effected in May 2001:
1. In April 2002, we issued an aggregate of 16,200 shares of common stock to
members of our Board of Directors as compensation for their current and prior
year Board service.
2. In April 2002, we authorized the release from escrow of 225,000 shares of
common stock to Roland Nassim pursuant to a 2001 settlement of a lawsuit.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
99.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K.
None.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
THE MAJOR AUTOMOTIVE COMPANIES, INC.
Date: August 19, 2002 /s/ Bruce Bendell
________________________________________
Bruce Bendell
Chairman of the Board and Chief
Executive Officer
/s/ Richard L. Feinstein
________________________________________
Richard L. Feinstein
Senior Vice President-Finance and
Chief Financial Officer
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