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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 March 31, 2003 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, New York 11101
---------------------------------
(Address of Principal Executive Offices)
(718) 937-3700
----------------
(Registrant's Telephone Number)
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 checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Act). YES [ ] NO [X]
As of May 16, 2003, there were 9,702,047 shares of the registrant's common stock
outstanding.
INDEX
Page No.
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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 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 ............ 18
Item 4. Controls and Procedures ............................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................... 19
Item 2. Changes in Securities ................................................. 19
Item 3. Defaults Upon Senior Securities ....................................... 19
Item 4. Submission of Matters to a Vote of Security Holders ................... 19
Item 5. Other Information ..................................................... 19
Item 6. Exhibits and Reports on Form 8-K ...................................... 20
Signatures .................................................................... 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, 2003 December 31, 2002
----------- -----------
(UNAUDITED)
ASSETS
Current assets
Cash and cash equivalents $ 3,642,395 $ 796,074
Short-term investments 425,930 425,930
Net investment in direct financing leases, current 162,316 164,555
Accounts receivable, net 12,812,444 15,179,194
Inventories 49,273,112 46,520,973
Due from related parties 1,994,504 1,130,966
Deferred income taxes 1,576,000 1,576,000
Other current assets 500,675 506,435
----------- -----------
Total current assets 70,387,376 66,300,127
Net investment in direct financing leases,
net of current portion 211,556 233,937
Property and equipment, net 4,856,979 4,938,545
Goodwill 13,589,000 13,589,000
Due from officer and stockholder 1,395,358 1,395,358
Other assets 667,418 790,374
----------- -----------
Total assets $91,107,687 $87,247,341
=========== ===========
3
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable - floor plan $ 47,717,025 $ 46,224,707
Accounts payable 10,975,678 6,727,578
Accrued expenses 6,283,008 6,991,326
Current maturities of long-term debt 2,082,603 675,452
Customer deposits and other current liabilities 447,526 978,981
------------- -------------
Total current liabilities 67,505,840 61,598,044
Long-term debt, less current maturities 6,131,478 7,701,700
------------- -------------
Total liabilities 73,637,318 69,299,744
Commitments
Stockholders' equity
Preferred stock, $.01 par value- 2,000,000 shares
authorized; 0 shares issued and
outstanding in 2003 and 2002, respectively -- --
Common stock, $.01 par value- 50,000,000 shares
authorized; 9,634,171 and 9,564,371 shares issued and
outstanding in 2003 and 2002, respectively 96,341 95,643
Additional paid in capital 40,123,067 40,123,765
Deficit (20,785,275) (20,308,047)
Treasury stock, at cost; 227,191 shares in 2003 and 2002 (1,963,764) (1,963,764)
------------- -------------
Total stockholders' equity 17,470,369 17,947,597
------------- -------------
Total liabilities and stockholders' equity $ 91,107,687 $ 87,247,341
============= =============
4
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
(Unaudited)
2003 2002
------------ ------------
Sales $ 91,145,991 $ 91,345,510
Cost of sales 75,851,109 75,173,416
------------ ------------
Gross profit 15,294,882 16,172,094
Operating expenses 15,451,285 14,868,426
Interest expense, net of interest income 300,825 371,635
------------ ------------
Income (loss) before income tax expense (457,228) 932,033
Income tax expense 20,000 382,000
------------ ------------
Net income (loss) $ (477,228) $ 550,033
============ ============
Net income (loss) per common share
Basic $ (0.05) $ 0.07
Diluted $ (0.05) $ 0.06
============ ============
Average number of shares used in computation:
Basic 9,341,058 8,226,406
Diluted 9,341,058 9,116,680
============ ============
5
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
(Unaudited)
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (477,228) $ 550,033
Adjustments to reconcile net income
to net cash provided by (used in) operating activities
Amortization of intangible assets -- 8,929
Depreciation 89,371 191,813
Reduction of bad debt reserve (79,530) --
Amortization of stock-based compensation -- 20,188
(Increase) decrease in assets:
Net investment in direct financing leases 24,620 (163,130)
Accounts receivable, net 2,446,280 1,576,304
Inventories (2,752,139) 1,178,216
Deferred income taxes -- 382,000
Due from related parties (863,538) 185,799
Other assets 128,715 678,371
Increase or (decrease) in liabilities
Accounts payable 4,248,100 (1,095,004)
Accrued expenses (708,318) (165,744)
Customer deposits (531,455) 122,604
Notes payable - floor plan 1,492,318 (5,990,973)
Other liabilities -- (1,930)
------------ ------------
NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES 3,017,196 (2,522,524)
------------ ------------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Purchase of property and equipment (7,804) (80,852)
------------ ------------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (7,804) (80,852)
------------ ------------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Proceeds from long-term debt -- 272,867
Payment of long-term debt (163,071) (314,247)
Loans to officers -- 322,208
------------ ------------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES (163,071) 280,828
------------ ------------
6
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,846,321 (2,322,548)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 796,074 4,294,826
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,642,395 $ 1,972,278
============ ============
Supplemental disclosures of cash flow information Cash paid during the period for:
Interest $ 599,992 $ 588,292
Income taxes 17,000 55,000
Non-cash financing and investing
Common stock issued in exchange for preferred shares -- 12,333
7
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
March 31, 2003
1. Basis of Presentation and Significant Accounting Policies
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to fairly present, in all material
respects, 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, 2002 consolidated
financial statements and related notes included in the Company's Form 10-K for
the year ended December 31, 2002. The results of operations for the three-month
periods are not necessarily indicative of the operating results for the full
year.
In order to maintain consistency and comparability of financial
information between periods presented, certain reclassifications have been made
to the Company's prior year 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.
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. In 2003, because the
Company incurred a net loss, the exercise of options and warrants would have
been antidilutive and were, therefore, excluded from the calculation.
2. Floor Plan Interest, Floor Plan Assistance and Advertising Assistance
Floor plan and advertising assistance received from manufacturers are
recorded as offsets to the cost of the vehicle and recognized into income upon
the sale of the vehicle or when earned under a specific manufacturer's program,
whichever is later. Floor plan assistance payments, which were previously
accounted for as a reduction of floor plan interest expense, have been included
as offsets to inventory and cost of sales, as appropriate. Floor plan interest
expense, which was previously included in interest expense, is now presented as
a component of operating expense in the accompanying consolidated condensed
statement of operations to provide more meaningful information regarding the
Company's margin performance.
For the three months ended March 31, 2003 and 2002, aggregate floor plan
interest included in operating expenses was $433,759 and $492,053, respectively.
For the three months ended March 31, 2003 and 2002, aggregate floor plan
assistance received was $384,465 and $275,396, respectively, of which $270,465
and $275,396, respectively, were included in cost of sales.
8
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
March 31, 2003
Continued
For the three months ended March 31, 2003 and 2002, aggregate advertising
assistance received was $458,179 and $86,470, respectively, of which $322,179
and $86,470, respectively, were included in cost of sales.
3. Inventories
Inventories are comprised of the following:
March 31, 2003 December 31, 2002
------------ ------------
New automobiles $ 15,712,303 $ 15,794,564
New trucks and vans 14,319,407 11,733,652
Used automobiles and trucks 18,033,743 17,148,771
Parts and accessories 1,172,422 1,832,196
Other 35,237 11,790
------------ ------------
$ 49,273,112 $ 46,520,973
============ ============
4. Related Party Transactions
Amounts due from related parties result from sales and purchases of
vehicles to and from dealerships owned by Bruce Bendell, the Company's
President, Chief Executive Officer, Acting Chief Financial Officer and
Chairman, and his brother, Harold Bendell (the "Bendell Dealerships"), as well
as previous advances made in the ordinary course of business. All of the sales
and purchases to and from the Bendell Dealerships are made at wholesale cost
plus related fees and have, therefore, resulted in no significant profit or
loss to the Company. For the three months ended March 31, 2003, the related
party sales amounted to $1,101,275. There were no related party sales during
the first quarter of 2002. For the three months ended March 31, 2003 and 2002,
the purchases from related parties aggregated $5,771,282 and $7,719,605
respectively.
Pursuant to a management agreement with Harold Bendell, which, by its
terms, expired, but has been orally extended until such time as the parties
reach agreement on terms of an extension to the management agreement, the
Company has accrued a management fee for services performed by Harold Bendell.
For the three months ended March 31, 2003 and 2002, such accrual amounted to
$43,127 and $198,883, respectively.
In unrelated transactions, in order to obtain floor plan financing at
favorable rates, each of Bruce Bendell and Harold Bendell 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 (collectively, the "Credit Enhancement") and pay each of
the Bendell's the fair value of his respective contributions. The Company has
engaged an independent valuation firm and has received a preliminary valuation
from such firm of $160,000 for the economic risk value of the Credit
Enhancement.
Accordingly, the Company accrued such amount as a liability in the
third quarter of 2002. When the final valuations have been completed, and the
Company's Board of Directors has reviewed the results and evaluated the
circumstances of the Credit Enhancement relative to the Company's enterprise
value, adjustment, if necessary and warranted, will be made for any difference
from the preliminary valuation.
9
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
March 31, 2003
Continued
5. Settlements of Litigation
In March 2003, in connection with the 2002 settlement of a lawsuit
entitled Ronald K. Premo v. Fidelity Holdings, Inc., the Company issued 69,800
shares of its common stock, in addition to the 15,000 shares of its common stock
issued in 2002, to reach the aggregate guaranteed value of $72,039, as required
by the settlement terms. There was no effect on earnings in connection with the
issuance of these shares.
In April 2003, in connection with the settlement of a lawsuit entitled
Zannett Lombardier Ltd., et al. v. The Major Automotive Companies, Inc., the
Company issued 49,876 shares of its common stock representing the $40,000 that
was required to be paid in shares pursuant to the related settlement agreement.
In the first quarter of 2003, $70,000 was charged against earnings in connection
with this settlement. The balance of the settlement value, $100,000, was accrued
during the year ended December 31, 2002.
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 Condensed 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. Until November 3, 2000, when our Board of Directors
determined to sell our non-automotive operations, including our Technology
division, we operated in two divisions: Automotive and Technology. Since that
time, our 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 first quarter of 2003 saw our historical first quarterly decline in revenues
and gross profits. This resulted in a net loss for this quarter of $477,000
compared with a net profit of $550,000 in the comparable 2002 quarter. There are
several factors that, we believe, contributed to this result. First, is the
general decline in automotive sales throughout the country. We attribute this
trend to both the general economy and consumer reluctance based on expectations
of war with Iraq. The second and more local factor, was the severe and prolonged
winter weather conditions that prevailed in the New York metropolitan area
during the first quarter of 2003. This resulted in reduced sales and increased
operating costs.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated condensed 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
11
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, Basis of Presentation and Significant Accounting
Policies, of the Notes to Consolidated Condensed Financial Statements included
elsewhere, herein.
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 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, goodwill
and property and equipment, which constitute a significant component of our
consolidated condensed 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. 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. 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 have applied the
new rules on accounting for goodwill beginning in the first quarter of 2002.
During 2002, we performed the required impairment tests of goodwill as of
January 1, 2002 and December 31, 2002. We have concluded, based, in part, on the
analysis performed and conclusions reached by an independent valuation appraiser
we retained, that there is no impairment of goodwill as of either January 1,
2002 or December 31, 2002. We remain, however, 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.
Reclassifications. In order to maintain consistency and comparability of
financial information between periods presented, certain reclassifications have
been made to our prior year financial statements.
Floor plan and advertising assistance received from manufacturers are now
recorded as reductions of inventory or offsets to the cost of the vehicle, as
appropriate, and recognized as income upon the sale of the vehicle or when
earned under a specific manufacturer's program, whichever is later. Floor plan
assistance payments, which were previously accounted for as a reduction of floor
plan interest expense, have been included as offsets to cost of sales and
inventory, as appropriate. Floor plan interest expense, which was previously
classified as interest expense below operating income, is now presented as a
component of operating expense in the accompanying consolidated condensed
statement of operations to provide more meaningful information regarding the
Company's margin performance.
For the three months ended March 31, 2003 and 2002, aggregate floor plan
interest included in operating expense was $433,759 and $492,053, respectively.
The decrease in 2003 of interest expense relative to flat sales volume is
primarily attributable to the lower interest rates associated with the Company's
new floor plan arrangements.
12
For the three months ended March 31, 2003 and 2002, aggregate floor plan
assistance now included as a reduction of cost of sales was $270,465 and
$275,396, respectively.
Advertising assistance received from manufacturers for the three months ended
March 31, 2003 and 2002, now included as a reduction of cost of sales was
$322,179 and $86,970, respectively.
Commitments And Contingencies
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 and employment-related
lawsuits. 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 OPERATIONS - THREE MONTHS ENDED MARCH 31, 2003 AND THREE MONTHS ENDED
MARCH 31, 2002
Revenues. Revenues for the three-month period ended March 31, 2003 decreased to
approximately $91.1 million, which is $.2 million, less than the prior
comparable period's revenues of $91.3 million. This decrease was solely
attributable to the revenues of our automotive dealership operations. The
primary reason for the decrease in revenues was a significant decline in new
unit sales, as partially offset by a large increase in the average sales price
per unit, coupled with an increase in used vehicle unit sales, as partially
offset by a decrease in the average selling price of used vehicles sold. New
vehicle sales decreased by 182 units in the first quarter of 2003 to 1,261 units
from 1,443 units in the first quarter of 2002, while used vehicle sales
increased 280 units to 3,727 units in the 2003 first quarter over 3,447 units,
retail and wholesale, in the prior year's comparable quarter. The average sales
price of new vehicles sold increased by $2,407 and the average sales price of
used vehicles decreased by $168. The decrease in new unit sales in this quarter
is primarily attributable to sales by the
13
dealerships in Hempstead, Long Island, including the closed dealerships, and the
increase in used vehicle units sold is attributable to our Long Island City, New
York dealerships. An average of approximately 1,242 used vehicles, retail and
wholesale, were sold during each of the months in the 2003 period, compared with
an average of 1,149 units per month in the 2002 comparable period. Major Auto's
sales efforts included extensive Internet promotions, local advertising in all
media and the branding of its used car operation as "Major World." Management
believes, however, that the exceptionally severe winter weather conditions
during the first quarter of 2003, together with a decline in demand as a result
of the anticipation of war with Iraq were the significant causative factors of
our decline in revenue. A further decline in industry-wide new vehicle sales and
a continuation of consumer reluctance, generally, or in the New York
metropolitan region, in particular, could materially adversely affect our
revenues and operating results.
Cost of sales. The cost of sales increase of approximately $700,000, or 0.9%, to
$75.9 million in the first quarter of 2003 from $75.2 million for the three
months ended March 31, 2002 is solely attributable to our automotive dealership
operations. This increase is primarily the result in the average cost of new
vehicles, which increased by $2,230 per vehicle sold in the first quarter of
2003 compared with the first quarter of 2002. The average cost of each used
vehicle sold decreased by only $12 in the 2003 first quarter compared with the
same period in 2002.
Gross profit. Our automotive operations generated almost the entire gross profit
of $15.3 million for the three months ended March 31, 2003, a decrease of
approximately $900,000 million, or 5.6%, from gross profits of $16.2 million in
the prior year's comparable quarter. The decrease in gross profit was
attributable to both the substantial decrease in the number of new vehicles sold
and a decrease in average gross profit per used vehicle sold of $156. Gross
profits as a percentage of sales decreased to 16.6% in the first quarter of 2003
from 17.2% in the prior year's comparable quarter. This increase is reflective
of our efforts to sell vehicles in a marketplace that has been adversely
affected by the economy, consumer reluctance and competition.
Operating expenses. In the three months ended March 31, 2003, operating expenses
increased approximately $600,000 or 0.4%, to approximately $15.5 million, from
$14.9 million in the prior year's comparable quarter. All of this increase is
attributable to our automotive dealership operations. This increase is primarily
attributable to the costs associated with increased sales efforts and results,
principally, advertising and compensation. Interest related to our floor plan
financing was $434,000 in the 2003 period compared with $492,000 in the
comparable 2002 period. Although we maintained a higher inventory level in 2003,
this decrease is attributable to the lower interest rates in effect that are
associated with our new floor plan facilities.
Interest expense,net. Net interest expense had a net decrease of approximately
$71,000 to $301,000 in the first quarter of 2003 from interest expense of
$372,000 incurred in the comparable prior period. The decline in interest is
attributable to repayments of long-term debt.
Income tax expense. Income tax expense reflects only state and local taxes,
since we do not expect any federal income tax expense for 2003.
14
RESULTS OF CONTINUING OPERATIONS - THREE MONTHS ENDED MARCH 31, 2002 AND THREE
MONTHS ENDED MARCH 31, 2001
Revenues. Revenues for the three-month period ended March 31, 2002 increased to
approximately $91.3 million, which is $3.2 million, or 3.6%, more than the prior
comparable period's revenues of $88.1 million. Such increase was solely
attributable to the revenues of our automotive dealership operations. The
primary reason for the growth in revenues was increased unit sales as partially
offset by decreases in the average selling price of vehicles sold. New vehicle
sales increased by 78 units in the first quarter of 2002 to 1,443 units from
1,365 units in the first quarter of 2001, while used vehicle sales increased 103
units to 3,447 units in the 2002 first quarter over 3,344 units, retail and
wholesale, in the prior year's comparable quarter. The average sales price of
new vehicles sold decreased by $522 and the average sales price of used vehicles
decreased by $246. Management believes that the increase in new unit sales in
this quarter is significantly attributable to sales by the dealerships in
Hempstead, Long Island and the increase in used vehicle units sold is
attributable to our successful efforts in selling used vehicles at our expansive
facility in Long Island City, New York. An average of approximately 1,149 used
vehicles, retail and wholesale, were sold during each of the months in the 2002
period, compared with an average of 1,115 units per month in the 2001 comparable
period. Major Auto's sales efforts included extensive Internet promotions, local
advertising in all media and the branding of its used car operation as "Major
World." Management believes that market acceptance of its Major World brand was
a strong contributor to the 2002 sales volume performance.
Cost of sales. The cost of sales increase of $1.0 million, or 1.3%, to $75.2
million in the first quarter of 2002 from $74.2 million for the three months
ended March 31, 2001 is solely attributable to our automotive dealership
operations. This increase is consistent with the increased sales volume in terms
of units and also with the respective decreases in the average selling prices of
new and used vehicles.
Gross profit. Our automotive operations generated almost the entire gross profit
of $16.2 million for the three months ended March 31, 2002, an increase of
approximately $2.3 million, or 16.5%, from gross profits of $13.9 million in the
prior year's comparable quarter. The increase in gross profit was attributable
to both the increase in units sold and an increase in gross profit per vehicle
sold. Although the average sales price per new and used vehicle sold decreased,
the average gross profit per new and used vehicle sold increased by $280 and
$234, respectively. Gross profits as a percentage of sales increased to 17.2% in
the first quarter of 2002 from 15.8% in the prior year's comparable quarter.
Operating expenses. In the three months ended March 31, 2002, operating expenses
increased approximately $2.1 million, or 16.4%, to approximately $14.9 million,
from $12.8 million in the prior year's comparable quarter. All of this increase
is attributable to our automotive dealership operations. This increase is
primarily attributable to the costs associated with increased sales efforts and
results, principally, advertising and compensation. Floor plan interest included
in operating expenses was $492,000 and $540,000 in the three months ended March
31, 2002 and 2001 respectively. The decrease was attributable to both lower
inventory levels and reduced interest rates in the 2002 period compared with
2001.
Interest expense, net. Net interest expense had a net decrease of approximately
$48,000 to $372,000 in the first quarter of 2002 from interest expense of
$324,000 incurred in the comparable prior period attributable to increases in
long-term debt.
15
Income tax expense. Income tax expense was recorded in the first quarter of 2002
based on an annualization of the current quarter's income and assumed the
utilization of our remaining net operating loss carryforwards in this year.
Income tax expense for the comparable prior year's period was based on the
expectation that such loss carryforwards would exceed the taxable income.
ASSETS, LIQUIDITY AND CAPITAL RESOURCES - MARCH 31, 2003
At March 31, 2003, our total assets were $91.1 million, an increase of
approximately $3.9 million from total assets of $87.2 million at December 31,
2002. This aggregate increase is primarily related to the increases in our cash
and cash equivalents of $2.8 million, inventories of $2.8 million and due from
related parties of $900,000, as partially offset by a decrease in accounts
receivable of $2.4 million.
For the three months ended March 31, 2003, we had a net increase in cash and
cash equivalents of $2,846,321. The primary reason for this increase was the net
cash provided by our operating activities of $3,017,196.
The net cash provided by our operating activities of $3,017,196 was primarily
the result of cash used in our operations of $415,857, comprised of our net loss
of $477,228, less non-cash charges of $9,841 and a net increase in liabilities
of $4,520,645 (attributable to the increases in accounts payable of $4,248,100
and floor plan notes payable of $1,492,318 and decreases in accrued expenses and
customer deposits of $708,318 and $531,455, respectively) as partially offset
by a net increase in non-cash assets of $1,036,082 (primarily from increases of
$2,752,139 and $863,538 in inventories and due from related parties,
respectively, as partially offset by the reduction in accounts receivable of
$2,446,280). This is reflective of both our reduced level of sales during the
first quarter of 2003 and the buildup of inventory during that period in
anticipation of increased sales volumes in the second and third quarters of
2003. The latter two quarters have, historically, been the primary selling
seasons for our new and used
vehicles.
Additionally, we used cash of $7,804 in our investing activities, which is
attributable to purchases of property and equipment.
We used $163,071 in our financing activities for payments of long-term debt.
The foregoing activities, i.e., operating, investing and financing, resulted in
a net cash increase of $2,846,321 for the three months ended March 31, 2003.
We require cash to fund our working capital needs and capital expenditures, as
well as to meet existing commitments. These cash requirements include payments
on long-term debt of $505,000 for the last nine months of 2003, $2.0 million for
2004, $544,000 for 2005 and $5.1 million thereafter, and lease payments of $1.0
million for the last nine months of 2003, $1.4 million for 2004 and $1.3 million
for 2005. In addition, pursuant to an employment agreement with our President,
Chief Executive Officer and Acting Chief Financial Officer, Bruce Bendell, we
are obligated to pay him a minimum of $500,000 per year through June 30, 2004.
All of these obligations are funded, principally, from cash flows from
operations and borrowings under floor plan financings.
We believe that the cash generated from existing operations, together with cash
on hand, available credit from our current lenders, including banks and floor
plan lenders, will be sufficient to finance our debt and lease obligations,
other commitments, current operations and internal growth for at least the next
twenty-four months.
16
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our Chief Executive
Officer, who is also our Acting Chief Financial Officer, after evaluating the
effectiveness of the Company's disclosure controls and procedures (as defined in
the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date
within 90 days of the filing date of this quarterly report on Form 10-Q (the
"Evaluation Date")), has concluded that as of the Evaluation Date, our
disclosure controls and procedures were adequate and effective to ensure that
material information relating to the Company and its consolidated subsidiaries
would be made known to him by others within those entities, particularly during
the period in which this quarterly report on Form 10-Q was being prepared.
Changes in Internal Controls. There were no significant changes in our
internal controls or in other factors that could significantly affect our
disclosure controls and procedures subsequent to the Evaluation Date, nor any
significant deficiencies or material weaknesses in such disclosure controls and
procedures requiring corrective actions. As a result, no corrective actions were
taken.
FORWARD-LOOKING STATEMENTS
When used in the Quarterly Report on Form 10-Q, the words "may",
"will", "should", "expect", "believe", "anticipate", "continue", "estimate",
"project", "intend" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act regarding events, conditions and
financial trends that may affect our future plans of operations, business
strategy, results of operations and financial condition. We wish to ensure that
such statements are accompanied by meaningful cautionary statements pursuant to
the safe harbor established in the Private Securities Litigation Reform Act of
1995. Prospective investors are cautioned that any forward-looking statements
are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the forward-looking statements as a result of various factors including
our ability to consummate, and the terms of, acquisitions, if any. Such
forward-looking statements should, therefore, be considered in light of various
important factors, including those set forth herein and others set forth from
time to time in our reports and registration statements filed with the
Securities and Exchange Commission (the "Commission"). We disclaim any intent or
obligation to update such forward-looking statements.
17
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 Unites
States. Consequently, foreign sales constitute a minimal amount of our revenues.
Even so, our financial results could be affected by changes in foreign currency
exchange rates or weak economic conditions in foreign markets. Because
substantially all our revenues are currently denominated in U.S. dollars, a
strengthening of the dollar could make our 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.
ITEM 4. CONTROLS AND PROCEDURES.
Within 90 days prior to the date of this report, we carried out an evaluation,
under the supervision and with the participation of our Chief Executive Officer
and Acting Chief Financial Officer, of the effectiveness of the design and
operation of our "disclosure controls and procedures" (as defined in the
Securities Exchange Act of 1934, as amended, Rules 13a-14(c) and 15(d)-14(c)).
This evaluation has provided our Chief Executive Officer and Acting Chief
Financial Officer with reasonable assurance that our disclosure controls and
procedures are effective and can be relied upon to gather, analyze and disclose
all information required to be included in our periodic SEC reports.
In addition, we reviewed our internal controls, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of our evaluation.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter, there were no significant developments in the Company's
legal proceedings. For a detailed discussion of the Company's legal proceedings,
please refer to Note 5 herein, and the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002.
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:
1. On April 30, 2003, the Company issued 4,500 shares of common stock to David
Edelstein, at a per share price of $0.74, as compensation for services as an
outside member of the Company's Board of Directors.
2. On April 30, 2003, the Company issued 4,500 shares of common stock to Jeffrey
Weiner, at a per share price of $0.74, as compensation for services as an
outside member of the Company's Board of Directors.
3. On April 30, 2003, the Company issued 4,500 shares of common stock to Steven
Nawi, at a per share price of $0.74, as compensation for services as an outside
member of the Company's Board of Directors.
4. On April 30, 2003, the Company issued 4,500 shares of common stock to Steven
Hornstock, at a per share price of $0.74, as compensation for services as an
outside member of the Company's Board of Directors.
5. In April 2003, the Company issued 49,876 shares of its common stock in
connection with the settlement of a lawsuit against entitled Zannett Lombardier
Ltd., et al. v. The Major Automotive Companies, Inc.
6. In March 2003, the Company issued 69,800 shares of its common stock in
connection with the settlement of a lawsuit entitled Ronald K. Premo v. Fidelity
Holdings, Inc.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
99.1 Certification of Chief Executive Officer and Acting
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.
20
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: May 20, 2003 /s/ Bruce Bendell
------------------
Bruce Bendell
Chairman of the Board and Chief Executive Officer
and Acting Chief Financial Officer
21
CERTIFICATION
I, Bruce Bendell, certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Major Automotive
Companies, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. I am responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to me
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based
on my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
May 20, 2003 /s/ Bruce Bendell
-----------------
Bruce Bendell
President, Chief Executive Officer and
Acting Chief Financial Officer
22