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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, 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 August 11, 2003, there were 9,702,047 shares of the registrant's common
stock outstanding.
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 Financial Statements............................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 17
Item 4. Controls and Procedures........................................................ 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 18
Item 2. Changes in Securities.......................................................... 18
Item 3. Defaults Upon Senior Securities................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders............................ 18
Item 5. Other Information.............................................................. 18
Item 6. Exhibits and Reports on Form 8-K............................................... 19
Signatures............................................................................. 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
June 30, 2003 December 31, 2003
------------- -----------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 3,469,681 $ 796,074
Certificates of deposit 428,364 425,930
Net investment in direct financing leases, current 167,911 164,555
Accounts receivable, net 11,164,650 15,179,194
Inventories 43,761,546 46,520,973
Due from related parties 2,210,958 1,130,966
Deferred income taxes 1,576,000 1,576,000
Other current assets 934,875 506,435
----------- -----------
Total current assets 63,713,985 66,300,127
Net investment in direct financing leases,
net of current portion 153,366 233,937
Property and equipment, net 4,790,393 4,938,545
Goodwill 13,589,000 13,589,000
Due from officer and stockholder 1,395,358 1,395,358
Notes receivable and other assets 310,661 790,374
----------- -----------
Total assets $83,952,763 $87,247,341
=========== ===========
3
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable - floor plan $ 42,197,693 $ 46,224,707
Accounts payable 8,469,583 6,727,578
Accrued expenses 6,676,208 6,991,326
Current maturities of long-term debt 1,941,231 675,452
Due to related parties 115,500 -
Customer deposits and other current liabilities 433,718 978,981
------------ ------------
Total current liabilities 59,833,933 61,598,044
Long-term debt, less current maturities 5,994,796 7,701,700
------------ ------------
Total liabilities 65,828,729 69,299,744
Contingencies
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; 9,702,047 and 9,564,371 shares issued and
outstanding in 2003 and 2002, respectively 97,021 95,643
Additional paid in capital 40,175,708 40,123,765
Deficit (20,184,931) (20,308,047)
Treasury stock, at cost; 227,191 shares in 2003 and 2002 (1,963,764) (1,963,764)
------------ ------------
Total stockholders' equity 18,124,034 17,947,597
------------ ------------
Total liabilities and stockholders' equity $ 83,952,763 $ 87,247,341
============ ============
4
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Six Months Ended June 30, For the Three Months Ended June 30,
--------------------------------- -----------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Sales $190,018,727 $194,877,356 $ 98,872,736 $103,531,846
Cost of sales 157,818,776 160,626,633 81,967,667 85,453,217
------------ ------------ ------------ ------------
Gross profit 32,199,951 34,250,723 16,905,069 18,078,629
Operating expenses 31,739,435 31,900,372 16,146,911 16,891,946
Interest expense, net of interest income 310,400 458,722 150,814 227,087
------------ ------------ ------------ ------------
Income before income tax 150,116 1,891,629 607,344 959,596
Income tax expense 27,000 832,000 7,000 450,000
------------ ------------ ------------ ------------
Net income $ 123,116 $ 1,059,629 $ 600,344 $ 509,596
============ ============ ============ ============
Net income per common share
Basic $ 0.01 $ 0.12 $ 0.06 $ 0.06
Diluted $ 0.01 $ 0.11 $ 0.06 $ 0.05
============ ============ ============ ============
Average number of shares used in computation:
Basic 9,398,454 8,747,873 9,455,220 9,263,607
Diluted 9,401,284 9,336,852 9,458,704 9,346,110
============ ============ ============ ============
5
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30,
(Unaudited)
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 123,116 $ 1,059,630
Adjustments to reconcile net income
to net cash provided by (used in) operating activities
Depreciation 179,793 220,875
Stock issued for compensation and services 53,321 40,376
Additions to (reductions of) allowance for doubtful accounts (38,138) 100,000
(Increase) decrease in assets:
Net investment in direct financing leases 77,215 (106,538)
Accounts receivable, net 4,052,682 995,331
Inventories 2,759,427 (7,291,274)
Due from related parties (964,492) (3,725,787)
Other assets 51,273 716,245
Increase or (decrease) in liabilities
Accounts payable 1,742,005 (1,318,859)
Accrued expenses (315,118) 6,148,426
Customer deposits and other liabilities (545,263) 28,589
Notes payable - floor plan (4,027,014) 1,957,165
----------- -----------
NET CASH PROVIDED (USED) IN OPERATING ACTIVITIES 3,148,807 (1,175,821)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (31,641) (45,080)
Proceeds from certificate of deposit 425,930 -
Purchase of certificate of deposit (428,364) -
----------- -----------
NET CASH PROVIDED (USED) IN INVESTING ACTIVITIES (34,075) (45,080)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of line of credit - (125,000)
Payment of long-term debt (441,125) (1,388,559)
Payment of capital lease obligations - (111,643)
Loans to officers - (1,275)
----------- -----------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES (441,125) (1,626,477)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,673,607 (2,847,378)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 796,074 4,294,826
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,469,681 $ 1,447,448
=========== ===========
Supplemental Disclosures of Cash Flows Information
Cash paid during the period for:
Interest $ 1,601,000 $ 1,186,000
Income taxes 20,000 257,000
Non-cash financing and investing
Reversal of capital lease obligation - 3,000,000
6
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
June 30, 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 interim 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 per share, where
applicable. Basic earnings per share excludes potential dilution and is
calculated by dividing income 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.
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 six months ended June 30, 2003 and 2002, aggregate floor plan interest
included in operating expenses was $1,204,753 and $884,238, respectively. For
the three months ended June 30, 2003 and 2002, aggregate floor plan interest
included in operating expenses was $629,755 and $392,185, respectively.
7
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
June 30, 2003
Continued
For the six-month and three-month periods ended June 30, 2003 and 2002,
aggregate floor plan assistance received was, as follows:
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
Total floor plan assistance received $ 725,549 $ 645,704 $ 341,084 $ 370,308
============ ============== =========== ===========
Amount included in cost of sales $ 635,549 $ 645,704 $ 365,084 $ 370,308
============ ============== =========== ===========
For the six-month and three-month periods ended June 30, 2003 and 2002,
aggregate advertising assistance received was, as follows:
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
Total advertising assistance received $ 612,494 $ 272,399 $ 154,315 $ 185,929
============ ============== =========== ===========
Amount included in cost of sales $ 536,494 $ 272,399 $ 214,315 $ 185,929
============ ============== =========== ===========
3. Inventories
Inventories are comprised of the following:
June 30, 2003 December 31, 2002
------------- -----------------
New automobiles $ 12,350,319 $ 15,794,564
New trucks and vans 12,557,236 11,733,652
Used automobiles and trucks 17,707,598 17,148,771
Parts and accessories 1,120,598 1,832,196
Other 25,795 11,790
---------------- -----------------
$ 43,761,546 $ 46,520,973
================ =================
8
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
June 30, 2003
Continued
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 and six-month periods ended June 30, 2003 and 2002, the related party
sales and purchases were as follows:
Six Months Ended June 30, Three Months Ended June 30,
------------------------- ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
Related party sales $ 2,236,658 $ 1,755,390 $ 1,135,383 $ 1,755,390
============ ============== ============ ===========
Related party purchases $ 9,655,185 $ 8,881,582 $ 3,883,903 $ 2,054,962
============ ============== ============ ===========
Pursuant to a management agreement with a dealership owned by 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 provided by
that dealership. For the six months ended June 30, 2003 and 2002, such accrual
amounted to $216,744 and $540,718, respectively. For the three months ended June
30, 2003 and 2002, such accrual amounted to $173,617 and $341,835, 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, "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, the Company's Board of
Directors will review the results and evaluate the circumstances of the Credit
Enhancement relative to the Company's enterprise value, and an adjustment, if
necessary and warranted, will be made for any difference from the preliminary
valuation.
5. Settlement of Litigation
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, including
$40,000 in shares, in connection with this settlement. The balance of the
settlement value, $100,000, was accrued during the year ended December 31,
2002. At June 30, 2003, the balance remaining to be paid was $66,000.
9
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 half of 2003 saw a decline in revenues and gross profits.
Nevertheless, we generated a net profit of $123,000 this period, compared with a
net profit of $1,060,000 in the comparable 2002 period. 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 related to the war with Iraq.
The second and more local factor was the severe and prolonged winter weather
conditions and stormy spring that occurred in the New York metropolitan area
during the first half of 2003. The result was fewer new vehicle sales which
accounted for decreased revenues and a decrease in profit margins on our used
vehicle sales.
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 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.
10
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 six months ended June 30, 2003 and 2002, aggregate floor plan interest
included in operating expense was $1,204,000 and $884,000, respectively. For the
three months ended June 30, 2003 and 2002, aggregate floor plan interest
included in operating expense was $630,000 and $392,000 respectively. The
increase in 2003 of interest expense relative to flat sales volume is primarily
attributable to the substantially higher levels of vehicle inventory maintained
during the current year as compared with 2002.
For the six months ended June 30, 2003 and 2002, aggregate floor plan assistance
now included as a reduction of cost of sales was $636,000 and $646,000,
respectively. For the three months ended June 30, 2003 and 2002, aggregate floor
plan assistance now included as a reduction of cost of sales was $365,000 and
$370,000, respectively.
11
Advertising assistance received from manufacturers for the six months ended June
30, 2003 and 2002, now included as a reduction of cost of sales, was $536,000
and $272,000, respectively. Advertising assistance received from manufacturers
for the three months ended June 30, 2003 and 2002, now included as a reduction
of cost of sales, was $214,000 and $186,000, respectively.
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 - SIX MONTHS ENDED JUNE 30, 2003 AND SIX MONTHS ENDED JUNE
30, 2002
Revenues. Revenues for the six-month period ended June 30, 2003 decreased to
approximately $190.0 million, which is $4.9 million, or 2.5%, less than the
prior comparable period's revenues of $194.9 million. Such decrease was solely
attributable to the revenues of our automotive dealerships' operations. The
primary reason for the decrease in revenues were decreased new vehicle unit
sales and a decrease in parts and service revenue that were only partially
offset by an increase in used vehicle units sold. New vehicle sales decreased by
361 units in the first half of 2003 to 2,503 units from 2,864 units in the first
half of 2002, primarily, because of decreased fleet sales, while used vehicle
sales substantially offset this decline by increasing 336 units to 7,824 units
in the 2003 first half from 7,488 units, retail and wholesale, in the prior
year's comparable six months. However, the average sales price of used vehicles
declined by $112 per vehicle and parts and service revenue declined by
approximately 19% from the prior year's comparable period. An average of
approximately 1,304 used vehicles, company-wide, retail and wholesale, were sold
during each of the months in the 2003 period, compared with an average of 1,248
units per month in the 2002 comparable period. Management believes that the
current economic conditions, including the effects of the Iraq war, that have
had a negative effect on the
12
automobile industry, in general, have also adversely impacted our business. In
addition, the severe winter conditions that ran into the spring have been a
significant factor in the downturn from last year's six-month and three-month
results.
Cost of sales. The cost of sales decrease of approximately $2.8 million, or
1.7%, to $157.8 million in the first half of 2003 from $160.6 million for the
six months ended June 30, 2002, is solely attributable to our automotive
dealerships' operations. This decrease is significantly attributable to the 361
unit decline in new vehicle sales.
Gross profit. Our automotive dealerships' operations generated all of the total
gross profit of $32.2 million for the six months ended June 30, 2003, a decrease
of approximately $2.1 million, or 6.1%, from gross profits of $34.3 million in
the prior year's comparable period. The decrease in gross profit was primarily
attributable to the lower number of new vehicles sold and the lower gross profit
per used vehicle sold in the 2003 period compared with the first six months of
2002.
Operating expenses. In the six months ended June 30, 2003, operating expenses
decreased approximately $200,000, or 0.6%, to approximately $31.7 million, from
approximately $31.9 million in the prior year's comparable period. All of this
decrease is attributable to our automotive dealerships' operations. This
decrease is primarily attributable to the implementation of overhead reductions
as partially offset by a $300,000 increase in interest related to our floor plan
financing, which was $1.2 million in the 2003 six-month period compared with
$900,000 in the comparable 2002 period. This increase in floor plan interest is
associated with the higher inventory levels that we maintained in the 2003
period as compared with the first six months of 2002.
Interest expense, net. Net interest expense had a net decrease of approximately
$148,000 in the first half of 2003 compared with 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 expenses for 2003.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2003 AND THREE MONTHS ENDED
JUNE 30, 2002
Revenues. Revenues for the three-month period ended June 30, 2003 decreased to
approximately $98.9 million, which is $4.6 million, or 4.4%, less than the prior
comparable period's revenues of $103.5 million. Such decrease was solely
attributable to the revenues of our automotive dealerships' operations. The
primary reason for the decrease in revenues was the decrease in new vehicles
sold. New vehicle unit sales decreased by 173 units, or 12.3%, in the current
quarter compared with the 2002 second quarter, while used vehicle sales were
flat quarter to quarter. Revenue per new vehicle sold also decreased by $524 per
vehicle in the 2003 second quarter as compared with the second quarter of 2002,
while revenue per used vehicle sold decreased by approximately $44 in the 2003
period from the comparable quarter in the prior year. Management believes that
the current economic conditions, including the effects of the Iraq war, that
have had a negative effect on the automobile industry, in general, have also
adversely impacted our business. In addition, the severe winter conditions that
ran into the spring have been a significant factor in the downturn from last
year's three-month results.
Cost of sales. The cost of sales decrease of approximately $3.5 million, or
4.1%, to $82.0 million in the second quarter of 2003 from $85.5 million for the
three months ended June 30, 2002 is
13
solely attributable to our automotive dealerships' operations. This decrease
is significantly attributable to the 173 unit decline and lower average cost, an
average decrease of $1,129 per vehicle, in new vehicle sales.
Gross profit. Our automotive dealerships' operations generated the total gross
profit of $16.9 million for the three months ended June 30, 2003, a decrease of
$1.2 million, or 6.6%, from gross profits of $18.1 million in the prior year's
comparable quarter. The decrease in gross profit was primarily attributable to
the decrease in volume of new vehicle sales as well lower dollar margins of new
and used vehicles sold in the period.
Operating expenses. In the three months ended June 30, 2003, operating expenses
decreased approximately $.8 million, or 4.7%, to approximately $16.1 million,
from $16.9 million in the prior year's comparable quarter. This decrease is
primarily attributable to the implementation of overhead reductions as partially
offset by a $238,000 increase in interest related to our floor plan financing,
which was $630,000 in the 2003 second quarter compared with $392,000 in the
comparable 2002 period. This increase in floor plan interest is associated with
the higher inventory levels that we maintained in the 2003 period as compared
with the first six months of 2002.
Interest expense, net. Net interest expense had a net decrease of approximately
$76,000 to $151,000 in the second quarter of 2003 from approximately $227,000
recorded in the comparable prior period. This decrease 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 expenses for 2003.
ASSETS, LIQUIDITY AND CAPITAL RESOURCES - JUNE 30, 2003
At June 30, 2003, our total assets were $84.0 million, a decrease of
approximately $3.2 million from total assets of $87.2 million at December 31,
2002. This aggregate decrease is primarily related to the decreases in our
inventories of $2.8 million and accounts receivable of $4.0 million, as
partially offset by increases in our cash and cash equivalents of $2.7 million
and due from related parties of $1.1 million.
For the six months ended June 30, 2003, we had a net increase in cash and cash
equivalents of $2,673,607. The primary reason for this increase was the net cash
provided by our operating activities of $3,148,807.
The net cash provided by our operating activities of $3,148,807 was comprised of
our net income of $123,116, plus net non-cash charges of $194,976 and a net
decrease in assets of $5,976,105 (attributable, primarily, to the decreases in
accounts receivable of $4,052,682 and inventories of $2,759,427 and an increase
in due to related parties of $964,492), as partially offset by a net decrease in
liabilities of $3,145,390 (primarily attributable to a decreases in floor plan
notes payable of $4,027,014 and accrued expenses and customer deposits
aggregating $860,381, as partially offset by an increase in accounts payable of
$1,742,005). This is reflective of both our reduced level of inventory and the
related floor plan liability in the first half of 2003 after its build up at
year-end, as well as our collection of cash from prior fleet sales during the
first half of 2003.
Additionally, our net cash use of $34,075 in our investing activities, is
primarily attributable to purchases of property and equipment.
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We used $441,125 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 $2,673,607 for the six months ended June 30, 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 $364,000 for the last six months of 2003, $1.9 million for
2004, $544,000 for 2005 and $5.1 million, thereafter, and lease payments of
$691,000 for the last six months of 2003, $1.4 million for 2004, $1.3 million
for 2005 and $3.3 million, thereafter. 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.
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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 of 1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (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.
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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 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.
Evaluation of disclosure controls and procedures. Based on the evaluation of our
disclosure controls and procedures (as defined in the Exchange Act Rules
13a-15(e) and 15d-15(e)) required by the Exchange Act Rules 13a-15(b) or
15d-15(b), our Chief Executive Officer and Acting Chief Financial Officer has
concluded that as of the end of the period covered by this report, our
disclosure controls and procedures were effective.
Changes in internal controls. There were no significant changes in our internal
controls or in other factors that could significantly affect those controls
subsequent to the date of our evaluation.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter, there were no significant developments in our legal
proceedings. For a detailed discussion of our legal proceedings, please refer to
Note 5 of the Notes to our Consolidated Condensed Financial Statements contained
herein, and our 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, we issued 4,500 shares of our common stock to David
Edelstein, at a per share price of $0.74, as compensation for services as an
outside member of our Board of Directors.
2. On April 30, 2003, we issued 4,500 shares of our common stock to Jeffrey
Weiner, at a per share price of $0.74, as compensation for services as an
outside member of our Board of Directors.
3. On April 30, 2003, we issued 4,500 shares of our common stock to Steven Nawi,
at a per share price of $0.74, as compensation for services as an outside member
of our Board of Directors.
4. On April 30, 2003, we issued 4,500 shares of our 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, we issued 49,876 shares of our common stock in connection with
the settlement of a lawsuit entitled Zannett Lombardier Ltd., et al. v. The
Major Automotive Companies, Inc.
6. In March 2003, we issued 69,800 shares of our 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Chief Executive Officer's and Acting Chief Financial Officer's
Certificate Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Chief Executive Officer's and Acting Chief Financial Officer's
Certificate 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 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 14, 2003 /s/ Bruce Bendell
-----------------
Bruce Bendell
Chairman of the Board and Chief
Executive Officer and Acting Chief
Financial Officer
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