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UNITED STATES
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 September 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 November 13, 2003, there were 9,474,856 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............................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 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................................................. 18
Signatures............................................................................... 19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30,
2003 December 31, 2002
---- -----------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 2,825,425 $ 796,074
Certificates of deposit 428,364 425,930
Net investment in direct financing leases, current 188,998 164,555
Accounts receivable, net 10,928,586 15,179,194
Inventories 45,623,163 46,520,973
Due from related parties 2,613,298 1,130,966
Deferred income taxes 1,576,000 1,576,000
Other current assets 924,919 506,435
----------- -----------
Total current assets 65,108,753 66,300,127
Net investment in direct financing leases,
net of current portion 132,269 233,937
Property and equipment, net 4,356,253 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 288,161 790,374
----------- -----------
Total assets $84,869,794 $87,247,341
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable - floor plan $ 42,267,912 $ 46,224,707
Accounts payable 8,706,638 6,727,578
Accrued expenses 6,344,755 6,991,326
Current maturities of long-term debt 1,980,850 675,452
Customer deposits and other current liabilities 693,198 978,981
------------ ------------
Total current liabilities 59,993,353 61,598,044
Long-term debt, less current maturities 5,940,794 7,701,700
------------ ------------
Total liabilities 65,934,147 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 9,474,856 and 9,337,180 shares outstanding
in 2003 and 2002, respectively 97,021 95,643
Additional paid in capital 40,175,708 40,123,765
Deficit (19,373,318) (20,308,047)
Treasury stock, at cost; 227,191 shares in 2003 and 2002 (1,963,764) (1,963,764)
------------ ------------
Total stockholders' equity 18,935,647 17,947,597
------------ ------------
Total liabilities and stockholders' equity $ 84,869,794 $ 87,247,341
============ ============
See accompanying notes to condensed consolidated financial statements.
4
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
For the Nine months Ended For the Three Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Sales $ 293,976,023 $ 306,686,431 $ 103,957,296 $ 111,809,075
Cost of sales 243,541,974 254,053,836 85,723,198 93,427,203
------------- ------------- ------------- -------------
Gross profit 50,434,049 52,632,595 18,234,098 18,381,872
Operating expenses 48,818,281 48,704,697 17,078,846 16,804,325
Interest expense, net of interest income 588,040 646,498 277,640 187,776
------------- ------------- ------------- -------------
Income before income taxes and
loss from discontinued operations 1,027,728 3,281,400 877,612 1,389,771
Income tax expense (benefit) 93,000 805,000 66,000 (27,000)
------------- ------------- ------------- -------------
Income from continuing operations 934,728 2,476,400 811,612 1,416,771
Loss from discontinued operations
(net of income tax benefits of $138,000) -- 206,000 -- 206,000
------------- ------------- ------------- -------------
Net income $ 934,728 $ 2,270,400 $ 811,612 $ 1,210,771
============= ============= ============= =============
Income per common share -
continuing operations
Basic $ 0.10 $ 0.27 $ 0.09 $0 .15
Diluted $ 0.10 $ 0.26 $ 0.09 $0 .15
Loss per common share -
discontinued operations
Basic -- $ 0.02 -- $ 0.02
Diluted -- $ 0.02 -- $ 0.02
Net income per common share
Basic $ 0.10 $ 0.25 $ 0.09 $ 0.13
Diluted $ 0.10 $ 0.24 $ 0.09 $ 0.13
============= ============= ============= =============
Average number of shares used in computation:
Basic 9,424,201 8,947,985 9,474,856 9,341,680
Diluted 9,427,048 9,339,341 9,477,741 9,344,175
============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
5
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30,
(Unaudited)
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 934,728 $ 2,270,400
Adjustments to reconcile net income
to net cash provided by (used in) operating activities
Amortization of intangible assets -- 45,000
Depreciation 278,246 308,626
Amortization of stock-based compensation -- 80,750
Stock issued for compensation and services 53,321 206,000
Additions to (reductions of) allowance for doubtful accounts (18,058) 137,000
(Increase) decrease in assets:
Net investment in direct financing leases 77,225 (69,591)
Accounts receivable, net 4,268,666 1,877,465
Inventories 1,342,233 (5,218,645)
Due from related parties (1,482,332) (1,589,289)
Other assets 83,729 2,923,863
Increase or (decrease) in liabilities
Accounts payable 1,979,060 (424,694)
Accrued expenses (646,571) 535,371
Customer deposits and other liabilities (285,783) 1,210,165
Notes payable - floor plan (3,956,795) 461,177
----------- -----------
NET CASH PROVIDED IN OPERATING ACTIVITIES 2,627,669 2,753,598
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (140,376) (45,080)
Proceeds from certificate of deposit 425,930 --
Purchase of certificate of deposit (428,364) --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (142,810) (45,080)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment of long-term debt (455,508) (2,173,152)
Payment of capital lease obligations -- (111,643)
Loans to officers -- 175,879
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (455,508) (2,108,916)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,029,351 599,602
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 796,074 4,294,826
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,825,425 $ 4,894,428
=========== ===========
6
Supplemental Disclosures of Cash Flows Information
Cash paid during the period for:
Interest $ 2,128,009 $ 1,576,172
Income taxes
43,000 -
See accompanying notes to condensed consolidated financial statements.
7
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
September 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 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. Advertising assistance payments, which were previously accounted for
as a reduction of floor plan interest expense, together with floor plan
assistance payments, have been included as offsets to inventory and cost of
sales, as appropriate. Floor plan interest expense is included as a component of
operating expense in the accompanying consolidated condensed statement of
operations.
For the nine months ended September 30, 2003 and 2002, aggregate floor plan
interest included in operating expenses was approximately $1,539,000 and
$1,515,000, respectively. For the three months ended September 30, 2003 and
2002, aggregate floor plan interest included in operating expenses was
approximately $361,000 and $631,000, respectively.
8
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
September 30, 2003
(Continued)
For the nine-month and three-month periods ended September 30, 2003 and 2002,
aggregate floor plan assistance received was, as follows:
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Total floor plan assistance received $ 1,115,556 $ 1,211,338 $ 390,007 $ 478,739
=========== ============== =========== ===========
Amount included in cost of sales $ 1,044,556 $ 1,211,338 $ 409,007 $ 478,739
=========== ============== =========== ===========
For the nine-month and three-month periods ended September 30, 2003 and 2002,
aggregate advertising assistance received was, as follows:
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Total advertising assistance received $ 830,340 $ 575,232 $ 209,209 $ 296,053
=========== ============== =========== ===========
Amount included in cost of sales $ 778,340 $ 575,232 $ 233,209 $ 296,053
=========== ============== =========== ===========
3. Inventories
Inventories are comprised of the following:
September 30, 2003 December 31, 2002
------------------ -----------------
New automobiles $ 14,388,651 $ 15,794,564
New trucks and vans 11,132,312 11,733,652
Used automobiles and trucks 18,920,273 17,148,771
Parts and accessories 1,113,160 1,832,196
Other 68,767 11,790
-------------- ------------
$ 45,623,163 $ 46,520,973
============== ============
9
THE MAJOR AUTOMOTIVE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Unaudited
September 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"), rent adjustment of approximately
$600,000 in connection with a dealership located on property owned by the
Bendells and 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 nine-month periods
ended September 30, 2003 and 2002, the related party sales and purchases were
as follows:
Nine Months Ended September 30, Three Months Ended September 30,
------------------------------- --------------------------------
2003 2002 2003 2002
---- ---- ---- ----
Related party sales $ 3,916,597 $ 3,140,484 $ 1,679,939 $ 1,385,094
============ ============= ================ ===========
Related party purchases $ 11,825,096 $ 11,132,584 $ 2,169,911 $ 2,251,002
============ ============= ================ ===========
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 nine months ended September 30, 2003 and 2002, such
accrual amounted to $422,050 and $856,000 respectively. For the three months
ended September 30, 2003 and 2002, such accrual amounted to $205,306 and
$315,282, 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 Company's
Board of Directors has agreed to obtain independent valuations of such credit
enhancement and collateral usage (collectively, the "Credit Enhancement") and
pay each of the Bendell's the fair value of his respective contributions. The
Company engaged an independent valuation firm and 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. In the third quarter of 2003, the Company's Board of Directors received
additional indications that the value of the Credit Enhancement may approximate
$450,000. As such, the Company accrued an additional $290,000 in the third
quarter of 2003. When the Company's Board of Directors is satisfied that it has
all of the information necessary for its analysis, it will review such data and
evaluate the circumstances of the Credit Enhancement relative to the Company's
enterprise value. Adjustment, if necessary and warranted, will be made for any
difference from the aggregate $450,000 that has been accrued.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our and our subsidiaries' ("we" or the "Company")
operations, financial condition, liquidity and capital resources should be read
in conjunction with our unaudited Consolidated Condensed Financial Statements
and related notes thereto included elsewhere herein.
This discussion contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. Our actual results could differ
significantly from the results discussed in the forward-looking statements.
The Company
On May 14, 1998, The Major Automotive Companies, Inc., 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 nine months of 2003 saw a decline in revenues and gross profits.
Nevertheless, we generated a net profit of $934,728 this period, compared with a
net profit of $2,270,400 in the comparable 2002 period. This was an increase of
$811,612 from the first half of 2003. There are several factors that, we
believe, contributed to this result. First, there was a 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. This resulted in fewer new vehicle sales during the first half of
the year, which accounted for decreased revenues and profitability. However, the
third quarter of 2003 showed a trend towards more normal seasonal profit levels
with our gross profit for the quarter down approximately $150,000, only 1.1%
less than the prior year's comparable quarter.
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.
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
11
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 our
margin performance.
For the nine months ended September 30, 2003 and 2002, aggregate floor plan
interest included in operating expense was $1,539,000 and $1,515,000,
respectively. For the three months ended September 30, 2003 and 2002, aggregate
floor plan interest included in operating expense was $361,000 and $631,000,
respectively. The relatively small increase in floor plan interest expense
incurred in the nine months ended September 30, 2003 compared with the same
period in 2002 reflects a relatively flat level of sales during the periods. The
decrease of floor plan interest for the three months ended September 30, 2003
compared with the same 2002 period is reflective of the higher levels of
inventory that were maintained in the 2002 period.
For the nine months ended September 30, 2003 and 2002, aggregate floor plan
assistance now included as a reduction of cost of sales was $1,045,000 and
$1,211,000, respectively. For the three months ended September 30, 2003 and
2002, aggregate floor plan assistance now included as a reduction of cost of
sales was $409,000 and $478,000, respectively.
Advertising assistance received from manufacturers for the nine months ended
September 30, 2003 and 2002, now included as a reduction of cost of sales, was
$778,000 and $575,000, respectively. Advertising assistance received from
manufacturers for the three months ended September 30, 2003 and 2002, now
included as a reduction of cost of sales, was $233,000 and $296,000,
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
12
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 - NINE MONTHS ENDED SEPTEMBER 30, 2003 AND NINE MONTHS
ENDED SEPTEMBER 30, 2002
Revenues. Revenues for the nine-month period ended September 30, 2003 had a net
decrease to approximately $293.9 million, which is $12.7 million, or 4.1%, less
than the prior comparable period's revenues of $306.6 million. The primary
reasons for the net decrease in revenues was the decrease in the number of
vehicles sold and the decrease in average selling prices of used vehicles. New
vehicles sold declined by 461 units in the first three quarters of 2003 to 3,929
units from 4,390 units in the first three quarters of 2002, while used vehicle
sales increased 543 units to 12,677 units in the 2003 first three quarters from
12,134 units, retail and wholesale, in the prior year's comparable nine months.
Although selling prices of new vehicles increased almost $2,000 per vehicle, it
wasn't enough to offset the decline in units sold. Similarly, although we sold
more used vehicles in the current year's nine-month period than we did in the
prior comparable period, such volume was not sufficient to offset the decline in
the average selling price of used vehicles. We believe that, due, in large part,
to the significant factory incentives offered to purchasers of new vehicles, a
large number of potential high line used vehicle purchasers were able to buy new
vehicles. As a result, the used vehicle sales mix changed toward those vehicles
at the lower end of the sales price range.
Cost of sales. The cost of sales decrease of $10.6 million, or 4.2%, to $243.5
million in the first three quarters of 2003 from $254.1 million for the nine
months ended September 30, 2002, is approximately the same as the decreased
sales revenue percentage and reflects an increase of $725 in the average cost of
new vehicles sold and a decrease of $593 in the average unit cost of used
vehicles sold.
Gross profit. Our automotive operations generated total gross profit of $50.4
million for the nine months ended September 30, 2003, a decrease of
approximately $2.2 million, or 4.2%, from gross profits of $52.6 million in the
prior year's comparable period. The decrease in gross profit was almost totally
attributable to the average sales price decrease on used vehicles sold in the
current period. Specifically, our Long Island City dealership's used vehicle
sales generated almost the entire decrease in gross profit. Gross profit as a
percentage of revenues remained relative steady at 17.1% and 17.2% in the nine
months ended September 30, 2003 and 2002, respectively.
Operating expenses. In the nine months ended September 30, 2003, operating
expenses increased approximately $100,000, or 0.2%, to approximately $48.8
million, from $48.7 million in the prior year's comparable period. All of this
increase is attributable to our accrual of $290,000 of additional expense in
13
connection with a floor plan credit enhancement arrangement, as partially offset
by a decline in other expenses related to our automotive dealerships'
operations. Interest expense, relating primarily to our floor plan and included
in operating costs, remained flat at approximately $1.5 million in each of the
periods. This is reflective, primarily, of the lower interest rates in effect
during the current period as substantially offset by increased inventory
levels.
Interest expense. Interest expense relates to short-term and long-term
borrowings and there was no significant change in the underlying borrowings'
amounts or rates.
Income tax expense (benefit). Income tax expense reflects only minimum federal
tax and state and local taxes, since we do not expect any federal income tax
expense for 2003.
Discontinued operations. We had a loss from discontinued operations of $206,000
(net of $138,000 of income tax benefits) in the first three quarters of 2002,
compared with no loss from discontinued operations in the comparable current
period. The loss in 2002 represents the cost of litigation settlements and
reduced realization of notes receivable relating to the discontinued operations
in excess of amounts we had previously provided.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2003 AND THREE MONTHS
ENDED SEPTEMBER 30, 2002
Revenues. Revenues for the three-month period ended September 30, 2003 decreased
to approximately $104.0 million, which is $7.8 million, or 7.0%, less than the
prior comparable period's revenues of $111.8 million. This decrease is
substantially attributable to sharp decline in used vehicle average sales prices
from $14,611 in the third quarter of 2002 to $12,861 in the current period. We
believe that this decrease is reflective of the sales mix where a larger volume
of lower priced vehicles is being sold
Cost of sales. The cost of sales decrease of $7.7 million, or 8.2%, to $85.7
million in the third quarter of 2003 from $93.4 million for the three months
ended September 30, 2002 is solely attributable to our automotive dealerships'
operations. This decrease is consistent with the decrease in sales.
Gross profit. Our automotive dealerships' operations generated the total gross
profit of $18.2 million for the three months ended September 30, 2003, a
decrease of $150,000, or 1.1%, from gross profits of $18.3 million in the prior
year's comparable quarter. The relatively flat gross profits, in a period
experiencing a sales decline is reflective of our ability to acquire reasonably
priced cars and in anticipation of market demand changes. As such, gross profit
as a percentage of revenues increased to 17.5% in the three months ended
September 30, 2003 from 16.5% in the prior comparable quarter.
Operating expenses. In the three months ended September 30, 2003, operating
expenses decreased approximately $300,000, or 1.8%, to approximately $17.1
million, from $16.8 million in the prior year's comparable quarter. This
decrease is primarily reflective of reduced floor plan interest expense and our
successful efforts to decrease excessive spending while maintaining our
initiatives and the costs associated with increased sales efforts, principally,
advertising and compensation as partially offset by our accrual in the current
quarter of $290,000 of additional expense in connection with a floor plan credit
enhancement arrangement. The interest expense, relating primarily to our floor
plan decreased by $270,000 from $631,000 in the third quarter of 2002 to
$361,000 in the current comparable quarter. This decrease is significantly
attributable to the lower interest rates as partially offset by increased
inventory levels during the current period.
Interest expense. Interest expense relates to short-term and long-term
borrowings and there was no significant change in the underlying borrowings'
amounts or rates.
Income tax expense. Income tax expense reflects only minimum federal tax and
state and local taxes, since we do not expect any federal income tax expense for
2003.
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Discontinued operations. We had a loss from discontinued operations of $206,000
(net of $138,000 of income tax benefits) in the third quarter of 2002, compared
with no loss from discontinued operations in the comparable current period. The
loss represents the cost of litigation settlements and reduced realization of
notes receivable relating to the discontinued operations in excess of amounts we
had previously provided for the estimated additional costs associated with those
operations.
ASSETS, LIQUIDITY AND CAPITAL RESOURCES - SEPTEMBER 30, 2003
At September 30, 2003, our total assets were $84.9 million, a decrease of
approximately $2.3 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 $1.3 million and accounts receivable of $4.3 million, as
partially offset by increases in our cash and cash equivalents of $2.0 million
and due from related parties of $1.5 million.
For the nine months ended September 30, 2003, we had a net increase in cash and
cash equivalents of $2,029,351. The primary reason for this increase was the net
cash provided by our operating activities of $2,627,699.
The net cash provided by our operating activities of $2,627,699 was comprised of
our net income of $934,728, plus net non-cash charges of $313,509, aggregating
$1,248,237 and a net decrease in assets of $3,845,098 (attributable, primarily,
to the decreases in accounts receivable of $4,250,608 and inventories of
$1,342,233 and an increase in due from related parties of $1,482,332), as
partially offset by a net decrease in liabilities of $2,910,089 (primarily
attributable to a decreases in floor plan notes payable of $3,956,795, accrued
expenses of $646,571 and customer deposits and other liabilities aggregating
$285,783, as partially offset by an increase in accounts payable of $1,979,060).
This is reflective of both our reduced level of inventory and the related floor
plan liability in the first nine months of 2003 after its build up at year-end,
as well as our collection of cash in 2003 from prior fleet sales.
Additionally, our net cash use of $142,810 from our investing activities, is
primarily attributable to purchases of property and equipment.
We used $455,508 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 $2,029,351 for the nine months ended September 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 three months of 2003, $1.9 million
for 2004, $544,000 for 2005 and $5.1 million, thereafter, and lease payments of
$345,000 for the last three 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 September 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
our Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
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 the Chief Executive Officer and Acting Chief Financial
Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the 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.
On July 28, 2003, we filed a Report on Form 8-K reporting that we had entered
into an employment agreement with Bruce Bendell, our President, Chief Executive
Officer and Acting Chief Financial Officer effective January 1, 2003.
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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: November 14, 2003 /s/ Bruce Bendell
------------------------------------------
Bruce Bendell
Chairman of the Board and Chief Executive
Officer and Acting Chief Financial Officer
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