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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, 2004 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 [X] NO [ ]
As of May 24, 2004, there were 9,492,856 shares of the registrant's common stock
outstanding.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements .................................................. 3
Consolidated Condensed Balance Sheets ......................................... 3
Consolidated Condensed Statements of Operations .............................. 5
Consolidated Condensed Statements of Cash Flows ............................... 6
Notes to Consolidated Condensed 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 ............ 18
Item 4. Controls and Procedures ............................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................... 19
Item 2. Changes in Securities and use of proceeds ............................. 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 ...................................... 19
Signatures .................................................................... 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 938,237 $ 1,003,137
Short-term investments 430,325 430,325
Net investment in direct financing leases, current 200,187 213,311
Accounts receivable, net 11,400,968 11,204,480
Inventories 48,197,788 50,257,955
Due from related parties 1,754,043 2,515,749
Other current assets 274,119 277,942
----------- -----------
TOTAL CURRENT ASSETS 63,195,667 65,902,899
Net investment in direct financing leases,
net of current portion 29,492 62,773
Property and equipment, net 4,834,663 4,899,059
Deferred income taxes 1,696,000 1,576,000
Excess of costs over net assets acquired 13,589,000 13,589,000
Due from officer 1,395,358 1,395,358
Notes receivable and other assets 236,012 187,850
----------- -----------
TOTAL ASSETS $84,976,192 $87,612,939
=========== ===========
3
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable - floor plan $ 47,224,846 $ 49,599,366
Accounts payable 7,572,292 7,761,992
Accrued expenses 5,042,420 4,955,215
Current maturities of long-term debt 1,970,425 701,741
Customer deposits and other current liabilities 741,738 567,846
------------ ------------
TOTAL CURRENT LIABILITIES 62,551,721 63,586,160
Long-term debt, less current maturities 5,741,814 7,156,125
------------ ------------
TOTAL LIABILITIES 68,293,535 70,742,285
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value- 2,000,000 shares
authorized; 0 shares issued and outstanding
in 2004 and 2003 -- --
Common stock, $.01 par value- 50,000,000 shares
authorized; 9,702,047 shares issued and 9,474,856
shares outstanding in 2004 and 2003 97,020 97,020
Additional paid in capital 40,175,709 40,175,709
Deficit (21,626,308) (21,438,311)
Treasury stock, at cost; 227,191 shares in 2004 and 2003 (1,963,764) (1,963,764)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 16,682,657 16,870,654
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 84,976,192 $ 87,612,939
============ ============
4
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2004 2003
------------ ------------
Sales $ 84,871,806 $ 91,145,991
Cost of sales 70,757,927 76,616,109
------------ ------------
Gross profit 14,113,879 14,529,882
Operating expenses 14,214,115 14,686,285
Interest expense, net of interest income 188,173 300,825
------------ ------------
Loss before income taxes (288,409) (457,228)
Income tax expense benefit (expense) 100,412 (20,000)
------------ ------------
Net loss $ (187,997) $ (477,228)
============ ============
Net loss per common share:
Basic $ (0.02) $ (0.05)
Diluted $ (0.02) $ (0.05)
============ ============
Average number of shares used in computation:
Basic 9,474,856 9,341,058
Diluted 9,474,856 9,341,058
============ ============
5
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (187,997) $ (477,228)
Adjustments to reconcile net loss
to net cash provided by (used in) operating activities
Depreciation and amortization 92,682 89,371
Deferred income taxes (120,000) --
Reduction of allowance for doubtful accounts (118,322) (79,530)
(Increase) decrease in assets:
Net investment in direct financing leases 46,405 24,620
Accounts receivable (78,166) 2,446,280
Inventories 2,060,167 (2,752,139)
Due from related parties 761,706 (863,538)
Other assets (44,339) 128,715
Increase or (decrease) in liabilities
Accounts payable (189,700) 4,248,100
Accrued expenses 87,205 (708,318)
Customer deposits and other current liabilities 173,892 (531,455)
Notes payable - floor plan (2,374,520) 1,492,318
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 109,013 3,017,196
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (37,547) (7,804)
Proceeds from sale of leased equipment 9,261 --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (28,286) (7,804)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt (145,627) (163,071)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (145,627) (163,071)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (64,900) 2,846,321
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,003,137 796,074
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 938,237 $ 3,642,395
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 429,869 $ 599,992
Income taxes 10,000 17,000
6
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
March 31, 2004
1. Basis of Presentation and Significant Accounting Policies
In the opinion of The Major Automotive Companies, Inc. (the "Company"), the
accompanying unaudited consolidated condensed financial statements contain all
adjustments (consisting primarily 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, 2003 consolidated financial
statements and related notes included in the Company's Form 10-K for the year
ended December 31, 2003. 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. For the three months ended March 31,
2003, warranty expense of $765,000 was reclassified from operating expense to
cost of sales to conform with the 2004 presentation.
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 2004 and 2003, because the Company
incurred a net loss, the exercise of options and warrants would have been
antidilutive and were, therefore, excluded from the calculations.
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 have been included as offsets to
inventory and cost of sales, as appropriate. Floor plan interest expense is
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, 2004 and 2003, aggregate floor plan
interest included in operating expenses was $507,696 and $433,759, respectively.
For the three months ended March 31, 2004 and 2003, aggregate floor plan
assistance received was $351,655 and $384,465, respectively. For the three
months ended March 31, 2004 and 2003, aggregate floor plan assistance of
$378,886 and $270,465, respectively, were included as a reduction of cost of
sales.
7
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
March 31, 2004
(Continued)
For the three months ended March 31, 2004 and 2003, aggregate advertising
assistance received was $170,985 and $458,179, respectively. For the three
months ended March 31, 2004 and 2003, aggregate advertising assistance of
$329,498 and $322,179, respectively, were included as a reduction of cost of
sales.
3. Inventories
Inventories are comprised of the following:
March 31, 2004 December 31, 2003
-------------- -----------------
New automobiles $11,847,100 $16,339,679
New trucks and vans 16,986,566 15,785,288
Used automobiles and trucks 17,710,206 16,618,207
Parts and accessories 1,514,040 1,473,761
Other 139,876 41,020
----------- -----------
$48,197,788 $50,257,955
=========== ===========
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, 2004 and 2003, the related party sales amounted to
$1,613,847 and $1,101,275, respectively. For the three months ended March 31,
2004 and 2003, the purchases from related parties aggregated $1,845,623 and
$5,771,282, respectively.
Pursuant to an agreement in principal with Harold Bendell, through his company,
HB Automotive, Inc., effective January 1, 2004, and a previous management
agreement, which expired, but was extended through oral agreement by the
parties, the Company has accrued management fees for services performed by HB
Automotive, Inc. and Harold Bendell. For the three months ended March 31, 2004
and 2003, such accruals amounted to $474,000 and $43,127, respectively.
As of March 31, 2004, Bruce Bendell was indebted to the Company in the amount
of $1,395,358, for which no interest has been charged. This indebtedness arose
from a series of cash advances, the latest of which was advanced prior to June
30, 2002.
5. Franchise Terminations
In February 2004, the Company sold its Subaru franchise and certain parts to an
unrelated third party for a cash purchase price of $450,000. Additionally, the
purchaser received the Company's inventory of new 2004 Subaru vehicles and
assumed the related floor liability.
All proceeds from this transaction have been put in escrow pending receipt of
certain approvals from third parties. Accordingly, because of the uncertainty,
no effect has been given to this transaction in the Company's financial
statements.
In March 2004, the Company received notice from American Suzuki Motor
Corporation, the franchisor of the Company's Suzuki dealership in Hempstead, NY,
that they have terminated the franchise agreement.
Neither the Subaru nor Suzuki dealership was material to the Company's
operations and management does not expect the sale and termination of such
dealerships to have a significant effect on results of operations or cash flow.
8
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
March 31, 2004
(Continued)
6. Subsequent Events
On April 29, 2004, the Company received a Notification of Deficiency from Nasdaq
indicating that the Company is not in compliance with Nasdaq Marketplace Rule
4310(c)(4), relating to minimum bid price per share ($1.00) for continued
listing on The Nasdaq SmallCap Market.
The Company has until October 26, 2004 to demonstrate compliance with this rule
(and maintain compliance with all other listing requirements) or face possible
delisting from The Nasdaq SmallCap Market. If, by October 26, 2004, the Company
does not demonstrate compliance with the minimum $1.00 bid price, but otherwise
satisfies the Nasdaq SmallCap Market initial listing criteria, the Company will
be granted an additional 180 day compliance period. Thereafter, if the Company
has not regained compliance within the second 180 day compliance period, but
satisfies the initial inclusion criteria, it may be afforded an additional
compliance period, up to its next shareholder meeting, provided the Company
commits to: (1) seek shareholder approval for a reverse stock split at its next
shareholder meeting; and (2) promptly thereafter effect the reverse stock split.
On April 30, 2004, the Company issued an aggregate of 18,000 shares of its
common to the four non-employee members of its Board of Directors (the "Outside
Directors") in accordance with the Company's 2001 Outside Directors' Stock Plan.
The closing price of the Company's common stock on April 30, 2004 was $0.79 per
share. Accordingly, the Company charged $14,220, the fair value of the stock
issued, as directors' compensation expense in the second quarter of 2004.
On May 17, 2004, the Company received a letter from Nasdaq indicating that the
Company is not in compliance with Nasdaq Marketplace Rules 4350A(c) and
4350A(d)(2) (the "Rules"), relating to independent director and audit committee
requirements, respectively, for continued listing on The Nasdaq SmallCap Market.
The letter indicates that the Nasdaq Staff is reviewing the Company's
eligibility for continued listing on The Nasdaq SmallCap Market. To facilitate
this review, Nasdaq has requested the Company to provide, by June 1, 2004, the
Company's specific plan and timetable to achieve compliance with the Rules,
along with relevant documentation. If, after reviewing such data, the Nasdaq
Staff determines that the plan does not adequately address the issues noted, the
Company will receive notification that its securities will be delisted. At that
time, the Company may appeal the Nasdaq Staff's determination to a Listing
Qualifications Panel.
7. 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. During the
quarter, there were no significant developments in our legal proceedings which
are discussed in detail in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2003. 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.
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.
In the first quarter of 2004, our operations result in a pre-tax loss of
$288,000 and a net loss of $188,000. In the comparable quarter of 2003, we
sustained our historically first quarterly decline in revenues and gross
profits, which resulted in a pre-tax loss of $457,000 and a net loss for that
quarter of $477,000. There are several factors that, we believe, contributed to
our results. In the 2004 quarter, our sales declined, primarily as a result of
closed dealerships, but we were able to maintain a higher average profit margin
for our Company, i.e. 16.6%, than we did in the prior year's comparable quarter,
which was 15.9%. Also, our operating expenses declined by approximately $472,000
in the 2004 first quarter compared with the 2003 first quarter and interest
expense, net of interest income, declined by more than $100,000. We believe that
these results are reflective of our implementation of effective operational
strategies, including the closing of under-performing dealerships. In addition,
however, these changes are also due to the disproportionately poor results of
the 2003 first quarter. The 2003 quarter's results were adversely affected by a
number of factors outside our control including the general decline in
automotive sales throughout the country, attributable to both the general
economy and consumer reluctance based on expectations of war with Iraq, and the
severe and prolonged winter weather conditions that prevailed in the New York
metropolitan area during the first quarter of 2003 that 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 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, and
in our Form 10-K for the year ended December 31, 2003, filed with the Securities
and Exchange Commission.
10
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.
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. Additionally, we have performed such
tests as of December 31, 2003. 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 any of the dates for
which such tests were performed. 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.
Floor Plan and Advertising Assistance. 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 have been included
as offsets to cost of sales and inventory, as appropriate. Floor plan interest
expense is 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, 2004 and 2003, aggregate floor plan
interest included in operating expense was $507,696 and $433,759, respectively.
The increase in 2004 of floor plan interest expense is reflective of the
comparatively higher levels of inventory we maintained combined with lower sales
volume in the 2004 first quarter compared with the first quarter of 2003. This
resulted in the inventory turning fewer times and, thereby, generating greater
floor plan interest costs.
For the three months ended March 31, 2004 and 2003, aggregate floor plan
assistance included as a reduction of cost of sales was $378,886 and $270,465,
respectively.
Advertising assistance received from manufacturers for the three months ended
March 31, 2004 and 2004, included as a reduction of cost of sales was $329,498
and $322,179, respectively.
11
Contingencies. We are involved, and will continue to be involved, in a number of
legal proceedings arising out of the conduct of our business, including
litigation with customers, current and former business associates and
employment-related lawsuits. We intend to vigorously defend ourselves and assert
available defenses with respect to each of these matters. Where necessary, we
have accrued our estimate of the probable costs for the resolution of these
proceedings based on consultation with outside counsel, assuming various
strategies. Further, we have certain insurance coverage and rights of
indemnification with respect to certain aspects of these matters. However, a
settlement or an adverse resolution of one or more of these matters may result
in the payment of significant costs and damages, which could have a material
adverse effect on our business, financial condition, results of operations, cash
flows and prospects.
Income Taxes. Our income tax policy requires that we compute the provision for
income taxes on the pretax income (loss) based on the current law. We provide
for deferred income taxes to show the effect of tax consequences in future years
of differences between the tax bases of assets and liabilities and their
financial reporting amounts at each year-end based on enacted tax laws and
statutory tax rates. We use valuation allowances to reduce the value of deferred
tax assets when we believe that their recovery is in doubt.
12
Three Months Ended March 31,
-------------------------------------------------------------------------------------------
($ in millions, except per vehicle data) 2004 vs. 2003 2003 vs. 2002
Variance - Variance -
Favorable % Favorable %
2004 2003 (Unfavorable) Variance 2002 (Unfavorable) Variance
---- ---- ------------- -------- ---- ------------- --------
Revenues
New vehicles $ 31.1 $ 33.4 $ (2.3) (6.9) $ 34.6 $ (1.2) (3.5)
Used vehicles 49.7 53.5 (3.8) (7.1) 50.1 3.4 6.8
Service and parts 3.9 4.1 (0.2) (4.9) 5.9 (1.8) (30.5)
Other 0.2 0.1 0.1 100.0 0.7 (0.6) (85.7)
--------- --------- --------- --------- --------- --------- ---------
Total revenues $ 84.9 $ 91.1 $ (6.2) (6.8) $ 91.3 $ (0.2) (0.2)
========= ========= ========= ========= ========= ========= =========
GROSS PROFIT
New vehicles $ 2.0 $ 3.3 $ (1.3) (39.4) $ 3.5 $ (0.2) (5.7)
Used vehicles 10.5 9.9 0.6 6.1 9.6 0.3 3.1
Service and parts 1.3 1.2 0.1 8.3 1.7 (0.5) (29.4)
Other 0.3 0.1 0.2 200.0 0.7 (0.6) (85.7)
--------- --------- --------- --------- --------- --------- ---------
Total gross profit $ 14.1 $ 14.5 $ (0.4) (2.8) $ 15.5 $ (1.0) (6.5)
========= ========= ========= ========= ========= ========= =========
NEW VEHICLES
Unit sales 1,108 1,261 (153) (12.1) 1,443 (182) (12.6)
Average revenue per vehicle $ 28,062 $ 26,451 $ 1,611 6.1 $ 24,044 $ 2,407 10.0
Average cost per vehicle $ 26,223 $ 23,819 $ 2,404 10.1 $ 21,589 $ 2,230 10.3
Gross profit per vehicle $ 1,839 $ 2,632 $ (793) (30.1) $ 2,455 $ 177 7.2
Gross profit percentage 6.6% 10.0% -3.4% (34.0) 10.2% -0.2% (2.0)
USED VEHICLES
Unit sales 3,767 3,727 40 1.1 3,447 280 8.1
Average revenue per vehicle $ 13,145 $ 14,363 $ (1,218) (8.5) $ 14,545 $ (182) (1.3)
Average cost per vehicle $ 10,396 $ 11,727 $ (1,331) (11.3) $ 11,750 $ (23) (0.2)
Gross profit per vehicle $ 2,749 $ 2,636 $ 113 4.3 $ 2,795 $ (159) (5.7)
Gross profit percentage 20.9% 18.4% 2.5% 13.6 19.2% -0.8% (4.2)
PERCENTAGE OF TOTAL REVENUES
New vehicles 36.6% 36.7% -0.1% (0.3) 37.9% -1.2% (3.2)
Used vehicles 58.5% 58.7% -0.2% (0.3) 54.9% 3.8% 6.9
Service and parts 4.6% 4.5% 0.1% 2.2 6.4% -1.9% (29.7)
Other 0.3% 0.1% 0.2% 200.0 0.8% -0.7% (87.5)
--------- --------- --------- --------- --------- --------- ---------
100.0% 100.0% 0.0% 0.0% 100.0% 0.0% 0.0%
========= ========= ========= ========= ========= ========= =========
OTHER OPERATING DATA
Total operating expenses $ 14.2 $ 14.7 $ (0.5) (3.4) $ 14.2 $ 0.5 3.5
Floor plan interest (included
in operating expenses) 0.5 0.4 0.1 25.0 0.5 (0.1) (20.0)
13
RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2004 AND THREE MONTHS ENDED
MARCH 31, 2003
Revenues. Revenues for the three-month period ended March 31, 2004 decreased to
approximately $84.9 million, which is $6.2 million less than the prior
comparable period's revenues of $91.1 million. The primary reason for the
decrease in revenues was a significant decline in new vehicle unit sales,
partially offset by a small increase in used vehicle unit sales. However, an
increase in the average sales price in new vehicles was not sufficient to
offset the decline in units. New vehicle sales decreased by 153 units in the
first quarter of 2004 to 1,108, units from 1,261 units in the first quarter of
2003. The average revenue per new vehicle sold increased by $1,611 to $28,062
in the first quarter of 2004 from $26,451 in the first quarter of 2003. In
total, new vehicle revenues declined approximately $2.3 million or 6.9% to
$31.1 million in the first quarter of 2004 from $33.4 million in the comparable
prior quarter. Used vehicle sales increased 40 units to 3,767 units in 2004's
first quarter over 3,727 units, retail and wholesale, in the prior year's
comparable quarter. The average sales price of used vehicles sold decreased by
$1,218 to $13,145 in the first quarter of 2004 from $14,363 in the first
quarter of 2003. The result of relatively flat used vehicle unit sales combined
with a sharp decrease and the average sales price of such vehicles resulted in
a decrease in total used vehicle sales revenues of approximately $3.8 million
or 7.1% to $49.7 million in the first quarter of 2004 from $53.5 million in the
comparable quarter in 2003. The decrease in new unit sales in this quarter is
primarily attributable to sales by the dealerships we have recently closed. The
increase in average revenue per new vehicle sold, reflect the closure of
dealerships with new vehicles at the lower end of our pricing spectrum. The
decline in used vehicle sales prices reflects our efforts at remaining
competitive in our operating area. 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 decreased approximately $5.8 million, or 7.6%,
to $70.8 million in the first quarter of 2004 from $76.6 million for the three
months ended March 31, 2003. This decrease is primarily the result in the
average cost of new vehicles, which increased by $2,404 per vehicle sold in the
first quarter of 2004 compared with the first quarter of 2003. The average cost
of each used vehicle sold decreased by $1,331 in the 2004 first quarter compared
with the same period in 2003. This decrease in the average cost of used vehicles
sold, coupled with the relative high unit sales volume of such vehicles, more
than offset the cost increase of new vehicles with their much lower unit sales
volume, resulting in the almost $6 million decrease in cost of sales.
Gross profit. Our gross profit was $14.1 million for the three months ended
March 31, 2004, a decrease of approximately $400,000, or 2.8%, from gross
profits of $14.5 million in the prior year's comparable quarter. The decrease in
gross profit was attributable to both the decrease in the number of new vehicles
sold and an average decline of $793 in gross profit for each new vehicle sold.
We were able to substantially offset the resulting decline in gross profit by an
increase of $113 in the average gross profit of used vehicles sold combined with
a volume of more than three used vehicles sold for every new vehicle sold. Gross
profits as a percentage of sales increased to 16.6% in the first quarter of 2004
from 15.9% in the prior year's comparable quarter. This increase, we believe,
is, primarily, the result of our efforts and ability to selectively buy and sell
used vehicles in an efficient manner that takes advantage of changes in the
marketplace as they occur.
14
Operating expenses. In the three months ended March 31, 2004, operating expenses
decreased approximately $500,000 or 3.4%, to approximately $14.2 million, from
$14.7 million in the prior year's comparable quarter. This decrease is primarily
attributable to the effects of the closure of several of our dealerships
combined with other cost cutting and economies of scale initiatives during the
first quarter of 2004. Interest related to our floor plan financing was $508,000
in the 2004 period compared with $434,000 in the comparable 2003 period. On
average, we maintained a higher inventory level in 2004, while sales declined.
This resulted in lower inventory turnover and, therefore, higher carrying costs
in the form of floor plan interest.
Interest expense, net. Net interest expense had a net decrease of approximately
$113,000 to $188,000 in the first quarter of 2004 from interest expense of
$301,000 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 both deferred federal tax
amounts based on our estimated annual results of operations and state and local
taxes. In the first quarter of 2004, we increased our deferred tax asset by
$120,000, the amount of tax benefit we recorded in this period.
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 $180. The decrease in new unit sales in this quarter
is primarily attributable to sales by the 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
$76.6 million in the first quarter of 2003 from $75.9 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 $23 in the 2003 first quarter compared with the
same period in 2002.
Gross profit. Our automotive operations generated almost the entire gross profit
of $14.5 million for the three months ended March 31, 2003, a decrease of
approximately $1.0 million, or 6.5%, from gross profits of $15.5 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 $159. Gross profits as
a percentage of sales decreased to 15.9% in the first quarter of 2003 from 17.0
% in the prior year's comparable quarter. This decrease was reflective of
15
our efforts to sell vehicles in a marketplace that had been adversely affected
by the economy, consumer reluctance and competition.
Operating expenses. In the three months ended March 31, 2003, operating expenses
increased approximately $500,000 or 3.5%, to approximately $14.7 million, from
$14.2 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 did not expect any federal income tax expense for 2003.
LIQUIDITY AND CAPITAL RESOURCES - MARCH 31, 2004
At March 31, 2004, our total assets were $85.0 million, a decrease of
approximately $2.6 million from total assets of $87.6 million at December 31,
2003. This aggregate decrease is primarily related to the decreases in our
inventories of $2.1 million and due from related parties of $762,000, as
partially offset by an increase in accounts receivable of $200,000.
For the three months ended March 31, 2004, we had a net decrease in cash and
cash equivalents of $64,900. The primary reason for this decrease was the net
cash used in our financing activities of $145,627.
The net cash used in our financing activities, aggregating $145,627, for payment
of long-term debt,the purchase of property and equipment, combined with the cash
used in our investing activities, $28,286, for the purchase of property and
equipment, constituted our total use of cash of $173,913.
This was substantially offset by the $109,013 of net cash provided by our
operations, comprised of our net loss of $187,997, plus non-cash net credits of
$145,640 and a net decrease in assets of $2,745,773 (primarily from decreases of
$2,060,167 and $761,706 in inventories and due from related parties,
respectively, as partially offset by the increase in accounts receivable of
$78,166), substantially reduced by the decrease in liabilities of $2,303,123
(attributable, primarily to the decrease in floor plan notes payable of
$2,374,520). This is reflective of our reduction of our inventories and
related floor plan liabilities during this period of reduced sales.
The foregoing activities, i.e., operating, investing and financing, resulted in
the net decrease of $64,900 in our cash and cash equivalents for the three
months ended March 31, 2004.
Our working capital decreased to approximately $600,000 at March 31, 2004 from
approximately $2.3 million at December 31, 2003, primarily as result of a note
for approximately $1.3 million, which has a due date in January 2005, with M&K
Equities, Inc., a related party. The due date of such note has been extended
at the end of each of the years ended December 31, 2002 and 2003. We may seek
to extend such due date at December 31, 2004. However, there can be no
assurance, should we seek such extension, that it will be available to us.
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 $688,000 for the last nine months of 2004, $2.0 million for
2005, $479,000 for 2006 and $4.1 million, thereafter, and lease payments of $1.1
million for the last nine months of 2004, $1.3 million for 2005 and $1.3 million
for 2006. 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.
We believe that such agreement will be extended or renegotiated. However, there
can be no assurance that we and Mr. Bendell will agree on terms or, if agreed
upon, that such terms will not include material increases in cash or other
compensation to Mr. Bendell. All of these obligations are funded, principally,
from cash flows from operations and borrowings under floor plan financings.
16
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.
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 some vehicles in certain Eastern European countries,
principally, Ukraine, Belarus and Kazakhstan, 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
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 the end of the period covered by this report (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.
18
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
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2003.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
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.
31.1 Certification of Chief Executive Officer and Acting Chief
Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Acting Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
None.
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 24, 2003 /s/ Bruce Bendell
------------------
Bruce Bendell
President, Chief Executive Officer and
Acting Chief Financial Officer
19