<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 13, 1998
REGISTRATION NO. 333-52763
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HOMETOWN AUTO RETAILERS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5511 06-150-1703
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
</TABLE>
831 STRAITS TURNPIKE
WATERTOWN, CT 06795
(860) 945-4900
(860) 945-4909 FACSIMILE
------------------------------
(Address, including zip code, and telephone number, including area code, of
registrant's executive offices)
------------------------------
JOSEPH SHAKER
PRESIDENT AND CHIEF OPERATING OFFICER
HOMETOWN AUTO RETAILERS, INC.
831 STRAITS TURNPIKE
WATERTOWN, CT 06795
(860) 945-4900
(860) 945-4909 FACSIMILE
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
STEPHEN A. ZELNICK, ESQ. STEPHEN A. WEISS, ESQ,
MORSE, ZELNICK, ROSE & LANDER, LLP ANDREW J. COSENTINO, ESQ.
450 PARK AVENUE GREENBERG TRAURIG HOFFMAN
NEW YORK, NEW YORK 10022 LIPOFF ROSEN & QUENTE
(212) 838-8040 L200 PARK AVENUE, 15TH FLOOR
(212) 838-9190 (FACSIMILE) NEW YORK, NEW YORK 10166
(212) 801-9200
(212) 801-6400 (FACSIMILE)
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
CROSS REFERENCE SHEET
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF PART I OF
FORM S-1
<TABLE>
<CAPTION>
ITEM AND CAPTION IN FORM S-1 LOCATION IN PROSPECTUS
- ----------------------------------------------------------- ------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus.......... Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus...................................... Inside Front and Outside Back Cover
of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges....................... Prospectus Summary--The Company;
Risk Factors
4. Use of Proceeds................................. Prospectus Summary; Use of Proceeds
5. Determination of Offering Price................. Outside Front Cover Page of
Prospectus; Risk Factors;
Underwriting
6. Dilution........................................ Dilution
7. Selling Security--Holders....................... Not Applicable
8. Plan of Distribution............................ Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to be Registered...... Description of Securities;
Underwriting
10. Interests of Named Experts and Counsel.......... Legal Matters; Experts
11. Information with Respect to the Registrant......
(a) Description of Business..................... Business
(b) Description of Property..................... Business--Properties and Facilities
(c) Legal Proceedings........................... Not Applicable
(d) Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters......................... Front Cover Page; Dividend Policy;
Description of Capital Stock; Shares
Eligible for Future Sale;
Management-- 1998 Stock Option Plan
(e) Financial Statements........................ Consolidated Financial Statements;
Capitalization
(f) Selected Financial Data..................... Selected Consolidated Financial
Information and Operating Data
(g) Supplementary Financial Information......... Not Applicable
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. Management's Discussion and Analysis
of Financial Condition and Results
of Operations
(i) Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.................................. Not Applicable
(j) Directors, Executive Officers, Promoters and
Control Persons............................. Management--Directors and Executive
Officers
(k) Executive Compensation...................... Management--Executive Compensation;
and Management--Stock Option Plan;
(l) Security Ownership of Certain Beneficial
Owners and Management........................... Principal Stockholders
(m) Certain Relationships and Related
Transactions................................ Management--Certain Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities..................................... Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JULY 13, 1998
2,000,000 SHARES
[LOGO]
CLASS A COMMON STOCK
------------------------
All of the shares of Class A Common Stock, par value $.001 per share (the
"Class A Common Stock"), offered hereby are being sold by Hometown Auto
Retailers, Inc. (the "Company" or "Hometown").
Prior to this offering (the "Offering"), there has been no public market for
the Class A Common Stock of the Company. It is expected that the initial public
offering price will be between $9.00 and $11.00 per share. For information that
was considered in determining the initial public offering price, see
"Underwriting." Application has been made for quotation of the Class A Common
Stock on the Nasdaq National Market under the symbol "HCAR."
The Company has two classes of authorized Common Stock, the Class A Common
Stock, which is offered hereby, and the Class B Common Stock, par value $.001
per share (the "Class B Common Stock"). Holders of Class A Common Stock are
entitled to one vote per share and holders of Class B Common Stock are entitled
to ten votes per share. Both Class A Common Stock and Class B Common Stock vote
together as a single class on all matters to be voted on by stockholders of the
Company. Class A Common Stock is not convertible, while Class B Common Stock is
convertible, on a share for share basis, either at the option of the holder
thereof or automatically upon either public or private sale by the holder. All
of the authorized and outstanding shares of Class B Common Stock, which will
represent approximately 94.4% of the aggregate voting power of the Company upon
completion of this Offering, are beneficially owned by the existing stockholders
of the Company. See "Risk Factors--Concentration of Voting Power;" "Description
of Capital Stock" and "Principal Stockholders."
An estimated $10,000,000 of the proceeds of the Offering will be used to
repay a portion of floor plan indebtedness of which $5,600,000 has been
guaranteed by certain affiliates of the Company. See "Use of Proceeds" and
"Certain Transactions."
------------------------
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE CLASS A COMMON STOCK OFFERED HEREBY, SEE "RISK FACTORS"
BEGINNING ON PAGE 10.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
UNDERWRITING DISCOUNTS PROCEEDS TO
PRICE TO PUBLIC AND COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total(3)..................................... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. The Company has also agreed to issue to Paulson Investment Company,
Inc., as representative of the several Underwriters (the "Representative"),
warrants (the "Representative's Warrants") to purchase up to 200,000 shares
of Class A Common Stock for $ per share [120% of the initial
offering price].
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 300,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts Commissions and Proceeds to Company
will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Class A Common Stock are being offered by the several
Underwriters when, as and if delivered to and accepted by the Underwriters and
subject to various prior conditions, including the right to reject orders in
whole or in part. It is expected that delivery of the certificates representing
the shares will be made against payment therefor at the offices of
in New York, New York on or about , 1998.
PAULSON INVESTMENT COMPANY, INC.
The date of this Prospectus is , 1998
<PAGE>
This Prospectus includes trademarks of companies other than Hometown Auto
Retailers, Inc., which trademarks are the property of their respective holders.
------------------------
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS, INCLUDING THE WORDS,
"BELIEVES," "MAY," "WILL," "EXPECT," "ANTICIPATE," "CONTINUE," "ESTIMATE,"
"PROJECT," "INTEND" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY
FORWARD-LOOKING STATEMENTS REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS
THAT MAY AFFECT THE COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY,
RESULTS OF OPERATIONS AND FINANCIAL POSITION. SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE
THE ACTUAL RESULTS OR PERFORMANCE OF THE COMPANY, OR INDUSTRY RESULTS, TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS OR PERFORMANCE EXPRESSED OR IMPLIED
BY SUCH FORWARD-LOOKING STATEMENTS. CERTAIN OF THESE FACTORS, RISKS AND
UNCERTAINTIES AND OTHER FACTORS ARE DISCUSSED IN MORE DETAIL IN THE RISK FACTORS
SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS. PROSPECTIVE INVESTORS ARE
CAUTIONED THAT ANY FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE
PERFORMANCE AND NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS.
Neither Ford Motor Company ("Ford Motor"), General Motors Corporation
("GM"), Toyota Motor Corp. and its United States affiliate, Toyota Motor Sales,
U.S.A., Inc. (collectively, "Toyota Motor"), Chrysler Corporation ("Chrysler")
and American Isuzu Motors, Inc. ("American Isuzu"), nor any other automotive
manufacturer (a "Manufacturer") has been involved, directly or indirectly, in
the preparation of this Prospectus or in the Offering being made hereby. No
Manufacturer has made any statements or representations in connection with the
Offering or provided any information or materials that were used in connection
with the Offering, and no Manufacturer has any responsibility for the accuracy
or completeness of this Prospectus. The Company has agreed to indemnify each
Manufacturer with which it has a franchise agreement against certain liabilities
that may be incurred in connection with the Offering, including liabilities
under the Securities Act of 1933, as amended.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK, INCLUDING OVERALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
THE CLASS A COMMON STOCK AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH
THE OFFERING.
------------------------
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE
INDICATED, ALL INFORMATION CONTAINED IN THIS PROSPECTUS GIVES RETROACTIVE EFFECT
TO THE CONSUMMATION OF (I) THE COMPANY'S ISSUANCE OF 3,760,000 SHARES OF CLASS B
COMMON STOCK IN EXCHANGE FOR THE CAPITAL STOCK OF FOUR CORPORATIONS OPERATING
SIX DEALERSHIPS, A COLLISION REPAIR CENTER AND A FACTORY AUTHORIZED FREE
STANDING SERVICE CENTER (THE "EXCHANGE") AND (II) THE CASH ACQUISITION OF THREE
ADDITIONAL DEALERSHIPS (THE "ACQUISITIONS"), ALL OF WHICH TRANSACTIONS SHALL BE
CONSUMMATED ON THE CLOSING OF THE OFFERING. UNTIL THE CLOSING OF THE OFFERING,
HOMETOWN AUTO RETAILERS, INC. WILL CONDUCT NO OPERATIONS UNDER ITS OWN NAME AND
ALL REVENUES WILL BE GENERATED BY ITS PREDECESSOR COMPANIES. REFERENCES HEREIN
TO THE "COMPANY" OR "HOMETOWN" MEAN HOMETOWN AUTO RETAILERS, INC., ITS
PREDECESSOR COMPANIES AND SUBSIDIARIES AFTER GIVING EFFECT TO THE FOREGOING
TRANSACTIONS. UNLESS OTHERWISE INDICATED, ALL SHARE, PER SHARE AND FINANCIAL
INFORMATION SET FORTH HEREIN HAS BEEN ADJUSTED RETROACTIVELY TO GIVE EFFECT TO
(I) A 12,000-FOR-1 STOCK SPLIT RESULTING IN THE ISSUANCE OF 240,000 SHARES OF
CLASS A COMMON STOCK, (II) THE ISSUANCE OF 3,760,000 SHARES OF CLASS B COMMON
STOCK IN THE EXCHANGE, AND (III) THE AMENDMENT TO THE CERTIFICATE OF
INCORPORATION REDUCING THE AUTHORIZED CAPITAL STOCK TO 29,760,000 SHARES AND THE
CLASS B COMMON STOCK TO 3,760,000 SHARES AND ASSUMES THAT THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND THE REPRESENTATIVE'S WARRANTS ARE NOT EXERCISED. SEE
"UNDERWRITING."
THE COMPANY
The Company is engaged in the business of selling new and used cars and
light trucks, providing maintenance and repair services, selling replacement
parts and providing related financing, insurance and service contracts through 9
franchised dealerships located in New Jersey, Connecticut, Massachusetts and
Vermont. The Company's dealerships offer 12 American and Asian automotive
brands, including Chevrolet, Chrysler, Dodge, Eagle, Ford, Isuzu, Jeep, Lincoln,
Mercury, Oldsmobile, Plymouth and Toyota. The Company also operates a collision
repair center and is active in two "niche" segments of the automotive market,
the sale of Lincoln town cars and limousines to livery car and livery fleet
operators and the maintenance and repair of cars and trucks at a Ford and
Lincoln Mercury factory authorized free-standing service center. The Company
believes that it is one of the five largest automotive dealers in New England
and a leading dealer in the State of New Jersey. The Company's growth strategy
is to participate in the recent consolidation trend in the automotive sales and
service industry and, through strategic acquisitions, become the largest dealer
group in New England and parts of the Mid-Atlantic region and to expand its two
"niche" businesses: livery sales and maintenance and light repair in
free-standing neighborhood factory authorized service centers.
The Company believes that it is the nation's largest seller of Lincoln town
cars and limousines to livery car and livery fleet operators. The Company also
believes that more than 80% of the factory approved 1998 model year livery
vehicles sold as new vehicles to livery operators were Lincoln Town Cars and
limousines. The Company has achieved its market position in livery car sales
through innovative sales, financing and maintenance programs creating a high
level of repeat business under which livery car operators trade in their
vehicles for new models every 18 to 24 months. During 1997 and the quarter ended
March 31, 1998, on a pro forma combined basis, 5.4% and 8.1%, respectively, of
the Company's revenues were attributable to the sale, financing and maintenance
of livery vehicles. The Company believes that it will be able to expand its
livery sales business throughout the New England and Mid-Atlantic regions by
adding additional sales locations and maintenance and repair facilities.
The Company's "Lincoln Mercury Autocare" center located in Connecticut was
the pilot facility for Ford's authorized free-standing neighborhood service
center concept for the maintenance and light repair of cars and trucks. During
1997 and the quarter ended March 31, 1998, on a pro forma combined basis, 0.4%
and 0.3%, respectively, of the Company's revenues were generated at its free
standing neighborhood service center. Free-standing neighborhood service centers
are an innovative attempt by the automobile retail industry to recapture repair
and maintenance business which has been lost in recent decades to chain
3
<PAGE>
and independent service businesses. These services centers are designed to
enhance customer convenience by operating during extended hours, servicing
vehicles without prior appointment and offering quick turnaround. The Company
intends to establish additional neighborhood service centers in locations in
which they develop a concentration of dealerships.
OPERATING STRATEGY
The Company will seek to consolidate operations and increase the
profitability of its existing dealerships by using a strategy that combines its
"best in class" operating practices with the advantages of its established
customer base, local presence and name recognition. Upon completion of the
Exchange and the Acquisition, each of the Company's dealerships will use a core
operating strategy specifically designed to produce a high shop absorption rate
(i.e., that portion of total dealership fixed costs borne by the gross profit
generated by the parts and service departments), a high rate of service
retention and a high ratio of retail used to new car sales, all in order to
maximize profitability and provide insulation from the cyclicality of new car
sales. Each dealership has a general manager who is highly-trained and
ultimately responsible for the operation, personnel and financial performance of
that dealership. The Company's established operating practices and procedures,
including the management and pricing of inventories of new and used vehicles,
are continually reviewed and updated by the general managers and members of the
Company's operating committee, consisting of its six senior executive officers,
each of whom is, or has been, the chief operating officer of a franchised
dealership. The executive officers of the Company have over 130 years of
combined experience in the automotive retailing industry and are members of
families who have owned dealerships since 1947. They are recognized leaders in
the automotive retailing industry and serve at various times in leadership
positions in state and national industry organizations. The Company has also
received numerous awards based on high customer satisfaction index ("CSI")
ratings and other performance measures regularly compiled or monitored by the
automobile Manufacturers.
The Company believes that the following factors, coupled with its
established organizational structure, will help it achieve its operating
strategy:
- an established customer base and name recognition for each of its existing
dealerships;
- a high ratio of retail used car to new car sales;
- a strong regional focus permitting cross-marketing of used and same brand
new vehicles;
- management and control efficiencies;
- strong presence in higher profit margin automotive "niche" businesses: (i)
sale, financing and maintenance of livery vehicles; and (ii) operation of
free-standing neighborhood factory authorized service centers in locations
with a concentration of Hometown dealerships;
- brand diversity;
- potential cost savings from centralized financing and administrative
functions; and
- the ability to source high quality used vehicles cost-effectively through
coordinated auction buying, trade-ins and off-lease programs.
GROWTH STRATEGY
The Company's goals are to become, through selected acquisitions, the
leading consolidator and the largest dealer group in New England, to increase
the number of its dealerships in New Jersey and other portions of the
Mid-Atlantic region, to add additional sales locations and maintenance and
repair facilities for its livery sales business and to establish additional
factory authorized free-standing neighborhood service centers in parts of both
New England and the Mid-Atlantic region with a concentration of Hometown
dealerships. Its acquisition strategy will focus on small to mid-sized
dealerships, having annual
4
<PAGE>
revenues of between $20 million and $60 million per location (some of which may
be part of larger groups), which are located in urban fringe or suburban areas.
By the nature of their customer base and "neighborhood" location, the Company
believes that these small to mid-sized dealerships are more compatible with its
core operating strategy than larger regional dealerships, as they are able to
provide customers with convenient access for the higher margin products and
services, such as used vehicle retail sales, light repair and maintenance
services and sale of replacement parts.
THE INDUSTRY
Over the past three decades, there has been a trend toward fewer, but
larger, automotive dealerships. In 1996, each of the largest 100 dealer groups
had more than $200 million in revenues. Although significant consolidation has
taken place since its inception, the industry today remains highly fragmented,
with only the largest 100 dealer groups generating less than 10% of total sales
revenues and controlling approximately 5% of all franchised dealerships. The
Company believes that the recent industry trend of consolidating larger
dealerships which has taken place in other parts of the country, can also be
applied to the small and mid-sized dealerships located in the densely populated
Northeastern region. Factors within the industry favoring the Company's
consolidation strategy include:
- CUSTOMER CONVENIENCE. Because they are able to provide their customers
with more convenient access for maintenance and repair, customers tend to
favor a large number of small to mid-size dealerships and service centers,
rather than one remotely-located large regional center.
- ECONOMIES OF SCALE. Small and mid-sized dealerships can most often benefit
from the synergies created by being a member of a larger automotive group,
including cross-utilization of same brand new and used car inventories,
lower cost financing, more effective auction positioning and integration
of computer systems.
- CONSOLIDATION IS FAVORED BY MANUFACTURERS. The Company believes that the
principal Manufacturers are seeking to reduce the number of dealerships
holding their franchises and to retain or establish higher quality dealers
with enhanced financial stability who can better foster the Manufacturer's
brand image.
CORPORATE HISTORY; FOUNDERS
The Company was founded in March 1997 to consolidate and operate automobile
dealerships in the Northeast, primarily New Jersey and New England. On the
closing of the Offering, the stockholders of four corporations operating six
franchised dealerships, one collision repair center and one factory authorized
free-standing neighborhood auto-service center in New Jersey and Connecticut
(collectively, the "Core Operating Companies") will exchange all of their stock
in such corporations for 3,760,000 shares of Class B Common Stock (the
"Exchange"). Until the closing of the Offering, Hometown Auto Retailers, Inc.
will conduct no operations under its own name and all revenues will be generated
by its predecessor companies. In 1997 and the three months ended March 31, 1998,
the Core Operating Companies had pro forma combined revenues of $178,433,000 and
$45,521,000, respectively, and income before income taxes of $2,761,000 and
$687,000, respectively. In addition, the Company has entered into agreements to
acquire three operating dealerships in Connecticut, Massachusetts and Vermont
for an aggregate consideration of $6.7 million plus the assumption of certain
liabilities (the "Acquisitions") which added $61,732,000 and $12,532,000 to pro
forma revenues for 1997 and the quarter ended March 31, 1998 and $2,248,000 and
$595,000 to income before income taxes for such periods. See "Exchange and
Acquisitions," "Use of Proceeds" and "Description of Securities."
Consummation of the Offering is conditioned upon the consummation of the
transactions contemplated by the Exchange and the Acquisitions.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,000,000 shares of Class A Common Stock
Common Stock to be outstanding after the 2,240,000 shares of Class A Common Stock(1)
offering................................... 3,760,000 shares of Class B Common Stock
Use of proceeds.............................. Finance the acquisition of three automobile
dealerships; repay certain indebtedness;
working capital and general corporate
purposes, including additional acquisitions.
An estimated $10,000,000 of the proceeds of
the Offering will be used to repay a portion
of floor plan indebtedness of which
$5,600,000 has been guaranteed by certain
affiliates of the Company. See "Use of
Proceeds" and "Certain Transactions."
Nasdaq National Market symbol................ HCAR
</TABLE>
- ------------------------
(1) Does not include: (a) an aggregate of 480,000 shares reserved for issuance
under the Company's Stock Option Plan, 240,000 of which are subject to
outstanding options exercisable at the initial public offering price per
share; and (b) 300,000 shares subject to the over-allotment option. See
"Management Stock Options" and "Underwriting."
CERTAIN RISK FACTORS
The Company's acquisition program may be limited to some extent by general
policies adopted by the Manufacturers and by specific conditions imposed by the
Manufacturers in connection with approval of the Exchange and the Acquisitions.
See "Risk Factors--'Manufacturers' Control over Dealerships," Risks Relating to
Failure to Meet Manufacturer CSI Scores," "Dependence on Acquisitions for
Growth," and "Manufacturers' Restrictions on Acquisitions."
See "Risk Factors" beginning on page 11 for a description of the above and
certain other risks relevant to an investment in the Class A Common Stock.
6
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following summary pro forma financial data presents, for the year ended
December 31, 1997 and the three months ended March 31, 1998, certain historical
pro forma financial data and combined pro forma financial data and combined pro
forma data for the Core Operating Companies and the Acquisitions as if those
transactions had occurred as of January 1, 1997. See "Selected Financial Data"
and the Unaudited Pro Forma Financial Statements and the notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------------------------
CORE OPERATING COMPANIES (2) COMBINED
----------------------------------- CORE OPERATING ACQUISITIONS PRO FORMA
SHAKER (3) WESTWOOD MULLER COMPANIES (2) (3)(4)
----------- ----------- --------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED PRO FORMA
INCOME STATEMENT DATA (1):
Revenues
New vehicle sales........................... $ 29,345 $ 45,470 $ 33,308 $ 108,123 $ 26,365 $ 134,488
Used vehicle sales.......................... 21,800 8,396 19,996 50,192 28,835 79,027
Parts and service sales..................... 6,727 4,352 4,907 15,986 5,314 21,300
Other dealership revenues, net.............. 1,624 731 1,777 4,132 1,218 5,350
----------- ----------- --------- --------------- ------------- -----------
Total revenues............................ 59,496 58,949 59,988 178,433 61,732 240,165
Cost of sales................................. 51,226 52,770 51,641 155,637 53,386 209,023
----------- ----------- --------- --------------- ------------- -----------
Gross profit................................ 8,270 6,179 8,347 22,796 8,346 31,142
Amortization of excess of purchase price over
net book value of assets acquired........... -- -- -- -- -- 399(5)
Selling, general and administrative expenses
(2)......................................... 7,076 4,931 6,936 18,943 5,651 24,595
----------- ----------- --------- --------------- ------------- -----------
Income from operations...................... 1,194 1,248 1,411 3,853 2,695 6,148
Other income (expense)
Interest expense, net (2)................... (427) (295) (420) (1,142) (412) (281)
Other income (expense), net................. 116 (39) (27) 50 (35) 15
----------- ----------- --------- --------------- ------------- -----------
Income before taxes....................... $ 883 $ 914 $ 964 $ 2,761 $ 2,248 5,882
----------- ----------- --------- --------------- -------------
----------- ----------- --------- --------------- -------------
</TABLE>
<TABLE>
<S> <C>
Provision for income taxes........................................................................ 2,353(5)
------------
Net income.................................................................................... $ 3,529
------------
------------
Earnings per share, basic and diluted............................................................. $ 0.59
Weighted average shares........................................................................... 6,000,000
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA OTHER DATA (1):
Gross margin.................................. 13.9% 10.5% 13.9% 12.8% 13.5% 13.0%
Operating margin.............................. 2.0% 2.1% 2.4% 2.2% 4.4% 2.6%
Pre-tax margin................................ 1.5% 1.6% 1.6% 1.5% 3.6% 2.4%
Retail new vehicles sold...................... 1,297 1,473 1,511 4,281 1,150 5,431
Retail used vehicles sold..................... 1,256 377 1,301 2,934 1,791 4,725
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
--------------------------------------------------------------------------------
CORE OPERATING COMPANIES (2) CONSOLIDATED
----------------------------------- CORE OPERATING ACQUISITIONS PRO FORMA
SHAKER (3) WESTWOOD MULLER COMPANIES (2) (3)(4)
----------- ----------- --------- --------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED PRO FORMA
INCOME STATEMENT DATA (1):
Revenues
New vehicle sales........................... $ 5,967 $ 12,599 $ 7,133 $ 25,699 $ 5,731 $ 31,430
Used vehicle sales.......................... 5,723 4,273 4,470 14,466 5,395 19,861
Parts and service sales..................... 1,613 1,121 1,311 4,045 1,217 5,262
Other dealership revenues, net.............. 441 397 473 1,311 189 1,500
----------- ----------- --------- --------------- ------------- -----------
Total revenues............................ 13,744 18,390 13,387 45,521 12,532 58,053
Cost of sales................................. 11,612 16,502 11,473 39,587 10,688 50,275
----------- ----------- --------- --------------- ------------- -----------
Gross profit................................ 2,132 1,888 1,914 5,934 1,844 7,778
Amortization of excess of purchase price over
net tangible assets acquired................ -- -- -- -- -- 100(5)
Selling, general and administrative expenses
(2)......................................... 1,762 1,393 1,663 4,818 1,170 5,988
----------- ----------- --------- --------------- ------------- -----------
Income from operations...................... 370 495 251 1,116 674 1,690
Other income (expense)
Interest expense, net (2)................... (92) (132) (159) (383) (114) (150)
Other income (expense), net................. (6) (9) (31) (46) 35 (11)
----------- ----------- --------- --------------- ------------- -----------
Income before taxes....................... $ 272 $ 354 $ 61 $ 687 $ 595 1,529
----------- ----------- --------- --------------- -------------
----------- ----------- --------- --------------- -------------
</TABLE>
<TABLE>
<S> <C>
Provision for income taxes........................................................................ 612(5)
------------
Net income.................................................................................... $ 917
------------
------------
Earnings per share, basic and diluted............................................................. $ 0.15
Weighted average shares........................................................................... 6,000,000
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA OTHER DATA (1):
Gross margin.................................. 15.5% 10.3% 14.3% 13.0% 14.7% 13.4%
Operating margin.............................. 2.7% 2.7% 1.9% 2.5% 5.4% 2.9%
Pre-tax margin................................ 2.0% 1.9% 0.5% 1.5% 4.7% 2.6%
Retail new vehicles sold...................... 259 378 325 962 233 1,195
Retail used vehicles sold..................... 363 133 294 790 304 1,094
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
--------------------------------------
<S> <C> <C> <C>
CORE OPERATING PRO FORMA
SHAKER COMPANIES AS ADJUSTED
(6) (6) (7)
--------- -------------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
UNAUDITED PRO FORMA BALANCE SHEET DATA (1):
Working capital (deficit)................................................ $ 2,153 $ 1,938 $ 12,738
Inventories.............................................................. 8,321 23,587 29,560
Total assets............................................................. 12,814 46,144 57,895
Total debt............................................................... 7,877 25,992 20,543
Stockholders' equity..................................................... 3,823 16,043 33,124
</TABLE>
Notes:
(1) For financial presentation purposes, the Unaudited Pro Forma Income
Statement Data gives effect to the Exchange, the Acquisitions and the
Offering as if they had occurred as of January 1, 1997. The Exchange and the
Acquisitions will occur simultaneously with the Closing of the Offering.
(2) Pro forma adjustments made to the historical financial statements of the
Core Operating Companies and the Acquisitions are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------------------
SHAKER WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE OTHER (C) TOTAL
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
HISTORICAL................ $ 7,715 $ 5,594 $ 7,283 $ 1,934 $ 3,314 $ 1,452 $ 1 $ 27,293
PRO FORMA ADJUSTMENTS
(A)..................... (639) (663) (347) 32 (549) (532) -- (2,698)
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
PRO FORMA TOTAL........... $ 7,076 $ 4,931 $ 6,936 $ 1,966 $ 2,765 $ 920 $ 1 $ 24,595
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
INTEREST INCOME (EXPENSE),
NET:
HISTORICAL................ $ (189) $ (295) $ (512) $ (272) $ (72) $ (54) $ -- $ (1,394)
PRO FORMA ADJUSTMENTS
(B)..................... (238) -- 92 (50) 33 3 1,273 1,113
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
PRO FORMA TOTAL........... $ (427) $ (295) $ (420) $ (322) $ (39) $ (51) $ 1,273 $ (281)
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
--------- ----------- --------- ----------- ----------- --------- ----------- ---------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
------------------------------------------------------------------------------------------------
SHAKER WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE OTHER (C) TOTAL
--------- ----------- --------- ----------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES:
HISTORICAL............... $ 4,194 $ 1,432 $ 1,726 $ 481 $ 511 $ 332 $ -- $ 8,676
PRO FORMA ADJUSTMENTS
(A).................... (2,432) (39) (63) 9 (28) (135) -- (2,688)
--------- ----------- --------- ----------- ------ --------- ----------- ---------
PRO FORMA TOTAL.......... $ 1,762 $ 1,393 $ 1,663 $ 490 $ 483 $ 197 $ -- $ 5,988
--------- ----------- --------- ----------- ------ --------- ----------- ---------
--------- ----------- --------- ----------- ------ --------- ----------- ---------
INTEREST INCOME (EXPENSE),
NET:
HISTORICAL............... $ (57) $ (132) $ (181) $ (54) $ (42) $ (12) $ 1 $ (477)
PRO FORMA ADJUSTMENTS
(B).................... (35) -- 22 (8) 2 -- 346 327
--------- ----------- --------- ----------- ------ --------- ----------- ---------
PRO FORMA TOTAL.......... $ (92) $ (132) $ (159) $ (62) $ (40) $ (12) $ 347 (150)
--------- ----------- --------- ----------- ------ --------- ----------- ---------
--------- ----------- --------- ----------- ------ --------- ----------- ---------
</TABLE>
(a) Reflects a pro forma reduction to compensation expense, management fees
and rent expense based on contractual arrangements to be effective
immediately following the closing of the Offering as though, for pro
forma financial presentation purposes, such arrangements had been given
effect as of January 1, 1997. See Unaudited Pro Forma Financial
Statements and the notes thereto for a more detailed description of these
pro forma adjustments.
(b) Reflects a pro forma reduction to interest income earned on the cash
that is being distributed to the Shaker stockholders prior to the
Offering and of Bay State on cash and cash equivalents not realized as
part of the Exchange and the Acquisitions. Also includes reductions in
interest
9
<PAGE>
expense on (i) long-term debt incurred by Muller prior to the Exchange
that will be liquidated out of proceeds of the Offering and (ii) on
leases and debt not assumed as part of the acquisition of Brattleboro and
Pride. See Unaudited Pro Forma Financial Statements and the notes thereto
for a more detailed description of these pro forma adjustments.
(c) For the year ended December 31, 1997, includes $1,000 of selling,
general and administrative expenses incurred by Hometown during 1997. For
the three months ended March 31, 1998, includes $1,000 of interest income
accrued by Hometown during the same period. Both periods also include the
12 months and 3 months pro forma decreases in interest expenses resulting
from the repayment of certain floor plan obligations with proceeds from
the Offering and the decrease in interest expenses resulting from
refinancing the balance of the floor plan obligations with a commercial
lender. See Unaudited Pro Forma Financial Statements and the notes
thereto for a more detailed description of these pro forma adjustments.
(3) These transactions were accounted for using the purchase method of
accounting. ERR Enterprises, Inc. ("Shaker"), one of the Core Operating
Companies, was identified as the acquiror for financial statement
presentation purposes in accordance with SAB No. 97 because its stockholders
received the largest number of shares of Class B Common Stock in the
Exchange, representing the single largest voting interest in the Company.
(4) Gives effect to: (i) the Exchange and the Acquisitions, (ii) the
consummation of the Offering and (iii) the pro forma adjustments, specified
in footnotes (1) above and (5) below, to the historical financial
statements.
(5) The combination of Income Statement Data of the Core Operating Companies'
and the Acquisitions does not equal the total set forth in the Pro Forma
Financial Statements because of the following pro forma adjustments which
are made in total only: (i) the amortization of the "excess purchase price
over net book value of assets acquired;" (ii) the decrease in interest
expenses of $950,000 for 1997 and $238,000 for the three months ended March
31, 1998 resulting from the repayment of certain floor plan obligations with
proceeds from the Offering, and the decrease in interest of $323,000 for
1997 and $108,000 for the three months ended March 31, 1998 resulting from
refinancing the balance of the floor plan obligations with a commercial
lender; (iii) the provision for federal and state income taxes based on an
effective rate of 40% for each of the Core Operating Companies and
Acquisitions and (iv) $1,000 of selling, general and administrative expenses
incurred by Hometown during 1997 and $1,000 of interest income for the three
months ended March 31, 1998. See Unaudited Pro Forma Financial Statements
and the notes thereto for a more detailed description of these pro forma
adjustments.
(6) Gives effect to the Exchange on an historical basis and the pro forma
balance sheets adjustments for the Purchase and Accounting Adjustments. See
Unaudited Pro Forma Financial Statements and the notes thereto for a
description of these pro forma balance sheet adjustments.
(7) Gives effect to the Exchange and the Acquisitions on an historical basis and
the pro forma balance sheets adjustments for the Purchase and Accounting
Adjustments and the Offering proceeds. See Unaudited Pro Forma Financial
Statements and the notes thereto for a description of these pro forma
balance sheet adjustments.
10
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE CLASS A COMMON STOCK INVOLVES VARIOUS MATERIAL RISKS.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, IN
ADDITION TO THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, IN CONNECTION
WITH AN INVESTMENT IN THE CLASS A COMMON STOCK.
ABSENCE OF COMBINED OPERATING HISTORY
The Company has conducted no combined or coordinated operations other than
in connection with the Exchange, the Acquisitions and the Offering. The Core
Operating Companies have been operated and managed as separate independent
entities and the Company's future operating results will depend, in part, on its
ability to integrate operations and manage the combined enterprise. The
management group that will lead the Company has been formed only recently and
there can be no assurance that it will be able to effectively and profitably
integrate the Core Operating Companies, the Acquisitions and any future
acquisitions, or to effectively manage the combined entity. The inability of the
Company to do so could have a material adverse effect on its business, financial
condition and results of operations.
DEPENDENCE ON AUTOMOBILE MANUFACTURERS
The Company is significantly dependent upon its relationships with, and the
success of, certain Manufacturers. For the year ended December 31, 1997, Ford
Motor, Toyota Motor and Chrysler accounted for 59%, 16%, and 16% of the new
vehicle sales of the Company, respectively. The Company may become dependent on
additional manufacturers in the future as a result of its acquisition strategy
and changes in the Company's sales mix.
The Company also is dependent upon its Manufacturers to provide it with an
inventory of new vehicles. The most popular vehicles tend to provide the Company
with the highest profit margins and are frequently the most difficult to obtain
from the Manufacturers. In order to obtain sufficient numbers of these vehicles,
the Company may be required to purchase a larger number of less marketable makes
and models than it would otherwise purchase. Sales of less desirable makes and
models may result in lower profit margins than sales of the more popular
vehicles. If the Company were to be unable to obtain sufficient quantities of
the most popular makes and models, its profitability could be adversely
affected.
The success of each of the Company's franchises is also dependent to a great
extent on the success of the respective Manufacturer, including its financial
condition, marketing, vehicle demand, production capabilities and management.
Events such as labor strikes or negative publicity concerning a particular
Manufacturer, including safety recalls of a particular vehicle model, could
adversely affect the Company. The Company has attempted to lessen its dependence
on any one Manufacturer by obtaining agreements with a number of different
domestic and foreign automobile manufacturers.
LACK OF EXCLUSIVE MARKET AREA
The Company's franchise and dealership agreements with its Manufacturers do
not give the Company the exclusive right to sell any Manufacturer's product
within any given geographical area. Accordingly, a Manufacturer could grant a
franchise to another dealer to start a new dealership in proximity to one or
more of the Company's locations or an existing dealer could move its dealership
to a location which would be directly competitive with the Company. Although
under Connecticut and New Jersey law a manufacturer is prohibited from
establishing a new dealership, or authorizing the relocation of an existing
dealership, to a location within 14 miles (8 miles in New Jersey under certain
circumstances) of a pre-existing dealership holding a franchise to sell the same
brand, depending upon the dealership involved, such an event could have a
material adverse effect on the Company and its operations.
11
<PAGE>
MANUFACTURERS' CONTROL OVER DEALERSHIPS
The dealerships operated by the Company sell cars and light trucks pursuant
to franchise or dealership agreements with Ford Motor, GM, Toyota Motor,
Chrysler and American Isuzu. Through the terms and conditions of these
agreements, such Manufacturers exert considerable influence over the operations
of the Company's dealerships. Each of these agreements includes provisions for
the termination or non-renewal of the manufacturer-dealer relationship for a
variety of causes including any unapproved change of ownership or management and
other material breaches of the franchise agreement.
To its knowledge, the Company has, to date, complied with its dealership
agreements. There can be no assurance, however, that the Company will not from
time to time fail to comply with particular provisions of some or all of these
agreements. Although such agreements generally afford the Company a reasonable
opportunity to cure violations, if a Manufacturer were to terminate or decline
to renew one or more of the Company's significant agreements, such action could
have a material adverse effect on the Company and its business.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
The Company's future growth and financial success will be dependent upon a
number of factors including, among others, the Company's ability to identify
acceptable acquisition candidates, consummate the acquisition of such
dealerships on terms that are favorable to the Company, obtain the consent of
applicable automobile manufacturers, acquire and retain or hire and train
professional management and sales personnel at each such acquired dealership and
promptly and profitably integrate the acquired operations into the Company. The
Company may acquire dealerships with net profit margins which are materially
lower than the Company's historical average net profit margin. No assurance can
be given that the Company will be able to improve the profitability of any such
acquired dealerships. To manage its expansion, the Company intends to evaluate
on an ongoing basis the adequacy of its existing systems and procedures,
including, among others, its financial and reporting control systems, data
processing systems and management structure. However, no assurance can be given
that the Company will adequately anticipate all of the demands its growth will
impose on such systems, procedures and structure. Any failure to adequately
anticipate and respond to such demands could have a material adverse effect on
the Company.
Acquisitions of additional dealerships will require substantial capital
investment and could have a significant impact on the Company's financial
position and operating results. Any such acquisitions may involve the use of
cash (including the net proceeds of the Offering) or the issuance of additional
debt or equity securities which could have a dilutive effect on the then
outstanding capital stock of the Company. Acquisitions may also result in the
accumulation of substantial goodwill and intangible assets which would result in
amortization charges to the Company and adversely affect future earnings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Growth Strategy."
MANUFACTURERS' RESTRICTIONS ON EXISTING AND FUTURE ACQUISITIONS
As a condition to granting their consent to the Exchange and the
Acquisitions, the Manufacturers have imposed certain restrictions on the
Company. These include restrictions on: (i) the acquisition of more than a
specified percentage of the Common Stock (20% in the case of GM and Toyota Motor
and 50% in the case of Ford Motor) by any one person who in the opinion of the
Manufacturer is unqualified to own a dealership of such Manufacturer or has
interests incompatible with the Manufacturer, (ii) certain material changes in
the Company or extraordinary corporate transactions such as an acquisition,
merger or sale of a material amount of assets; (iii) a change in the general
manager of a dealership without the consent of the applicable Manufacturer; (iv)
the use of dealership facilities to sell or service new vehicles of other
Manufacturers; (v) in the case of GM, the advertising or marketing of non-GM
operations with GM
12
<PAGE>
operations; (vi) in the case of GM, any change in control of the Company's Board
of Directors; and (vii) in the case of Ford Motor, any change in greater than
50% of the Company's Board of Directors or management. If the Company is unable
to comply with these restrictions, the Manufacturer may require the Company to
sell the assets of the dealerships to the Manufacturer or to a third party
acceptable to the Manufacturer, or terminate the dealership agreements with the
Manufacturer.
It may be anticipated that obtaining Manufacturer's consent will also be a
prerequisite to any future acquisitions which the Company will seek to
consummate. Various Manufacturers have set limits on the number of dealerships
carrying their brand which may be owned by one dealer group (or company)
nationally or in specified market areas or which may be acquired within
specified time periods.
In the case of Ford Motor Company, the Company may not acquire more than two
Ford and two Lincoln Mercury Dealerships during the first 12-month period after
execution of the Dealer Sales and Service Agreement and thereafter may not
acquire an additional dealership unless and until the Company's Ford and Lincoln
Mercury dealerships, as the case may be, are meeting Ford's performance
criteria. Additionally, the Company may not: (a) acquire an additional Ford or
Lincoln Mercury dealership, as the case may be, if the Company would then own or
control authorized Ford or Lincoln Mercury dealerships with total retail sales
of new vehicles for the preceding calendar year of more than 2% of the total
Ford or Lincoln Mercury, as the case may be, retail sales volume in the United
States or more than 2% of the total Ford or Lincoln Mercury retail sales volume
in any state; or (b) acquire an additional Ford or Lincoln Mercury dealership,
as the case may be, if the Company would own or control more than one authorized
dealership in those market areas (defined by Ford) having three or less Ford or
Lincoln Mercury authorized dealerships in them or acquire more than 25% of the
Ford or Lincoln Mercury authorized dealerships in a market area having four or
more authorized Ford or Lincoln Mercury dealerships in them.
In the case of Toyota Motor Sales, U.S.A., Inc., the Company may not: (a)
acquire greater than a specified number of dealerships per region (e.g. four in
the Boston region and five in the New York region); (b) acquire the greater of
one or 20% of the Toyota dealerships in any metro market (as defined by Toyota);
(c) own or control dealerships in contiguous market areas; or (d) acquire Toyota
dealerships more frequently than every nine months.
In the case of General Motors, provided that the Company meets certain
managerial requirements, the Company may acquire up to five General Motor
dealerships during the period ending 24 months after the effective date of the
dealer sales and service agreement.
Certain state laws, however, limit the ability of automobile manufacturers
to reject proposed transfers of dealerships, notwithstanding the terms of any
dealership agreement. See "Business --Dealership Agreements." The loss of one or
more of the Company's dealership agreements could have a material adverse effect
on the Company's business, financial condition and results of operations.
RISKS RELATED TO ACQUISITION FINANCING; FUTURE CAPITAL REQUIREMENTS
The Company currently intends to finance future acquisitions by issuing
shares of Class A Common Stock as full or partial consideration for acquired
dealerships. The issuance of additional shares of Class A Common Stock may be
dilutive to the Company's future earnings per share. In addition, the extent to
which the Company will be able or willing to issue Class A Common Stock for
acquisitions will depend on the then current market value of the Class A Common
Stock and the willingness of potential acquisition candidates to accept shares
of that stock as part of the consideration for the sale of their businesses. To
the extent that the Company is unable or unwilling to do so, the Company may be
required to use available cash or proceeds from debt or equity financings. The
Company currently expects that the net proceeds from the Offering and other
existing resources will be sufficient to fund its acquisition program and other
cash needs for at least the next 12 months. However, no assurance can be given
that the net proceeds from the Offering and other existing resources will be
sufficient to fund the Company's acquisition program and other cash needs or
that the Company will be able to obtain adequate additional capital from other
sources
13
<PAGE>
for either such purposes. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Combined Operating Companies
Commitments--Credit Facility."
RISKS RELATING TO FAILURE TO MEET MANUFACTURER CSI SCORES
Many manufacturers attempt to measure customers' satisfaction with
automobile dealerships through a CSI, or customer satisfaction index, rating
system. These manufacturers may use a dealership's CSI scores as a factor in
evaluating applications for additional dealership acquisitions and participation
by a dealership in incentive programs. The dealerships operated by the Core
Operating Companies have historically exceeded their Manufacturers' CSI
standards. However, there can be no assurance that either the Company
dealerships operated by members of the Core Operating Companies or other
subsequently acquired dealerships will continue to meet such standards.
Moreover, from time to time, the components of the various Manufacturer CSI
scores have been modified and there is no assurance that such components will
not be further modified or replaced by different systems in the future which
make it more difficult for key Company dealerships to meet such standards.
RELIANCE ON KEY PERSONNEL
The Company will depend to a large extent upon the abilities and continued
efforts of its senior executive officers including Salvatore A. Vergopia, Joseph
Shaker, Edward A. Vergopia, Corey Shaker, William C. Muller Jr. and James
Christ. Further, the Company may be dependent on the senior management of the
dealerships acquired by means of the Acquisitions and any other businesses
acquired in the future. If any of these persons becomes unavailable to continue
in such capacity, or if the Company were unable to attract and retain other
qualified employees, its business or prospects could be adversely affected.
Although the Company has entered into a five-year employment agreement with each
of its six senior executive officers and directors, there can be no assurance
that any individual will continue in his present capacity for any particular
period of time. The Company has made application for life and disability
insurance on the lives of its senior executive officers as follows: Salvatore A.
Vergopia, $500,000; Joseph Shaker, $1,000,000; Edward A. Vergopia, $250,000;
Corey Shaker, $250,000; William C. Muller Jr., $250,000 and James Christ,
$250,000. No assurance can be given that any such policies will be issued. See
"Management."
SUBSTANTIAL COMPETITION
The automotive retailing industry is highly competitive with respect to
price, service, location and assortment. The Company competes with automobile
dealerships (including public franchised dealership consolidators), private
market buyers and sellers of used vehicles, used vehicle dealerships, service
center chains, independent service and repair shops and financing and insurance
("F&I") operations. In the sale of new vehicles, the Company competes with other
franchised dealers. The Company does not have any cost advantage in purchasing
new vehicles from the Manufacturers, and typically will rely on advertising,
merchandising, sales expertise, service reputation and location of its
dealerships to sell new vehicles. In recent years, the Company has also faced
competition from non-traditional sources such as companies that sell automobiles
on the Internet, automobile rental agencies, independent leasing companies,
used-car "superstores" and price clubs associated with established consumer
agencies such as the American Automobile Association, some of which use
non-traditional sales techniques such as one-price shopping. In addition, Ford
Motor has announced that it is exploring the possibility of going into business
with some of its dealers to create automotive superstores in selected markets.
In furtherance of this plan, Ford Motor has recently announced a proposed joint
venture with Republic Industries under which Ford Motor would acquire a 51%
interest and Republic Industries a 49% interest in a joint venture entity that
will acquire one Lincoln Mercury and eight Ford dealerships in the Rochester,
New York area to create a retail network. The dealerships would be operated by
Republic Industries. Some of these recent market entrants may have greater
financial, marketing and personnel resources and/or lower overhead or sales
costs than the
14
<PAGE>
Company. In the parts and service area, the Company also competes with a number
of regional or national chains which offer selected parts and services at prices
that may be lower than the Company's prices. In addition, there can be no
assurance that the Company's strategy will be more effective than the strategies
of its competitors.
MATURE INDUSTRY
The United States automobile dealership industry generally is considered a
mature industry in which minimal growth is expected in unit sales of new
vehicles. As a consequence, growth in the Company's revenues and earnings are
likely to be significantly affected by the Company's success in acquiring and
integrating dealerships and the pace and size of such acquisitions. See
"Business--Growth Strategy."
CYCLICAL NATURE OF AUTOMOBILE SALES
Sales of motor vehicles, particularly new vehicles, historically have been
subject to substantial cyclical variation characterized by oversupply and weak
demand. The Company believes that the industry is affected by many factors,
including general economic conditions, consumer confidence, the level of
personal discretionary spending, interest rates and credit availability. There
can be no assurance that the industry will not experience sustained periods of
decline in vehicle sales, particularly new vehicle sales, in the future. Any
such decline could have a material adverse effect on the Company. The Company
believes that new vehicle sales in North America will be at levels slightly
under 1997 during 1998 and 1999 and at levels increasingly higher than 1997 in
the years 2000 through 2002. The Company does not believe that future expected
sales levels through 2002 will have a negative impact on its business. During
the past five years the Company's sales of new and used vehicles have not been
materially affected by overall industry levels of vehicle sales but have been
more significantly affected by the timing of introduction of new models by
particular Manufacturers and changes in consumer preferences for particular
brands or models.
SEASONALITY; VARIABILITY OF QUARTERLY OPERATING RESULTS
The automobile industry is subject to seasonal variations in revenues.
Demand for cars and light trucks is generally lower during the winter months
than in other seasons, particularly in regions of the United States where the
Company is located which are associated with harsh winters. Accordingly, the
Company expects its revenues and operating results to be generally lower in its
first and fourth quarters than in its second and third quarters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
IMPORTED PRODUCTS
A significant portion of the Company's new vehicle business will involve the
sale of vehicles, parts or vehicles composed of parts that are manufactured
outside the United States. As a result, the Company's operations will be subject
to customary risks of importing merchandise, including fluctuations in the value
of currencies, import duties, exchange controls, trade restrictions, work
stoppages and general political and economic conditions in foreign countries.
The United States or the countries from which the Company's products are
imported may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duties or tariffs, which
could affect the Company's operations and its ability to purchase imported
vehicles and/or parts.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL MATTERS
The Company will be subject to a wide range of federal, state and local laws
and regulations which are administered by various federal, state and local
regulatory agencies, such as local licensing requirements, consumer protection
laws and environmental requirements governing, among other things, discharges to
the air and water, the storage of petroleum substances and chemicals, the
handling and disposal of wastes,
15
<PAGE>
and the remediation of contamination arising from spills and releases. The
violation of these laws and regulations could result in civil and criminal
penalties being levied against the Company or in a cease and desist order
against operations that are not in compliance. Future acquisitions by the
Company may also be subject to governmental regulation, including antitrust
reviews. The Company believes that the Core Operating Companies substantially
comply with all applicable laws and regulations relating to its business, but
future laws and regulations may be more stringent and require the Company to
incur significant additional costs. The failure to satisfy current or future
regulatory requirements could have a material adverse effect on the operations
and financial condition of the Company. See "Business --Governmental
Regulations" and "Business--Environmental Matters."
CONCENTRATION OF VOTING POWER; ANTI-TAKEOVER PROVISIONS
The former stockholders of the Core Operating Companies own all of the Class
B Common Stock, which entitles them to ten votes for each share held, while
holders of Class A Common Stock, which is the only stock offered hereby, are
entitled to one vote per share held. Consequently, upon completion of the
Offering, such holders of the Class B Common Stock, who will own 62.7% of the
Company's outstanding Common Stock of all classes, will control 94.4% of the
aggregate number of votes eligible to be cast by stockholders for the election
of directors and certain other stockholder actions, and will be in a position to
control the policies and operations of the Company. In addition, the holders of
the Class B Common Stock have entered into a stockholders' agreement obligating
them, for a five-year period, to vote for Salvatore A. Vergopia, Joseph Shaker,
William C. Muller Jr., Corey Shaker, Edward A. Vergopia and James Christ as
members of the Company's Board of Directors. See "Description of Capital
Stock-Stockholders' Agreement." The executive officers and directors of the
Company will control 54.5% of the aggregate number of votes eligible to be cast
by stockholders for the election of directors and certain other stockholder
actions, and will be in a position to control the policies and operations of the
Company. Accordingly, absent a significant increase in the number of shares of
Class A Common Stock outstanding or conversion of Class B Common Stock into
Class A Common Stock, the holders of shares of Class B Common Stock will be
entitled, for the foreseeable future, to elect all members of the Board of
Directors and control all matters subject to stockholder approval.
The Delaware General Corporation Law requires super-majority voting
thresholds to approve certain "business combinations" between interested
stockholders and the Company which may render more difficult or tend to
discourage attempts to acquire the Company. In addition, the Company's Board of
Directors has the authority to issue shares of preferred stock ("Preferred
Stock"), of which 2,000,000 are currently authorized, in one or more series and
to fix the rights and preferences of the shares of any such series without
stockholder approval. Any series of Preferred Stock is likely to be senior to
all classes of Common Stock of the Company with respect to dividends,
liquidation rights and, possibly, voting rights. The ability to issue Preferred
Stock could also have the effect of discouraging unsolicited acquisition
proposals, thus affecting the market price of the Common Stock and preventing
stockholders from obtaining any premium which might otherwise be offered by a
potential buyer. In addition, certain of the Company's dealer agreements will
prohibit the acquisition of more than a specified percentage of the Common Stock
without the consent of the relevant Manufacturers. See "Management--Executive
Officers and Directors," "Principal Stockholders" and "Description of Capital
Stock."
BROAD DISCRETION BY MANAGEMENT IN USE OF PROCEEDS
The Company intends to use approximately $10 million or 58.1%, ($12.7
million or 63.8% if the Underwriter's over-allotment option is exercised in
full) of the estimated net proceeds of the Offering for general corporate
purposes and working capital, including the making of additional acquisitions.
Accordingly, the Company's management will retain broad discretion as to the use
of a substantial portion of the net proceeds of the Offering. See "Use of
Proceeds."
16
<PAGE>
POTENTIAL EFFECT OF SHARES ELIGIBLE FOR FUTURE SALE ON PRICE OF COMMON STOCK
Sales of substantial amounts of Class A Common Stock in the public market
subsequent to the Offering could adversely affect the market price of the Class
A Common Stock. Upon consummation of the Offering, the Company will have
2,240,000 shares of Class A Common Stock outstanding (2,540,000 shares if the
Underwriters' over-allotment option is exercised in full). Of these shares, the
2,000,000 shares of Class A Common Stock offered hereby (2,300,000 shares if the
Underwriter's over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act
except for shares held by persons deemed to be "affiliates" of the Company or
acting as "underwriters" as those terms are defined in the Securities Act. The
remaining 240,000 of shares Class A and 3,760,000 shares of Class B Common Stock
outstanding will be "restricted securities" within the meaning of Rule 144 under
the Securities Act and will be eligible for resale subject to the volume, manner
of sale, holding period and other limitations of Rule 144. Currently, 240,000
shares of Class A Common Stock are issuable under existing stock options granted
to executive officers and employees under the Company's Stock Option Plan. See
"Management -Stock Options," "Description of Capital Stock" and "Shares Eligible
for Future Sale."
Pursuant to the Underwriting Agreement between the Company and the
Underwriters, the Company and its executive officers and directors have agreed
not to offer, sell or otherwise dispose of any shares of Common Stock for a
period of 180 days from the date of this Prospectus without the consent of the
representatives of the Underwriters other than: (i) pursuant to the Company's
Stock Option Plan, or (ii) in connection with and as consideration for
acquisitions of automobile dealerships, provided that the proposed transferees
agree in writing for the benefit of the Underwriters to be bound by the
foregoing provisions. See "Shares Eligible for Future Sale" and "Underwriting."
NO PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE
Prior to this Offering, there has been no public market for the Class A
Common Stock. The Class A Common Stock has been approved for listing, subject to
notice of issuance, on the Nasdaq National Market under the symbol "HCAR."
However, there can be no assurance that an active trading market will develop
subsequent to this Offering or, if developed, that it will be sustained. The
initial public offering price of the Class A Common Stock was determined through
negotiations between the Company and the Representative and may bear no
relationship to the price at which the Class A Common Stock will trade after the
Offering. For information relating to the factors considered in determining the
initial public offering price, see "Underwriting." Prices for the Class A Common
Stock after the Offering may be influenced by a number of factors, including the
liquidity of the market for the Class A Common Stock, investor perceptions of
the Company and the automotive retailing industry and general economic and other
conditions. Sales of substantial amounts of Class A Common Stock in the public
market subsequent to the Offering could adversely affect the market price of the
Class A Common Stock.
POSSIBLE VOLATILITY OF PRICE
The market price of the Class A Common Stock could be subject to wide
fluctuations in response to a number of factors, including quarterly variations
of operating results, investor perceptions of the Company and automotive
retailing industry and general economic and other conditions.
17
<PAGE>
THE COMPANY
CORPORATE HISTORY; FOUNDERS
Hometown was organized under the laws of the State of Delaware in June 1997
as the successor to a corporation organized under the laws of the State of New
York in March 1997 by four persons: Morse, Zelnick, Rose & Lander, LLP, a New
York City law firm which is counsel to the Company in connection with this
Offering; Joseph Lauria, Esq., a lawyer practicing in New Jersey; Matthew J.
Visconti, Jr., a Vice President of the Company and an automobile retail industry
executive for more than twenty years; and AutoInfo, Inc., a non-prime automobile
finance company, who each received 60,000 shares of Class A Common Stock. These
four organizers identified the Core Operating Companies, consisting of the
Shaker Group, the Muller Group and Westwood.
The Company's corporate headquarters are located at 831 Straits Turnpike,
Watertown, CT 06795 and its telephone number is (860) 945-4900.
THE EXCHANGE
In May 1997, the Core Operating Companies agreed, in principle, to combine
their dealerships in the Company. Effective, as of July 1, 1997, the
stockholders of the Core Operating Companies entered into an Exchange Agreement
pursuant to which they agreed to exchange all of the outstanding shares of four
corporations for an aggregate of 3,760,000 shares of the Company's Class B
Common Stock.
Consummation of the Exchange will occur simultaneously with the closing of
this Offering. As a result, the Company will succeed to the ownership of, and
operate, six franchised dealerships, one factory authorized free-standing
neighborhood auto service center and one collision repair center located in
Connecticut and New Jersey offering a choice of nine American and Asian brands,
including Chevrolet, Eagle, Ford, Isuzu, Jeep, Lincoln, Mercury, Oldsmobile and
Toyota.
ACQUISITIONS
On July 2, 1997, the Company entered into an agreement to purchase the
business and certain assets of Brattleboro Chrysler Plymouth Dodge, Inc.
("Brattleboro") for a purchase price of $2.7 million and the assumption of
certain of Brattleboro's liabilities. On the closing of this Acquisition, the
Company will acquire the Brattleboro dealership in Vermont which holds
franchises to sell the Chrysler, Dodge and Plymouth brands. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations
- -Acquisitions."
On August 14, 1997, the Company entered into an agreement to purchase the
business and certain assets of Leominster Lincoln Mercury, Inc., also doing
business as Bay State Lincoln Mercury ("Bay State"), for a purchase price of
$3.0 million and the assumption of certain of Bay State's liabilities. On the
closing of this Acquisition, the Company will acquire the Bay State dealership
in Framingham, Massachusetts which holds franchises to sell the Lincoln and
Mercury brands.
On May 28, 1998, the Company entered into an agreement to purchase the
business and certain assets of Pride Auto Center, Inc. ("Pride"), a Jeep/Eagle
dealer, for an estimated purchase price of approximately $925,000, including a
$55,000 deposit previously paid and $200,000 to be paid through the issuance of
an 8% promissory note payable in installments over a 36-month period and the
assumption of Pride's floor plan and certain other liabilities. As soon as
practicable following the closing, Hometown intends to close the Pride facility
and to consolidate its operations with those of another Hometown Jeep/Eagle
dealership located less than two miles away.
Each of the Acquisitions is subject to satisfaction of various conditions
precedent, including the achievement by each of the Sellers of certain levels of
income and the receipt of factory consents from all Manufacturers whose
franchises are held by each of the Sellers. The closing of each Acquisition is
to occur
18
<PAGE>
simultaneously with the closing of the Offering and with the closing of the
Exchange, but not later than July 31, 1998. Consummation of the Offering is
subject to consummation of the transactions contemplated by the Exchange and the
Acquisitions.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,000,000 shares of Common
Stock offered hereby, based upon an assumed initial public offering price of
$10.00 per share, are estimated to be $17.2 million ($19.9 million if the
Underwriters' over-allotment option for an additional 300,000 shares is
exercised in full) after deducting the underwriting discount and estimated
expenses of this Offering. Of the net proceeds, $6.4 million will be used to pay
the cash portion of the purchase price for the Acquisitions. In addition,
approximately $760,000 will be used to repay indebtedness with maturities of
less than one year with a weighted average interest rate of approximately 10.1%.
The remainder of the net proceeds, approximately $10 million or 58.1% ($12.7
million or 63.8% if the Underwriter's over-allotment option is exercised in
full) will be used for working capital and general corporate purposes, including
possible use in additional acquisitions of dealerships and for expansion of the
livery sales and factory authorized free-standing neighborhood service center
businesses. Pending application for these purposes, approximately $10 million
($12.7 million if the Underwriter's over-allotment option is exercised in full)
of the net proceeds will be used to pay down a portion of the Company's "floor
plan" indebtedness (i.e., revolving credit arrangements to finance inventory
purchases). The Company, from time to time, may draw down funds under its floor
plan financing arrangements with respect to its unencumbered vehicle inventory
as needed for acquisitions and other corporate purposes.
As of March 31, 1998, the Company had aggregate liability of $28,437,000
under its floor plan financing lines of credit, including liability of its
subsidiaries, Muller Chevrolet, Muller Toyota and Westwood in the amounts of
$4,148,000, $4,268,000 and $7,493,000, respectively. The floor plan liabilities
of these subsidiaries are guaranteed by affiliates of the Company as follows:
Muller Chevrolet by William Muller Sr. and William Muller Jr; Muller Toyota by
William Muller Sr., William Muller Jr. and James Christ; and Westwood by
Salvatore A. Vergopia. Hometown plans to reduce its floor plan obligations by
$10,000,000 using a portion of the proceeds of the Offering, of which an
estimated $5,600,000 will be used to reduce liabilities guaranteed by these
affiliates. To the extent that floor plan finance obligations guaranteed by
affiliates are reduced or eliminated through the use of a portion of the
proceeds of the Offering, these affililates will benefit through the reduction
of contingent liability on their guarantees. See "Certain Transactions."
The Company intends to pursue acquisitions in the future which will be
financed with cash, Class A Common Stock or a combination of both cash and Class
A Common Stock. Although the Company has identified and has held preliminary
discussions with several potential acquisition candidates, no discussions have
resulted in definitive agreements or understandings or otherwise reached the
stage where it is probable that any such acquisition will occur. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Core Operating Companies Commitments --Credit Facility."
DIVIDEND POLICY
The Company intends to retain all of its earnings to finance the growth and
development of its business, including future acquisitions, and does not
anticipate paying any cash dividends on its Common Stock for the foreseeable
future. Any future change in the Company's dividend policy will be made at the
discretion of its Board of Directors and will depend upon the Company's
operating results, financial condition, capital requirements, general business
conditions and such other factors as the Board of Directors deems relevant. Any
dividends will apply to both Class A Shares and Class B Shares as a group
without any distinction, See "Description of Capital Stock."
19
<PAGE>
DILUTION
The pro forma net tangible book value of Shaker as of March 31, 1998, after
giving effect to the receipt by Shaker stockholders in the Exchange of 1,880,000
shares of Class B Common Stock of Hometown, was $2.03 per share of Common Stock.
Pro forma net tangible book value per share is determined by dividing the pro
forma tangible net worth (pro forma tangible assets less pro forma total
liabilities) by the total number of outstanding shares of Common Stock. After
giving effect to the Exchange for the remaining Core Operating Companies,
Westwood and Muller, and to the issuance to the founders of Hometown of 240,000
shares of Class A Common Stock, the net tangible book value of Shaker was
diluted by $.66 per share to $1.37 After giving effect to the sale by Hometown
of the 2,000,000 shares of Class A Common Stock offered hereby and the receipt
of an estimated $17.2 million of net proceeds from the Offering (based on an
assumed initial public offering price of $10.00 per share), the application of
$6.4 million to complete the Acquisitions and after deducting the underwriting
discount and estimated expenses of the Offering), pro forma net tangible book
value of the Company at March 31, 1998 would have been $2.83 per share. This
represents an immediate increase in pro forma net tangible book value of $1.46
per share to existing stockholders and an immediate dilution of $7.17 per share
to the new investors purchasing Common Stock in the Offering.
The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 10.00
Pro forma net tangible book value of Shaker............................... $ 2.03
Decrease in pro forma net tangible book value per share attributable to
balance of Exchange..................................................... $ (.66)
Increase in pro forma net tangible book value per share attributable to
the Offering and the Acquisitions....................................... 1.46
Pro forma net tangible book value per share after giving effect to the
Offering.................................................................. 2.83
---------
Dilution per share to new investors......................................... $ 7.17
---------
---------
</TABLE>
The following table sets forth, on a pro forma basis as of March 31, 1998,
the number of shares of Common Stock purchased from the Company, after giving
effect to the Exchange, the total consideration paid to the Company and the
average price per share paid by existing stockholders and new investors
purchasing shares in the Offering (before deducting underwriting discounts and
commissions and estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------- ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Shaker Stockholders................................... 1,880,000 31.3% $ 3,823,000 14.9% $ 2.03
Westwood, Muller and Other Stockholders............... 2,120,000 35.3% $ 1,855,000 7.2% $ 0.88
New Investors......................................... 2,000,000 33.3% $ 20,000,000 77.9% $ 10.00
------------- ----- ------------- -----
Total................................................. 6,000,000(1) 100.0% $ 25,678,000 100.0%
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
- ------------------------
(1) Assumes no exercise of 240,000 outstanding stock options granted under the
Company's Stock Option Plan, all of which will be exercisable at the initial
public offering price per share. In addition, 240,000 additional shares of
Common Stock are reserved for future issuance under the Stock Option Plan.
See "Management--Stock Options."
In the event the Underwriters exercise the over-allotment option in full,
the number of shares of Common Stock held by new investors will increase to
2,300,000 or 36.5% of the total number of shares of Common Stock outstanding
after the Offering.
20
<PAGE>
CAPITALIZATION
The following table sets forth, as of March 31, 1998, (i) the pro forma
capitalization of Shaker after giving effect to the receipt by Shaker
stockholders in the Exchange of 1,880,000 shares of Class B Common Stock of
Hometown, (ii) the pro forma capitalization of the Core Operating Companies
after giving effect to the Exchange, and (iii) the pro forma capitalization of
the Company after giving effect to the Exchange, the Acquisitions and the
Offering of the 2,000,000 shares of Class A Common Stock at an assumed initial
public offering price of $10.00 per share, after deducting the underwriting
discount and estimated expenses of the Offering and the application of a portion
of the estimated net proceeds therefrom to pay certain existing indebtedness.
See "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Unaudited Pro Forma Financial Statements of the Company and
the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
----------------------------------------
<S> <C> <C> <C>
PRO FORMA
<CAPTION>
CORE OPERATING PRO FORMA
SHAKER COMPANIES AS ADJUSTED
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(1) (2) (3)
----------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt (including current portion of long-term debt).......... $ 353 $ 1,764 $ 1,658
----------- ------- -----------
----------- ------- -----------
Long-term debt, less current maturities................................ 107 902 448
Stockholders' equity:
Preferred Stock, par value $.001 per share, 2,000,000 shares
authorized; no shares issued and outstanding (1)(2)(3)............. -- -- --
Common Stock, Class A, par value $.001 per share, 24,000,000 shares
authorized; no shares issued and outstanding (1); 240,000 issued
and outstanding (2); 2,240,000 issued and outstanding (3).......... -- -- 2
Common Stock, Class B, par value $.001 per share, 3,760,000 shares
authorized; 1,880,000 issued and outstanding (1); 3,760,000 issued
and outstanding (2)(3)............................................. 2 4 4
Additional paid-in capital........................................... 67 12,285 29,483
Retained earnings.................................................... 3,754 3,754 3,635
----------- ------- -----------
Total stockholders' equity............................................. 3,823 16,043 33,124
----------- ------- -----------
Total capitalization................................................... $ 3,930 $ 16,945 $ 33,572
----------- ------- -----------
----------- ------- -----------
</TABLE>
- ------------------------
(1) Reflects the pro forma capitalization of Shaker after giving effect to the
receipt by Shaker stockholders in the Exchange of 1,880,000 shares of Class
B Common Stock of Hometown.
(2) Reflects the pro forma historical capitalization of the Company after giving
effect to the Exchange.
(3) Reflects the pro forma as adjusted capitalization of the Company after
giving effect to the Exchange, the Acquisitions, the net proceeds from the
sale of 2,000,000 shares of Class A Common Stock, and the payment of certain
existing indebtedness. Excludes (i) an aggregate of 480,000 shares of Class
A Common Stock reserved for issuance under the Company's Stock Option Plan,
of which options to purchase 240,000 shares are outstanding and (ii) 300,000
shares of Class A Common Stock subject to the Underwriters' over-allotment
option.
21
<PAGE>
SELECTED FINANCIAL DATA
The Company will acquire the Core Operating Companies and the Acquisitions
simultaneously with the closing of the Offering, which transactions will be
accounted for using the purchase method of accounting. E.R.R. Enterprises, Inc.
("Shaker"), the parent of one of the Core Operating Companies, has been
identified as the acquiror for financial statement presentation purposes in
accordance with SAB No. 97 because its stockholders will hold the single largest
voting interest subsequent to the Exchange. The following selected historical
financial data for Shaker for the years ended December 31, 1993, 1994 and 1995
and for the three months ended March 31, 1997 and 1998 have been derived from
the unaudited financial statements of Shaker, which have been prepared on the
same basis as the audited financial statements and, in the opinion of Shaker,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such data. The following selected
historical financial data for Shaker as of December 31, 1996 and 1997 and for
the years ended December 31, 1995, 1996 and 1997 have been derived from the
audited financial statements of Shaker included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA:
Revenues............................. $ 43,492 $ 52,644 $ 52,020 $ 62,222 $ 59,496 $ 14,103 $ 13,744
Cost of sales........................ 37,418 45,778 44,189 53,076 51,226 11,857 11,612
--------- --------- --------- --------- --------- --------- ---------
Gross profit..................... 6,074 6,866 7,831 9,146 8,270 2,246 2,132
Selling, general and administrative
expenses........................... 5,836 6,433 6,961 8,049 7,715 1,770 4,194
--------- --------- --------- --------- --------- --------- ---------
Income from operations........... 238 433 870 1,097 555 476 (2,062)
Other income (expense)
Interest income (expense), net..... (131) (204) (555) (384) (189) (76) (57)
Other income (expense), net........ 189 73 16 1 116 6 (6)
--------- --------- --------- --------- --------- --------- ---------
Income before taxes.............. 296 302 331 714 482 406 (2,125)
Provision for income taxes........... 102 136 118 321 166 162 (850)
--------- --------- --------- --------- --------- --------- ---------
Net income....................... $ 194 $ 166 $ 213 $ 393 $ 316 $ 244 $ (1,275)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Earnings per share, basic and
diluted............................ $ 7.68 $ 6.57 $ 8.43 $ 15.56 $ 12.51 $ 9.66 $ (50.47)
Weighted average shares.............. 25,263 25,263 25,263 25,263 25,263 25,263 25,263
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............ $ 2,585 $ 2,789 $ 3,138 $ 4,138 $ 4,563 $ 4,540 $ 2,821
Inventories.......................... 6,295 9,618 9,769 8,504 7,609 9,193 8,321
Total assets......................... 10,388 14,137 14,719 14,798 14,042 16,036 16,052
Total debt........................... 5,571 9,102 9,167 8,201 7,231 8,862 7,877
Stockholders' equity................. 4,011 4,177 4,390 4,782 5,098 5,026 3,823
</TABLE>
22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The Company will acquire the Core Operating Companies and Acquisitions
simultaneously with the closing of the Offering. However, for pro forma
financial presentation purposes, these transactions will be given effect as of
January 1, 1997. The various transactions will be accounted for using the
purchase method of accounting. E.R.R. Enterprises, Inc. ("Shaker"), the parent
of one of the Core Operating Companies, has been identified as the acquiror for
financial statement presentation purposes in accordance with SAB No. 97 because
its stockholders received the largest number of shares of Class B Common Stock
in the Exchange, which shares represent the single largest voting interest in
the Company. The following summary financial data presents, for the year ended
December 31, 1997 certain historical and pro forma data for the Core Operating
Companies and the Acquisitions. See "Selected Financial Data" and the Pro Forma
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
CORE OPERATING COMPANIES (2) ACQUISITIONS (2)
------------------------------- ---------------------------------
<CAPTION>
PRO FORMA
SHAKER (3) WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE (3)(4)
---------- -------- ------- --------- ----------- ------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA
INCOME STATEMENT DATA (1):
Revenues
New vehicle sales............................ $29,345 $45,470 $33,308 $ 9,890 $ 9,038 $ 7,437 $ 134,488
Used vehicle sales........................... 21,800 8,396 19,996 12,459 12,928 3,448 79,027
Parts and service sales...................... 6,727 4,352 4,907 2,066 2,024 1,224 21,300
Other dealership revenues, net............... 1,624 731 1,777 301 594 323 5,350
---------- -------- ------- --------- ----------- ------- -------------
Total revenues............................. 59,496 58,949 59,988 24,716 24,584 12,432 240,165
Cost of sales.................................. 51,226 52,770 51,641 21,502 20,986 10,898 209,023
---------- -------- ------- --------- ----------- ------- -------------
Gross profit............................... 8,270 6,179 8,347 3,214 3,598 1,534 31,142
Amortization of excess of purchase price
over net book value of assets acquired....... -- -- -- -- -- -- 399(5)
Selling, general and administrative
expenses (2)................................. 7,076 4,931 6,936 1,966 2,765 920 24,595
---------- -------- ------- --------- ----------- ------- -------------
Income from operations..................... 1,194 1,248 1,411 1,248 833 614 6,148
Other income (expense)
Interest expense, net (2).................... (427) (295) (420) (322) (39) (51) (281)
Other income (expense), net.................. 116 (39) (27) 9 (41) (3) 15
---------- -------- ------- --------- ----------- ------- -------------
Income before taxes........................ $ 883 $ 914 $ 964 $ 935 $ 753 $ 560 5,882
---------- -------- ------- --------- ----------- -------
---------- -------- ------- --------- ----------- -------
</TABLE>
<TABLE>
<S> <C>
Provision for income taxes........................................................................ 2,353(5)
------------
Net income.................................................................................... $ 3,529
------------
------------
Earnings per share, basic and diluted............................................................. $ 0.59
Weighted average shares........................................................................... 6,000,000
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA OTHER DATA (1):
Gross margin................................... 13.9% 10.5% 13.9% 13.0% 14.6% 12.3% 13.0%
Operating margin............................... 2.0% 2.1% 2.4% 5.0% 3.4% 4.9% 2.6%
Pre-tax margin................................. 1.5% 1.6% 1.6% 3.8% 3.1% 4.5% 2.4%
Retail new vehicles sold....................... 1,297 1,473 1,511 370 449 331 5,431
Retail used vehicles sold...................... 1,256 377 1,301 748 794 249 4,725
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
FOR THE THREE MONTH ENDED MARCH 31,1998
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CORE OPERATING COMPANIES (2) ACQUISITIONS (2)
------------------------------- -------------------------------
<CAPTION>
SHAKER (3) WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE
---------- -------- ------- --------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA INCOME
STATEMENT DATA (1):
Revenues
New vehicle sales......................................... $ 5,967 $12,599 $ 7,133 $ 1,980 $ 2400 1,351
Used vehicle sales........................................ 5,723 4,273 4,470 2,356 2,598 441
Parts and service sales................................... 1,613 1,121 1,311 555 362 300
Other dealership revenues, net............................ 441 397 473 80 65 44
---------- -------- ------- --------- --------- -------
Total revenues.......................................... 13,744 18,390 13,387 4,971 5,425 2,136
Cost of sales............................................... 11,612 16,502 11,473 4,133 4,735 1,820
---------- -------- ------- --------- --------- -------
Gross profit............................................ 2,132 1,888 1,914 838 690 316
Amortization of excess of purchase price
over net book value of assets acquired.................... -- -- -- -- -- --
Selling, general and administrative
expenses (2).............................................. 1,762 1,393 1,663 490 483 197
---------- -------- ------- --------- --------- -------
Income from operations.................................. 370 495 251 348 207 119
Other income (expense)
Interest expense, net (2)................................. (92) (132) (159) (62) (40) (12)
Other income (expense), net............................... (6) (9) (31) 9 26 --
---------- -------- ------- --------- --------- -------
Income before taxes..................................... $ 272 $ 354 $ 61 $ 295 $ 193 $ 107
---------- -------- ------- --------- --------- -------
---------- -------- ------- --------- --------- -------
<CAPTION>
<S> <C>
PRO FORMA
(3)(4)
-----------
<S> <C>
UNAUDITED PRO FORMA INCOME
STATEMENT DATA (1):
Revenues
New vehicle sales......................................... $31,430
Used vehicle sales........................................ 19,861
Parts and service sales................................... 5,262
Other dealership revenues, net............................ 1,500
-----------
Total revenues.......................................... 58,053
Cost of sales............................................... 50,275
-----------
Gross profit............................................ 7,778
Amortization of excess of purchase price
over net book value of assets acquired.................... 100(5)
Selling, general and administrative
expenses (2).............................................. 5,988
-----------
Income from operations.................................. 1,690
Other income (expense)
Interest expense, net (2)................................. (150)
Other income (expense), net............................... (11)
-----------
Income before taxes..................................... 1,529
</TABLE>
<TABLE>
<S> <C>
Provision for income taxes........................................................................ 612(5)
------------
Net income.................................................................................... $ 917
------------
------------
Earnings per share, basic and diluted............................................................. $ 0.15
Weighted average shares........................................................................... 6,000,000
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
UNAUDITED PRO FORMA OTHER DATA (1):
Gross margin................................ 15.5% 10.3% 14.3% 16.9% 12.7% 14.8% 13.4%
Operating margin............................ 2.7% 2.7% 1.9% 7.0% 3.8% 5.6% 2.9%
Pre-tax margin.............................. 2.0% 1.9% 0.5% 5.9% 3.6% 5.0% 2.6%
Retail new vehicles sold.................... 259 378 325 65 110 58 1,195
Retail used vehicles sold................... 363 133 294 137 130 37 1,094
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1998
-----------------------------------
<S> <C> <C> <C>
CORE
OPERATING PRO FORMA
SHAKER COMPANIES AS ADJUSTED
(6) (6) (7)
--------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
UNAUDITED PRO FORMA BALANCE SHEET DATA:
Working capital.............................................................. $ 2,153 $ 1,938 $ 12,738
Inventories.................................................................. 8,321 23,587 29,560
Total assets................................................................. 12,814 46,144 57,895
Total debt................................................................... 7,877 25,992 20,543
Stockholders' equity......................................................... 3,823 16,043 33,124
</TABLE>
Notes to Pro Forma Financial Data:
(1) For financial presentation purposes, the Unaudited Pro Forma Income
Statement Data give effect to the Exchange, the Acquisitions and the
Offering as if they had occurred as of January 1, 1997.
24
<PAGE>
(2) Pro forma adjustments made to the historical financial statements of the
Core Operating Companies and the Acquisitions are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHAKER WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE OTHER (C)
----------- ----------- --------- ----------- ----------- --------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative expenses:
Historical......................... $ 7,715 $ 5,594 $ 7,283 $ 1,934 $ 3,314 $ 1,452 $ 1
Pro forma adjustments(a)........... (639) (663) (347) 32 (549) (538) --
----------- ----------- --------- ----------- ----------- --------- -----------
Pro forma total.................... $ 7,076 $ 4,931 $ 6,936 $ 1,966 $ 2,765 $ 920 $ 1
----------- ----------- --------- ----------- ----------- --------- -----------
----------- ----------- --------- ----------- ----------- --------- -----------
Interest income (expense), net:
Historical......................... $ (189) $ (295) $ (512) $ (272) $ (72) $ (54) $ --
Pro forma adjustments (b).......... (238) -- 92 (50) 33 3 1,273
----------- ----------- --------- ----------- ----------- --------- -----------
Pro forma total.................... $ (427) $ (295) $ (420) $ (322) $ (39) $ (51) $ 1,273
----------- ----------- --------- ----------- ----------- --------- -----------
----------- ----------- --------- ----------- ----------- --------- -----------
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-------------------------------------------------------------------------------------
SHAKER WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE OTHER (C)
----------- ----------- --------- ----------- ----------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Selling, general and
administrative expenses:
Historical......................... $ 4,194 $ 1,432 $ 1,726 $ 481 $ 511 $ 332 --
Pro forma adjustments (a).......... (2,432) (39) (63) 9 (28) (135) --
----------- ----------- --------- ----------- ----------- --------- -----------
Pro forma total.................... $ 1,762 $ 1,393 $ 1,663 $ 490 $ 483 $ 197 --
----------- ----------- --------- ----------- ----------- --------- -----------
----------- ----------- --------- ----------- ----------- --------- -----------
Interest income (expense), net:
Historical......................... $ (57) $ (132) $ (181) $ (54) $ (42) $ (12) $ 1
Pro forma adjustments (b).......... (35) -- 22 (8) 2 -- 346
----------- ----------- --------- ----------- ----------- --------- -----------
Pro forma total.................... $ (92) $ (132) $ (159) $ (62) $ (40) $ (12) $ 347
----------- ----------- --------- ----------- ----------- --------- -----------
----------- ----------- --------- ----------- ----------- --------- -----------
<CAPTION>
<S> <C>
TOTAL
---------
<S> <C>
Selling, general and
administrative expenses:
Historical......................... $ 27,293
Pro forma adjustments(a)........... (2,698)
---------
Pro forma total.................... $ 24,595
---------
---------
Interest income (expense), net:
Historical......................... $ (1,394)
Pro forma adjustments (b).......... 1,113
---------
Pro forma total.................... $ (281)
---------
---------
TOTAL
---------
<S> <C>
Selling, general and
administrative expenses:
Historical......................... $ 8,676
Pro forma adjustments (a).......... (2,688)
---------
Pro forma total.................... $ 5,988
---------
---------
Interest income (expense), net:
Historical......................... $ (477)
Pro forma adjustments (b).......... 327
---------
Pro forma total.................... $ (150)
---------
---------
</TABLE>
(a) Reflects a pro forma reduction to compensation expense, management fees
and rent expenses based on contractual arrangements to be effective
simultaneously with the closing of the Offering. See Unaudited Pro Forma
Financial Statements and the notes thereto for a more detailed
description of these pro forma adjustments.
(b) Reflects the pro forma reduction to interest income earned on the cash
being distributed to the Shaker stockholders prior to the Offering, and
on cash and cash equivalents of Bay State not realized as part of the
Acquisitions. Also includes reductions in interest expense as follows:
(i) certain long-term debt incurred by Muller prior to the Closing will
be liquidated out of proceeds of the Offering; and (ii) on leases and
debt not assumed as part of the acquisition of Brattleboro and Pride. See
Unaudited Pro Forma Financial Statements and the notes thereto for a more
detailed description of these pro forma adjustments.
(c) For the year ended December 31, 1997, includes $1,000 of selling,
general and administrative expenses incurred by Hometown during 1997. For
the three months ended March 31, 1998, includes $1,000 of interest income
accrued by Hometown during the same period. Both periods also include the
12 months and three months pro forma decreases in interest expenses
resulting from the repayment of certain floor plan obligations with
proceeds from the Offering and the decrease in interest expenses
resulting from refinancing the balance of the floor plan obligations with
a commercial lender. See Unaudited Pro Forma Financial Statements and the
notes thereto for a more detailed description of these pro forma
adjustments.
(3) These transactions were accounted for using the purchase method of
accounting. ERR Enterprises, Inc. ("Shaker"), one of the Core Operating
Companies, was identified as the acquiror for financial statement
presentation purposes in accordance with SAB No. 97 because its stockholders
received the largest number of shares of Class B Common Stock in the
Exchange, representing the single largest voting interest in the Company.
(4) Gives effect to: (i) the Exchange and the Acquisitions, (ii) the
consummation of the Offering and (iii) the pro forma adjustments, specified
in footnotes (1) above and (5) below, to the historical financial
statements.
25
<PAGE>
(5) The combination of Income Statement Data of the Core Operating Companies'
and the Acquisitions does not equal the total set forth on the Pro Forma
Financial Statements because of the following pro forma adjustments which
are made in total only: (i) the amortization of the "excess purchase price
over net book value of assets acquired;" (ii) the decrease in interest
expenses of $950,000 for 1997 and $238,000 for the three months ended March
31, 1998 resulting from the repayment of certain floor plan obligations with
proceeds from the Offering, and the decrease in interest of $323,000 for
1997 and $108,000 for the three months ended March 31, 1998 resulting from
refinancing of the balance of the floor plan obligations with a commercial
lender; (iii) the provision for federal and state income taxes based on an
effective rate of 40% for each of the Core Operating Companies and
Acquisitions and (iv) $1,000 of selling, general and administrative expenses
incurred by Hometown during 1997. See Unaudited Pro Forma Financial
Statements and the notes thereto for a more detailed description of these
pro forma adjustments.
(6) Gives effect to the Exchange on an historical basis and the pro forma
balance sheets adjustments set forth in Note 4 "Unaudited Pro Forma Balance
Sheets--Purchase and Accounting Adjustments" of the Notes to the Unaudited
Pro Forma Financial Statements.
(7) Gives effect to the Exchange and the Acquisitions on an historical basis and
the pro forma balance sheets adjustments set forth in Note 4 "Unaudited Pro
Forma Balance Sheets--Purchase and Accounting Adjustments" and Note 5
"Unaudited Pro Forma Balance Sheets--Offering Proceeds" of the Notes to the
Unaudited Pro Forma Financial Statements.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and related notes thereto, the "Selected Financial Data" for ERR
Enterprises, Inc. (Shaker), the "Summary Pro Forma Financial Data," and the
"Unaudited Pro Forma Financial Data" appearing elsewhere in this Prospectus.
Until the closing of the Offering, Hometown and each of the Core Operating
Companies and Acquisitions are autonomous and independent without any common
ownership.
THE COMPANY--PRO FORMA INFORMATION
OVERVIEW
Hometown Auto Retailers, Inc. will acquire the Core Operating Companies and
the Acquisitions simultaneously with the closing of the Offering. The Exchange
and the Acquisitions will be accounted for using the purchase method of
accounting. E.R.R. Enterprises, Inc. (Shaker), one of the Core Operating
Companies, was identified as the acquiror for pro forma financial statement
presentation purposes in accordance with SAB No. 97 because its stockholders
will receive the largest number of shares of Class B Common Stock in the
Exchange, which shares represent the single largest voting interest in the
Company. Until the closing of the Offering, Hometown Auto Retailers, Inc. will
conduct no operations under its own name and all revenues will be generated by
its predecessor companies.
OPERATING STRATEGY
The Company, which has conducted no business to date other than in
connection with the Exchange, the Acquisitions and the Offering, intends to
integrate certain functions following the Offering and to implement practices
that have been successful at other franchises, including those of the Core
Operating Companies, and in other retail segments ("best practices"). This
integration and implementation of best practices may present opportunities to
increase revenues and reduce costs but may also necessitate additional costs and
expenditures for corporate administration, including expenses necessary to
implement the Company's acquisition strategy. These various costs and possible
cost-savings and revenue enhancements may make historical operating results not
comparable to, or indicative of, future performance.
PRO FORMA COMBINED REVENUES AND GROSS PROFIT
On a pro forma combined basis, the revenue by category and the percent of
total revenue for Hometown for 1997 and the first quarter of 1998 are as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
-------------------------- --------------------------
REVENUE REVENUE
(IN % OF TOTAL (IN % OF TOTAL
THOUSANDS) REVENUE THOUSANDS) REVENUE
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
New vehicle.......................................... $ 134,488 56.0% $ 31,430 54.1%
Used vehicle......................................... 79,027 32.9% 19,861 34.2%
Parts and service.................................... 21,300 8.9% 5,262 9.1%
F&I and other........................................ 5,350 2.2% 1,500 2.6%
------------- ----- ------------- -----
Total Revenue........................................ $ 240,165 100.0% $ 58,053 100.0%
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
Used vehicle and F&I revenues increased from 32.9% and 2.2% of total
revenues for the year ended December 31, 1997 to 34.2% and 2.6% of total
revenues for the three months ended March 31, 1998 as the Company focused its
efforts on higher margin business. The favorable effect on gross profit is
discussed below.
27
<PAGE>
On a pro forma combined basis, the gross profit by category and the percent
of total gross profit for Hometown for 1997 and the first quarter of 1998 are as
follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
-------------------------- --------------------------
GROSS PROFIT % OF TOTAL GROSS PROFIT % OF TOTAL
(IN GROSS (IN GROSS
THOUSANDS) PROFIT THOUSANDS) PROFIT
------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
New vehicle.......................................... $ 8,392 26.9% $ 1,807 23.2%
Used vehicle......................................... 7,307 23.5% 1,993 25.6%
Parts and service.................................... 10,093 32.4% 2,478 31.9%
F&I and other........................................ 5,350 17.2% 1,500 19.3%
------------- ----- ------ -----
Total Gross Profit................................... $ 31,142 100.0% $ 7,778 100.0%
------------- ----- ------ -----
------------- ----- ------ -----
</TABLE>
Used vehicle and F&I gross profit as a percent of total gross profit
increased from 23.5% and 17.2% for the year ended December 31, 1997 to 25.6% and
19.3% for the three months ended March 31, 1998 revenues. Both of these increase
are the effect of the favorable change in the mix of the various revenues of the
Company.
PRO FORMA COMBINED NEW VEHICLE REVENUES AND UNITS BY MANUFACTURER
On a pro forma combined basis, the new vehicle revenue and units by
Manufacturer for Hometown for 1997 are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------
REVENUE
(IN % OF TOTAL % OF TOTAL
THOUSANDS) REVENUE UNITS UNITS
------------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Ford Motor.................................................. $ 79,561 59.2% 2,939 54.1%
Chrysler.................................................... 21,619 16.1% 981 18.1%
Toyota Motor................................................ 21,604 16.1% 960 17.7%
GM.......................................................... 9,784 7.3% 455 8.4%
All Other................................................... 1,920 1.3% 96 1.7%
------------- ----- --------- -----
Total Revenue/units......................................... $ 134,488 100.0% 5,431 100.0%
------------- ----- --------- -----
------------- ----- --------- -----
</TABLE>
New vehicle revenues from sales of Ford Motor products of $79,561,000 for
the year ended December 31, 1997, was 59.2% of Hometown's total pro forma new
vehicle revenues. Brand diversity with-in Hometown is an important consideration
as is evidenced by the fact that two of Hometown's initial acquisitions brought
in Chrysler brand vehicles.
SELLING, GENERAL AND ADMINISTRATION
The pro forma combination of Hometown's selling, general and administration
expenses takes into account various adjustments made to the Company's historical
financial statements for changes for compensation of the owners and adjustments
for the negotiated fair market valued leases.
UNIT SALES
For the year ended December 31, 1997, the Company sold 5,431 new vehicles
for an average sales price and gross profit per vehicle of approximately $24,750
and $1,550, respectively. Retail used vehicle units sold for 1997 were 4,725.
Average sales price and gross profit per retail used vehicle were approximately
$12,900 and $1,550, respectively.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
The Company's primary source for financing its vehicle inventory is "floor
plan" financing arrangements with the Manufacturers. The floor plan arrangements
permit the Company to finance its new and used vehicle inventory and the
resulting liability is secured by the related inventory.
Each dealership maintains a floor plan financing line with its respective
Manufacturer, with the exception of Muller Chevrolet which has a floor plan line
financed through a bank. Interest rates on these lines vary from a low of 8.9%
to a high of 10.5%. The combined interest expense on floor plan notes payable,
before Manufacturers' interest credits, totaled approximately $2.5 million for
the year ended December 31, 1997 and $.7 million for the three months ended
March 31, 1998. Manufacturer interest credits, which is recorded as a reduction
of interest expense, totaled approximately $1.2 million for the year ended
December 31, 1997 and $.3 million for the three months ended March 31, 1998. The
pro forma balance of the Company's floor plan lines at March 31, 1998 was
$28,437,000 before the temporary pay-down of floor plan obligations. It is
anticipated that $10,000,000 of the proceeds from the Offering will temporarily
be applied to the floor plan liability accounts until the funds are needed for
future acquisitions.
COMMITMENTS, CONTINGENCIES AND GUARANTEES
Westwood is a guarantor of various credit lines and portfolios used
primarily for financing the sale of new and used limousines and for guaranteeing
loans to customers with below average credit. The amounts outstanding at
December 31, 1997 against these guarantees are as follows: (i) SEC Funding
Corp., a company in which the majority stockholder of Westwood is also a
stockholder, for loans aggregating approximately $935,000; (ii) Ford Motor
Credit Company, for loans aggregating $6,768,000 and a limited guarantor on
loans aggregating approximately $800,000; and (iii) Ford Motor Credit Company,
for loans aggregating approximately $754,000. During the year ended December 31,
1997, Westwood experienced a 2.12% customer default rate on these loans, which
is less than the industry average. For the year ended December 31, 1997,
Westwood incurred net losses of approximately $70,000 as a result of the
difference between amounts paid pursuant to its guarantees and the net amount
recovered on the resale of repossessed schedules. The financial institutions to
which Westwood extends its guarantee hold perfected security interests in the
financed vehicles and when Westwood is required to make payment under the
guarantee, the vehicle is returned by such institution to Westwood.
During the course of normal business, the owners of Westwood, Muller Toyota
and Muller Chevrolet provide personal guarantees on the floor plan financing
arrangements for their vehicle purchases dependent upon the new and used vehicle
sales and inventory levels. The aggregate amount of floor plan liability that is
guaranteed by these owners was $15,909,000 at March 31, 1998.
PROPERTY LEASES
Hometown has executed leases for the premises occupied by various
dealerships. Each of these governing leases will become effective as of the
closing of the Offering, have a term expiring in 2013, be on a triple net basis
and, generally, provide for a consumer price index ("CPI") increase to the base
rent for the five-year periods commencing January 1, 2004 and 2009.
On a pro forma basis for the year ended December 31, 1997, these new leases
represent an aggregate savings of approximately $44,000 in lease and rent
expenses as compared to the reported historical financials. These savings are
reflected in the pro forma adjustments to selling, general and administration
expenses.
EMPLOYMENT CONTRACTS
In April 1998, Hometown entered into five-year employment agreement,
effective as of the closing of the Offering, for the following key positions:
Chairman and Chief Executive Officer; President and Chief Operating Officer;
Vice President--New Jersey Operations; Vice President--Connecticut Operations;
Vice President--Fleet Operations; General Manager--Muller Toyota; Vice
President--Parts and Services;
29
<PAGE>
and Vice President--Mergers and Acquisitions. Each agreement provides for an
annual base salary of $200,000, except that the agreement for the General
Manager provides for an annual base salary of $150,000 plus an annual bonus
equal to five percent of the pre-tax profits of Muller Toyota, the agreement for
Vice President--Parts and Service provides for an annual base salary of $100,000
and the agreement for Vice President--Mergers and Acquisitions provides for an
annual base salary of $150,000. Each agreement also provides for participation
by the employee in all executive benefit plans and, if employment is terminated
without cause (as defined in the agreement), payment of an amount equal to the
salary which would have been payable over the unexpired term of his employment
agreement.
On a pro forma basis for the year ended December 31, 1997, these new
employment contracts represent an aggregate savings of approximately $1,725,000
in owners' salaries, bonuses and benefits as compared to the reported historical
financials. These savings are reflected in the pro forma adjustments to selling,
general and administration expenses.
ACQUISITIONS
Since the Company was organized, in March 1997, it has entered into three
acquisition agreements providing for the purchase, at an aggregate price of $6.7
million plus the assumption of certain liabilities, of three dealerships located
in Connecticut, Massachusetts and Vermont. These three acquisitions add
$61,732,000 and $2,248,000, respectively, to the Company's pro forma revenues
and income before income taxes for the year ended December 31, 1997.
Each of the Acquisitions is subject to satisfaction of various conditions
precedent, including the achievement by each acquired company of certain levels
of income, the receipt of factory consents from all Manufacturers whose
franchises are held by each acquired company and the Closing of the Offering on
or prior to July 31, 1998. The closing of each Acquisition is to occur
simultaneously with the closing of the Offering and with the closing of the
Exchange.
BRATTLEBORO. On July 2, 1997, the Company entered into an agreement to
purchase the business and certain assets of Brattleboro Chrysler Plymouth Dodge,
Inc. ("Brattleboro") for a purchase price of $2.7 million and the assumption of
certain of Brattleboro's liabilities. On the closing of this Acquisition, the
Company will own Brattleboro, a dealership in Vermont which holds franchises to
sell the Chrysler, Dodge and Plymouth brands.
The Company also agreed to enter into a five-year lease for property owned
by an affiliate of Brattleboro at a monthly rental of $20,000 with a five year
renewal option at the same rental and an option to purchase the premises at its
then fair market value, but not less than $1.5 million.
In addition, the Company agreed to enter into an employment agreement with
Thomas E. Cosenzi ("Cosenzi"), a key employee of Brattleboro, at an annual base
salary of $150,000 plus a bonus, payable monthly, equal to 5% of the income
before income taxes of Brattleboro and any other business managed by Cosenzi for
Hometown up to $800,000 and 10% of the pre-tax income of such business in excess
of $800,000. The employment agreement will also provide that Cosenzi will be
granted a six-year incentive stock option to purchase such number of shares of
Hometown's Common Stock as have an aggregate value of $500,000, based on the per
share price in the Offering.
BAY STATE. On August 14, 1997, the Company entered into an agreement to
purchase the business and certain assets of Leominster Lincoln Mercury, Inc.,
doing business as Baystate Lincoln Mercury ("Bay State"), for a purchase price
of $3.0 million and the assumption of certain of Baystate's liabilities. On the
closing of this Acquisition, the Company will own the Bay State dealership in
Framingham, Massachusetts holding franchises to sell the Lincoln and Mercury
brands.
The Company has agreed to enter into fifteen-year lease for property owned
by an affiliate of Bay State at a monthly rental of $30,000 during the first
five years, $35,000 during the second five years and $38,000 during the final
five years.
30
<PAGE>
PRIDE. On May 28, 1998, the Company entered into an agreement to purchase
the business and certain assets of Pride, a Jeep/Eagle dealer, for an estimated
purchase price of approximately $925,000, including a $55,000 deposit previously
paid and $200,000 to be paid through issuance of an 8% promissory note payable
in installments over a 36-month plus and the assumption of floor plan and
certain other liabilities. As soon as practicable following the closing,
Hometown intends to close the Pride facility and to consolidate its operations
with those of another Hometown Jeep/Eagle dealership located less than two miles
away.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,000,000 shares of Class A
Common Stock offered hereby, based upon an assumed initial public offering price
of $10.00 per share, are estimated to be $17.2 million after deducting the
underwriting discount and estimated expenses of the Offering. Of the net
proceeds, $6.4 million will be used to pay the cash portion of the purchase
price for the Acquisitions. In addition, approximately $760,000 will be used to
repay indebtedness with maturities of less than one year with a weighted average
interest rate of approximately 10.1%. The remainder of the net proceeds,
approximately $10 million, will be used for working capital and general
corporate purposes, including possible use in additional acquisitions of
dealerships and for expansion of the livery sales and factory authorized
free-standing neighborhood service center businesses. Pending application for
these purposes, approximately $10 million of the net proceeds will be used to
pay down a portion of the Company's floor plan indebtedness. The Company, from
time to time, may draw down funds under its floor plan financing arrangements
with respect to its unencumbered vehicle inventory as needed for acquisitions
and other corporate purposes.
CYCLICALITY
The Company's operations, like the automotive retailing industry in general,
are affected by a number of factors relating to general economic conditions,
including consumer business cycles, consumer confidence, economic conditions,
availability of consumer credit and interest rates. Although the above factors,
among others, may affect the Company's business, Hometown believes that the
impact on the Company's operations of future negative trends in such factors
will be somewhat mitigated by its (i) strong parts, service and collision repair
services, (ii) variable cost salary structure, (iii) geographic regional focus,
and (iv) product diversity.
SEASONALITY
The Company's operations are subject to seasonal variations, with the second
and third quarters generally contributing more operating profit than the first
and fourth quarters. This seasonality is driven primarily by: (i) Manufacturer
related factors, primarily the historical timing of major Manufacturer incentive
programs and model changeovers, (ii) weather-related factors, which primarily
affect parts and service and (iii) consumer buying patterns.
EFFECTS OF INFLATION
Due to the relatively low levels of inflation experienced in fiscal 1995,
1996 and 1997, inflation did not have a significant effect on the results of the
Core Operating Companies during those periods.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued the following
statements. The Company is currently not affected by these statements, however,
when applicable, the Company will adopt the provisions of each statement.
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
SFAS No. 123 defines a fair value based method of accounting for stock based
compensation and encourages adoption of that method. SFAS No. 123, however, also
allows measurement of compensation cost using the intrinsic value
31
<PAGE>
based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees". If the Company elects to use the accounting in Opinion No. 25, it
must make pro forma disclosures of net income and earnings per share, as if the
fair value based method of accounting has been applied.
Statement No. 128 "Earnings Per Share" ("SFAS 128"). SFAS No. 128 requires
the presentation of basic earnings per share and diluted earnings per share.
"Basic earnings per share" represents net income divided by the weighted average
shares outstanding. "Diluted earnings per share" represents net income divided
by weighted average shares outstanding adjusted for the incremental dilution of
outstanding stock options. A reconciliation of weighted average common shares
outstanding to weighted average common shares outstanding assuming dilution is
required as disclosure.
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS No.
130, requires the presentation of comprehensive income in an entity's financial
statements. Comprehensive income represents all changes in equity of an entity
during the reporting period, including net income and charges directly to
equity, which are excluded from net income.
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS No. 131 requires that enterprises report certain
information about operating segments, information about products and services,
the geographic areas in which they operate and their major customers.
YEAR 2000 CONVERSION
The Company has assessed the ability of its software and other computer
systems to properly utilize dates beyond December 31, 1999 (the "Year 2000
Conversion"). Management believes that the costs of the modifications and
conversions required will not be material. However, if the modifications and
conversions are not made or not completed in a timely fashion, the failure of
its Year 2000 Conversion could have a material adverse effect on the operations
of the Company.
Although management believes it will not have material Year 2000 Conversion
issues, its future operations are dependent upon the ability of its vendors and
suppliers to successfully address the Year 2000 Conversion issues. There can be
no assurance that the computer systems of other companies upon which the
Company's own computer system relies or upon which its business is dependent,
will be timely converted, or that failure of another company to convert will not
adversely affect the Company.
SHAKER
The following discussion and analysis are based on the historical financial
statements of E.R.R. Enterprises, Inc. ("Shaker"). Shaker is one of the three
Core Operating Companies of Hometown .
OVERVIEW.
Shaker is a holding company that operates one of the largest dealer groups
in Connecticut, consisting of Shaker's Lincoln Mercury, Inc. in Watertown
Connecticut; Family Ford, Inc. and Family Rental, Inc. in Waterbury,
Connecticut; and Shaker's Jeep/Eagle, Inc. in Waterbury, Connecticut. It also
operates Lincoln Mercury Autocare, Inc., a factory authorized free-standing
neighborhood automobile maintenance and repair center in Naugatuck, Connecticut.
Shaker is a franchised dealer for Lincoln, Mercury, Ford, Jeep, and Eagle cars
and trucks.
Shaker was originally founded as Shaker Auto Service, an automobile repair
shop, in Waterbury, Connecticut in 1930. After World War II, Shaker became an
automobile dealer, ultimately being awarded the Jeep, Lincoln Mercury and Ford
franchises. Currently, Shaker is owned and operated by a third generation of the
Shaker family.
Shaker has diverse sources of automotive revenues, including: new car sales,
new light truck sales, used car sales, used light truck sales, used cars
purchased from the manufacturers, parts sales, service sales, including from
Lincoln Mercury Autocare, Inc., finance fees, insurance commissions, extended
service
32
<PAGE>
contract sales, documentary fees and after-market product sales. Sales revenues
include sales to retail customers, other dealers and wholesalers. Other
dealership revenue includes revenue from the sale of financing, insurance and
extended service contracts, all net of a provision for anticipated chargebacks.
and related documentary fees charged to customers.
Shaker's gross profit varies as its automotive merchandise mix (the mix
between new vehicle sales, used vehicle sales, parts and service sales, and
other dealership revenues) changes. The gross margin realized by Shaker on the
sale of its products and services generally varies between approximately 13.9%
and 15.1%, with new vehicle sales generally resulting in the lowest gross margin
and parts and service sales generally resulting in the highest gross margin.
Revenues from related financing, insurance and service contracts contribute a
disproportionate share of gross, operating and pre-tax margins. When Shaker's
new vehicle sales increase or decrease at a rate greater than its other revenue
sources, its gross profit margin responds inversely. Factors such as
seasonality, weather, cyclicality and manufacturers' advertising and incentives
may impact Shaker's merchandise mix and therefore affect its gross profit
margin.
Selling, general and administrative expenses consist primarily of
compensation for sales, administrative, finance and general management
personnel, rent, marketing, insurance and utilities. Interest expense consists
of interest charges on debt, including floor plan inventory financing, net of
interest credits received from certain manufacturers and interest income earned.
The following table sets forth certain selected financial data and data as a
percentage of revenues for Shaker for the periods indicated:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1995 1996 1997 1997
---------------------- ---------------------- ---------------------- ----------------------
<CAPTION>
AMOUNT % AMOUNT % AMOUNT % AMOUNT %
----------- --------- ----------- --------- ----------- --------- ----------- ---------
(IN
(IN THOUSANDS) THOUSANDS)(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
New vehicle............ $ 25,713 49.4% $ 30,511 49.0% $ 29,345 49.3% $ 6,945 49.2%
Used vehicle........... 18,260 35.1% 22,429 36.0% 21,800 36.6% 5,105 36.2%
Parts and service...... 6,565 12.6% 7,406 11.9% 6,727 11.3% 1,674 11.9%
F&I and Other, net..... 1,482 2.8% 1,876 3.0% 1,624 2.7% 379 2.7%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Total revenues....... 52,020 100.0% 62,222 100.0% 59,496 100.0% 14,103 100.0%
Cost of sales............ 44,189 84.9% 53,076 85.3% 51,226 86.1% 11,857 84.1%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Gross profit............. 7,831 15.1% 9,146 14.7% 8,270 13.9% 2,246 15.9%
Selling, general &
administrative
expenses............... 6,961 13.4% 8,049 12.9% 7,715 13.0% 1,770 12.6%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Income from operations... 870 1.7% 1,097 1.8% 555 0.9% 476 3.4%
Other income and expense:
Interest expense....... 555 1.1% 384 0.6% 189 0.3% 76 0.5%
Other income (expense)
net.................. 16 0.0% 1 0.0% 116 0.2% 6 0.0%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Income before income
taxes.................. 331 0.6% 714 1.1% 482 0.8% 406 2.9%
Provision for income
taxes.................. 118 0.2% 321 0.5% 166 0.3% 162 1.1%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
Net income............... $ 213 0.4% $ 393 0.6% $ 316 0.5% $ 244 1.7%
----------- --------- ----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- --------- ----------- ---------
<CAPTION>
<S> <C> <C>
1998
----------------------
AMOUNT %
----------- ---------
<S> <C> <C>
Revenues:
New vehicle............ $ 5,967 43.4%
Used vehicle........... 5,723 41.6%
Parts and service...... 1,613 11.7%
F&I and Other, net..... 441 3.2%
----------- ---------
Total revenues....... 13,744 100.0%
Cost of sales............ 11,612 84.5%
----------- ---------
Gross profit............. 2,132 15.5%
Selling, general &
administrative
expenses............... 4,194 30.5%
----------- ---------
Income from operations... (2,062) -15.0%
Other income and expense:
Interest expense....... 57 0.4%
Other income (expense)
net.................. (6) 0.0%
----------- ---------
Income before income
taxes.................. (2,125) -15.5%
Provision for income
taxes.................. (850) -6.2%
----------- ---------
Net income............... ($ 1,275) -9.3%
----------- ---------
----------- ---------
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Shaker's revenues decreased by $2,726,000, or 4.4%, from $62,222,000 for the
year ended December 31, 1996 to $59,496,000 for the year ended December 31,
1997. Most of the decrease was due to a decline in the sales of new and used
Ford cars and trucks at Family Ford and a decline in manufacturer's warranty
service revenue at Family Ford and Autocare.
33
<PAGE>
Sales of new Ford cars and trucks generally declined in Family Ford's
primary market area in 1997. According to the Ford Dealer Performance Report for
1997, Family Ford's market penetration, i.e. share of its primary market area,
increased from 11.5% in 1996 to 12.7% in 1997 for new cars and from 22.3% in
1996 to 30.8% in 1997 for new trucks even though Family Ford sold 109 fewer new
cars and trucks in 1997 when compared to 1996. The decline in sales of new cars
and trucks at Family Ford reflects this decrease in general market demand for
Fords in its market area. In addition, the mild winter of 1996 to 1997 reduced
the demand for light trucks in its market. As a result, Family Ford experienced
a decrease in sales of new cars and trucks in 1997 of $1,440,000, or 8.3% below
sales of used cars in 1996. This revenue decline was partially offset by an
increase of $274,000 in new car sales at Shaker Lincoln Mercury, an increase of
2.1% over new car sales in 1996, for a combined decline in revenue for Shaker of
$1,166,000, or 3.8% below revenue in 1996.
Sales of used cars at Family Ford were adversely impacted by a temporary
tightening of credit policy by local banks in the first half of 1997. The Family
Ford credit rejection rate (i.e. the percentage of potential used car buyers
rejected for car loans) increased from an average of 15% to 30%. As a result,
Family Ford sold 87 fewer used cars and trucks in 1997 than in 1996, for a drop
in revenue of $1,151,000, or 10.9% below 1996. In the second half of 1997, the
credit rejection rate returned to the historical average of 15%. Management
believes that the temporary increase in the credit rejection rate was in
response to an unusually high level of used car sales in 1996, and the resulting
increase in the number of used car loans in the portfolios of local banks. The
decline in used car sales at Family Ford was partially offset by an increase in
used car sales at Shaker Lincoln Mercury of $522,000, or 4.4%, over sales in the
prior year, for a combined Shaker used car revenue decrease of $629,000, or
2.8%, compared to sales in 1996.
Parts and service revenue at Family Ford decreased $520,000, or 17.2%, in
1997 when compared to parts and service revenues in 1996. The decrease was due
partly to the decline in sales of new and used cars and partly reflects a
general 25% decline in warranty service revenue on Ford cars and trucks in the
Northeast region. The general decline in warranty service revenue is
attributable to stricter guidelines on dealer warranty work imposed by Ford
Motor Company. Parts and service revenue decreased slightly at Shaker Lincoln
Mercury by $12,000, or 0.4%, below parts and service revenues in 1996 and
decreased at Autocare by $147,000, 14.1% below such revenues in 1996, for a
combined Shaker parts and service revenue decrease of $679,000, or 9.2%, below
parts and service revenues in 1996.
Revenues from financing and the sale of insurance ("F&I") at Family Ford
decreased $248,000, or 19.4%, in 1997 compared to F&I revenues in 1996. This
decrease reflected lower activity in F&I sales due to lower sales of new and
used vehicles. At Shaker Lincoln Mercury, F&I revenue decreased $4,000, a 0.7%
decrease over F&I revenues in 1996, reflecting the change in mix in sales of new
and used vehicles in 1997. The combined F&I revenue in 1997 for Shaker decreased
$252,000, or 13.4%, from total F&I revenues in 1996.
GROSS PROFIT
Shaker gross profit decreased $876,000, or 9.6%, from $9,146,000 for the
year ended December 31, 1996 to $8,270,000 for the year ended December 31, 1997.
At Family Ford, gross profit from the sale of new cars and trucks decreased
by $312,000, or 21.8%, from 1996 to 1997. Of the $312,000 decrease, $118,000, or
37.8%, was due to a decline in sales of new cars and trucks. The remaining
$194,000, or 62.2%, was due to a decline in gross profit as a percent of sales
from 8.2% in 1996 to 7.0% in 1997, which reflects lower pricing necessary to
respond to the lower demand in its market area. At Shaker Lincoln Mercury, gross
profit from the sale of new cars and trucks decreased by $43,000, or 5.6%, from
1996 to 1997. The decrease of $43,000 consisted of a gross margin increase of
$16,000 due to increased sales of new cars and trucks, offset by a gross margin
decrease of $59,000 due to the decline in gross profit as a percent of sales
from 5.8% in 1996 to 5.4% in 1997.
Gross profit from the sale of used cars at Family Ford in 1997 decreased by
$102,000, a decline of 11.3%, compared to gross profit in 1996. Of the $102,000
decrease, $98,000, or 96.1%, was due to a decline
34
<PAGE>
in sales of used cars, while $4,000, or 3.9%, was due to the decline in gross
profit as a percent of sales from 8.5% in 1996 to 8.4% in 1997, which reflected
the tightened credit situation in the first half of 1997. When banks tighten
their credit policies, they will often demand a higher down payment than the
customer can afford, forcing dealers to reduce their prices to bring their
transactions within the bank's guidelines in order to avoid losing the sale. At
Shaker Lincoln Mercury, gross profit from the sale of used cars increased by
$280,000, or 41.4%, from 1996 to 1997. The increase of $280,000 consists of a
gross margin increase of $30,000 due to increased sales of used cars and
$250,000 was due to an increase in the gross profit as a percent of sales from
5.7% in 1996 to 7.7% in 1997.
Gross profit on parts and service decreased $310,000, or 20.7%, at Family
Ford from 1996 to 1997. Of the $310,000 decrease, $258,000 was due to a lower
volume of business, while $52,000 was due to a decline in gross profit as a
percent of sales from 49.7% of sales in 1996 to 47.6% in 1997. The decline in
gross profit margin reflects less warranty service as a percent of total
revenues. Dealers typically earn a higher gross profit percent on warranty
service than on customer paid work.
Refer to the discussion of F&I in the revenue section for details of the F&I
gross profit. Salespersons' commissions on these revenues are charged directly
to selling, general and administration expenses. There are no other costs
associated with revenue from F&I.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Shaker selling, general and administrative expenses decreased by $334,000,
or 4.1%, from $8,049,000, for the year ended December 31, 1996, to $7,715,000,
for the year ended December 31, 1997. The principal differences were decreases
in commissions, telephone and utility expense, policy work and delivery, offset
by increases in owner's compensation. Commissions decreased $238,000, or 17.5%,
reflecting the lower sales volume in 1997. Telephone and utilities expense
decreased $200,000 or 50%, due to a change in long distance carriers to realize
lower rates and the installation of a waste oil heater in the Shaker Lincoln
Mercury service department that substantially reduced heating costs in 1997.
Policy work consists of repairs on cars prior to sale, the cost of which does
not increase the sales price of the vehicle and is not otherwise recovered by
the dealer. Policy work expense declined $24,000, or 16.6%, reflecting the lower
sales volume in 1997. Delivery expense declined $40,000, or 93%, in 1997 as a
result of the lower sales volume and changes in delivery policy. Compensation
increased by $363,000, or 13.1%, in 1997 mostly due to increased owner's
compensation.
INTEREST EXPENSES, NET
Shaker net interest expense decreased by $195,000, or 50.8%, from $384,000,
for the year ended December 31, 1996, to $189,000, for the year ended December
31, 1997. Net floor plan interest, net of floor plan assistance credits,
declined from $566,000 in 1996, to $408,000 in 1997, a decline of 27.9%,
primarily reflecting the lower sales volume in 1997. Net floor plan interest was
offset by net interest income which increased 20.3%, from $182,000 in 1996 to
$219,000 in 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
REVENUES
Shaker revenues increased by $10,202,000, or 19.6%, from $52,020,000 for the
year ended December 31, 1995, to $62,222,000 for the year ended December 31,
1996. Most of the increase was due to increased demand for new cars and trucks
as a result of new model introductions and an increase in manufacturers'
rebates, increased sales of used cars due to increased advertising expenditures
and an increase in parts and service revenue resulting from the severe 1996
winter weather.
Sales of new cars and trucks at Family Ford increased $2,824,000, or 19.3%,
from 1995 to 1996. In 1996, Family Ford sold 211 Ford Escorts compared to 109 in
1995. New truck sales increased in 1996 at Family Ford due partly to the
introduction of a completely restyled F-150 Ford truck (the first major restyle
35
<PAGE>
since 1977) and the severe 1996 winter weather which increased demand for four
wheel drive vehicles. At Shaker Lincoln Mercury, sales of new cars and trucks
increased $1,974,000, or 17.8%, from 1995 to 1996. The sales increase was due
primarily to the introduction of the Mercury Mountaineer, Mercury's first four
wheel drive sports utility vehicle, prior to mid-year 1996, and increased sales
of Lincoln Town Cars supported by higher factory rebates and improved lease
programs on luxury cars. On a combined basis, sales of new cars and trucks
increased $4,798,000, or 18.7%, in 1996 compared with sales of new cars in 1995.
Sales of used cars and trucks increased by $4,169,000, or 22.8%, from 1995
to 1996. The increase at Family Ford was $2,202,000, or 26.2%, and at Shaker
Lincoln Mercury sales of used cars and trucks increased $1,967,000, or 20.0%, in
1996. The sales increase was due to improved used car inventory turns supported
by increased advertising expenditures.
Parts and service revenue increased $841,000 for Shaker, or 12.8%, from 1995
to 1996. That increase consisted of an increase in parts and service revenues at
Family Ford of $620,000, a 25.8% increase over 1995, an increase at Shaker
Lincoln Mercury of $119,000, a 3.7% increase over 1995, and an increase at
Autocare of $102,000, a 10.8% increase over 1995. The increase in parts and
service revenues is primarily attributable to the severe winter weather in the
winter of 1996. In addition, Family Ford's "Owner Loyalty" program began to show
results by increasing the customer retention rate.
Revenues from F&I at Family Ford increased $284,000, or 28.6%, in 1996 when
compared to F&I revenues in 1995. This increase resulted from the increased
sales of new and used vehicles at Family Ford. At Shaker Lincoln Mercury,
finance and insurance revenue increased $110,000, a 22.5% increase over 1995,
reflecting the increased sales of new and used vehicles in 1996. The combined
finance and insurance revenue for Shaker increased $394,000, or 26.6%, in 1996
from 1995.
GROSS PROFIT
Shaker gross profit increased $1,315,000, or 16.8%, from $7,831,000 for the
year ended December 31, 1995, to $9,146,000 for the year ended December 31,
1996.
At Family Ford, gross profit from the sale of new cars and trucks increased
by $142,000, or 11%, from 1995 to 1996. Of the $142,000 increase, $248,000 was
due to the increase in sales of new cars and trucks. The remaining $106,000
decrease was due to a decline in gross profit as a percent of sales from 8.8% in
1995 to 8.2% in 1996, which reflects lower gross profit on the increased sales
of Ford Escorts compared to those sales in the prior year. At Shaker Lincoln
Mercury, gross profit from the sale of new cars and trucks increased by $8,000,
or 1.1%, from 1995 to 1996. The increase of $8,000 consists of a gross margin
increase of $134,000 due to increased sales of new cars and trucks, offset by a
gross margin decrease of $126,000 due to the decline in the gross profit as a
percent of sales from 6.8% in 1995 to 5.8% in 1996.
Gross profit from the sale of used cars and trucks at Family Ford in 1996
increased by $226,000, or 11.3%, compared to 1995. Of the $226,000 increase,
$176,000, or 77.9%, was due to an increase in sales of used cars. The remaining
$50,000, or 22.1%, was due to an increase in gross profit as a percent of sales
from 8.0% in 1995 to 8.5% in 1996, which reflects a higher ratio of retail
versus wholesale used cars in 1996. At Shaker Lincoln Mercury, gross profit from
the sale of used cars increased by $56,000, or 9.0%, from 1995 to 1996. The
increase of $56,000 consisted of a gross margin increase of $124,000 from
increased sales of used cars offset by a gross margin decrease of $68,000 due to
the decrease in gross profit as a percent of sales from 6.3% in 1995 to 5.7% in
1996, which reflects the decrease in the gross profit on the sales of used cars
at auctions.
Gross profit on parts and service increased $392,000, or 35.3%, at Family
Ford from 1995 to 1996. Of the $392,000 increase, $286,000 was due to the higher
volume of business, while $106,000 was due to an increase in gross profit as a
percent of sales from 46.2% in 1995 to 49.7% in 1996. The increase in gross
profit as a percent of sales reflects greater cost absorption on the increased
sales volume.
36
<PAGE>
Refer to the discussion of F&I in the revenue section for details of the F&I
gross profit. Salespersons' commissions on these revenues are charged directly
to selling, general and administration expenses. There are no other costs
associated with revenue from F&I.
SELLING, GENERAL & ADMINISTRATIVE EXPENSE
Shaker selling, general and administrative expenses increased by $1,088,000,
or 15.6%, from $6,961,000 for the year ended December 31, 1995 to $8,049,000 for
the year ended December 31, 1996. Expense increases generally reflected the
significant increase in selling activity. The principal increases in 1996
occurred in commissions, compensation, policy work and demo, loaner expense,
telephone and utilities, and data processing. Commissions increased $309,000, or
29.3%, from 1995. Compensation increased $411,000, or 17.4%, from 1995 due
primarily to increased owner's compensation. Policy work, demo and loaner
expenses increased by $126,000, or 48.9%, from 1995. Policy work consists of
repairs on cars prior to sale, the cost of which does not increase sales price
and is not otherwise recovered by the dealer. Telephone and utilities expense
increased $184,000, or 85%, from 1995. Data processing expense increased
$56,000, or 83.9%, from 1995 due to the purchase of a new computer system.
INTEREST EXPENSE, NET
Net interest expense decreased by $171,000, or 30.8%, from $555,000 for the
year ended December 31, 1995 to $384,000 for the year ended December 31, 1996.
Net floor plan interest, net of floor plan assistance credits, declined from
$715,000, or 20.8%, in 1995 to $566,000 in 1996. The decrease was due primarily
to improved control of automobile inventory, resulting from an increase in
inventory turns and increased floor plan assistance credits. Net floor plan
interest was offset by net interest income which increased 13.8% from $160,000
in 1995 to $182,000 in 1996.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
REVENUES
Shaker's revenues decreased by $359,000, or 2.5%, from $14,103,000 for the
three months ended March 31, 1997 to $13,744,000 for the three months ended
March 31, 1998. Most of the decrease was due to a decline in the sales of new
cars and trucks, partially offset by an increase in sales of used cars and
trucks.
New vehicle sales at Family Ford decreased by $907,000, or 22.3%, for the
three months ended March 31, 1998, compared to 1997. The decrease is due to a
decline in new vehicle unit sales of 43 vehicles, primarily Ford brand light
trucks and utility vehicles for which demand was lower as a result of mild
winter weather conditions. Used vehicle sales at Family Ford increased by
$362,000, or 16.7%, for the three months ended March 31, 1998, compared to 1997,
reflecting increased unit sales as a result of increased advertising and
promotion.
At Shaker Lincoln Mercury, new vehicle sales declined by $71,000, or 2.5%,
for the three months ended March 31, 1998, when compared to 1997. The decrease
is due to a decrease in new vehicle unit sales of six vehicles, offset by an
increase in the average revenue per new vehicle of $766.00. Used vehicle sales
at Shaker Lincoln Mercury increased by $256,000, or 8%, for the three months
ended March 31, 1998, compared to 1997, reflecting increased unit sales as a
result of increased advertising and promotion.
GROSS PROFIT
Shaker gross profit decreased $114,000 or 5.1%, from $2,246,000 for the
three months ended March 31, 1997 to $2,132,000 for the three months ended March
31, 1998.
At Family Ford, gross profit from the sale of new cars and trucks decreased
by $65,000, or 23.7%, for the three months ended March 31, 1998, compared to
1997 due, primarily, to a decline in unit sales of new cars and trucks as a
result of an unfavorable change in product mix. At Shaker Lincoln Mercury, gross
37
<PAGE>
profit from the sale of new cars and trucks increased by $29,000, or 21.1%, for
the three months ended March 31, 1998, compared to 1997 primarily as a result of
increased selling prices.
At Family Ford, gross profit from the sale of used cars and trucks decreased
by $75,000, or 20.7%, for the three months ended March 31, 1998, compared to
1997. The $75,000 decrease consists of an increase of $61,000 due to increased
sales of used cars and trucks offset by a decrease in gross profit of $134,000
reflecting higher trade-in allowances and lower sales prices relative to cost.
At Shaker Lincoln Mercury, gross profit from the sale of used cars and trucks
decreased by $28,000, reflecting higher trade-in allowances and lower sales
prices relative to cost.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Shaker selling, general and administrative expenses increased by $2,424,000,
or 136.9%, from $1,770,000, to $4,194,000, for the three months ended March 31,
1998, compared to 1997. The principal difference was an increase in owners
compensation consisting of a one time bonus distributed among all owner
employees of $2,500,000. All other expenses decreased by $76,000.
INTEREST EXPENSES, NET
Shaker net interest expense decreased by $19,000, or 25.0%, from $76,000,
for the three months ended March 31, 1997, to $57,000, for the three months
ended March 31, 1998. Net floor plan interest, net of floor plan assistance
credits, declined from $127,000 for the three months ended March 31, 1997, to
$105,000 for the three months ended March 31, 1998, a decline of 17.3%,
primarily reflecting the lower first quarter 1998 new vehicle sales volume. Net
floor plan interest was offset by net interest income which decreased 5.9%, from
$51,000 for the three months ended March 31, 1997, to $48,000 for the three
months ended March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Shaker's principal sources of liquidity are cash on hand, cash from
operations and floor plan financing.
CASH AND CASH EQUIVALENTS
Shaker's total cash and cash equivalents at March 31, 1998 were $3.6
million.
CASH FLOW FROM OPERATIONS
For the three-year period ended December 31, 1997, Shaker generated $1.7
million in cash from operating activities. Cash flow from operating activities
decreased from $1.0 million in 1996 to $0.3 million in 1997, due primarily to a
smaller decrease in new and used vehicle inventory and timing differences in the
income tax liability accounts.
For the three months ended March 31, 1998, Shaker generated $8,000 in cash
from operating activities as compared to $350,000 for the three months ended
March 31, 1997. The $342,000 decrease was primarily due to unfavorable timing of
collections on finance contracts on new and used vehicles as compared to the
prior year.
38
<PAGE>
The following table sets forth historical selected information from the
statements of cash flow:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, FOR THE THREE MONTHS
MARCH 31,
----------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C>
1995 1996 1997 1997 1997
----------- --------- ----------- --------------- ---------------
<CAPTION>
AMOUNT AMOUNT AMOUNT AMOUNT AMOUNT
----------- --------- ----------- --------------- ---------------
(IN THOUSANDS) (IN THOUSANDS)(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Cash Provided by Operating Activities............... $ 389 $ 1,017 $ 334 $ 350 $ 8
Net Cash Provided by (Used) in Investing Activities..... (419) (18) (102) (57) 23
Net Cash Provided by (Used) in Financing Activities..... 373 339 226 12 38
Net Increase (Decrease) in Cash and
Cash Equivalents...................................... $ 343 $ 1,338 $ 458 $ 305 $ 69
</TABLE>
FLOOR PLAN FINANCING
Shaker obtains floor plan financing for its vehicle inventory from Ford
Motor Credit Corporation. As of March 31, 1998, Shaker had approximately $7.4
million of floor plan financing outstanding, bearing interest at prime rate plus
100 basis points. Interest expense on floor plan notes payable, before
manufacturer's interest assistance, totaled approximately $1.0 million, $0.9
million, $0.8 million $0.2 million and $0.2 million for the years ended December
31, 1995, 1996 and 1997 and the three months ending March 31, 1997 and 1998,
respectively. Manufacturer interest assistance, which is recorded as a reduction
of interest expense, totaled approximately $0.3 million, $0.3 million, and $0.4
million $0.1 million and $0.1 million for the years ended December 31, 1995,
1996, and 1997 and the three months ending March 31, 1997 and 1998,
respectively.
CYCLICALITY
Shaker's operations, like the automotive retailing industry in general, are
affected by a number of factors relating to general economic conditions,
including consumer business cycles, consumer confidence, economic conditions,
availability of consumer credit and interest rates. Although the above factors,
among others, may affect Shaker's business, Shaker believes that the impact on
the Shaker's operations of future negative trends in such factors will be
somewhat mitigated by its (i) strong parts, service and collision repair
services, (ii) variable cost salary structure, (iii) geographic regional focus,
and (iv) product diversity.
SEASONALITY
Shaker's operations will be subject to seasonal variations, with the second
and third quarters generally contributing more operating profit than the first
and fourth quarters. This seasonality is driven primarily by: (i) Manufacturer
related factors, primarily the historical timing of major Manufacturer incentive
programs and model changeovers, (ii) weather-related factors, which primarily
affect parts and service and (iii) consumer buying patterns.
EFFECTS OF INFLATION
Due to the relatively low levels of inflation experienced in fiscal 1995,
1996 and 1997, inflation did not have a significant effect on the results of
Shaker during those periods.
39
<PAGE>
BUSINESS
GENERAL
The Company is engaged in the business of selling new and used cars and
light trucks, providing maintenance and repair services, selling replacement
parts and providing related financing, insurance and service contracts through 8
franchised dealerships located in New Jersey, Connecticut, Massachusetts and
Vermont. The Company's dealerships offer 12 American and Asian automotive
brands, including Chevrolet, Chrysler, Dodge, Eagle, Ford, Isuzu, Jeep, Lincoln,
Mercury, Oldsmobile, Plymouth and Toyota. The Company also operates a collision
repair center and is active in two "niche" segments of the automotive market,
the sale of Lincoln town cars and limousines to livery car and livery fleet
operators and the maintenance and repair of cars and trucks at its Ford and
Lincoln Mercury factory authorized free-standing neighborhood service center.
The Company believes, based on available industry data, that it is one of the
five largest automotive dealers in New England and a leading dealer in the State
of New Jersey. The Company's growth strategy is to participate in the recent
consolidation trend in the automotive sales and service industry and, through
strategic regional acquisitions, become the largest dealer group in New England
and the Mid-Atlantic states, and to expand its two "niche" businesses: livery
sales and free-standing neighborhood factory authorized maintenance and light
repair centers in locations in which there is a concentration of Hometown
dealerships.
To date Hometown Auto Retailers, Inc. has conducted no combined or
coordinated operations, other than in connection with the Exchange and the
Acquisitions, and all revenues have been generated by its predecessor companies.
The six senior officers of the Company have over 130 years of combined
experience in the automotive retailing industry and are members of families who
have owned dealerships since 1947. In addition, they have been recognized as
leaders in the automotive retailing industry, serving at various times in
leadership positions in state and national industry organizations. The Core
Operating Companies have also received numerous awards based on high customer
satisfaction index ("CSI") ratings and other performance measures and their
principals, as well as many of the principals of the Acquisitions, will continue
to manage their dealerships. The persons who controlled and operated the Core
Operating Companies prior to the Exchange will play a dominant role in
establishing and implementing the Company's operating and acquisition
strategies.
INDUSTRY OVERVIEW
Domestic and foreign automobile manufacturers distribute their vehicles
through franchised dealerships. With more than $500 billion in 1996 sales,
automotive retailing is the largest retail trade sector in the United States.
The industry is highly fragmented, particularly in the northeastern United
States where Hometown is concentrated, and largely privately held, with
approximately 22,000 automobile dealership locations representing more than
53,000 franchised dealerships. In 1996, U.S. franchised automobile dealers sold
15.1 million new vehicles and 19.2 million used vehicles for sales of
approximately $328.4 billion and $171.8 billion, respectively, with the balance
attributable to sales of related automotive goods and services.. Since 1992, new
vehicle revenues have grown at a 10.5% compound annual rate. Over the same
period, used vehicle revenues have grown at a 14.6% compound annual rate. Slower
new vehicle unit sales growth over this time period has been offset by the
rising prices associated with new vehicles and, on average, the higher prices
paid for later model high quality used vehicles which now comprise a significant
part of the used vehicle market. Automobile sales are affected by many factors,
including rates of employment, income growth, interest rates, weather patterns
and other national and local economic conditions, automotive innovations and
general consumer sentiment. See "Risk Factors--Cyclicality" and "Risk
Factors--Seasonality."
The following table sets forth new and used vehicle sales by franchised
automobile dealers in the United States for each of the five years ended
December 31, 1996. New vehicles can only be sold at retail
40
<PAGE>
by franchised dealerships. The following table excludes sales of used vehicles
by nonfranchised dealerships and casual sales by individuals. Nonfranchised
dealerships and individuals had aggregate sales of $117.3 billion, $133.2
billion, $173.8 billion, $181.3 billion and $172.4 billion, respectively, for
each of the five years ended December 31, 1996.
<TABLE>
<CAPTION>
UNITED STATES FRANCHISED
DEALERS' VEHICLES SALES
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<CAPTION>
(UNITS IN MILLIONS; DOLLARS IN BILLIONS)
<S> <C> <C> <C> <C> <C>
New vehicle unit sales........................................... 12.9 13.9 15.1 14.8 15.1
New vehicle sales................................................ $ 220.6 $ 253.0 $ 289.9 $ 302.7 $ 328.4
Used vehicle unit sales.......................................... 15.1 16.3 17.8 18.5 19.2
Used vehicle sales............................................... $ 99.5 $ 115.0 $ 138.6 $ 157.0 $ 171.8
Total vehicle sales.............................................. $ 320.1 $ 368.0 $ 428.5 $ 459.7 $ 500.2
Annual growth in total vehicle sales............................. --% 15.0% 16.5% 7.3% 8.8%
</TABLE>
Manufacturers originally established franchised dealer networks for the
distribution of their vehicles as single-dealership, single-owner operations. In
return for distribution rights within specified territories, Manufacturers
exerted significant influence over such matters as a dealer's location,
inventory size and composition and merchandising programs, as well as the
identity of owners and managers. This strict control contributed to the
proliferation of small dealerships which, at their peak in the late 1940's,
numbered in excess of 46,000 dealership locations. Several manufacturers went
out of business in the 1950's, and the number of dealership locations decreased
to 36,000 by 1960. Significant industry changes took place in the 1970's when
fuel shortages forced dramatic increases in gasoline prices and foreign
manufacturers increased their penetration of the U.S. market with
fuel-efficient, low-cost vehicles. As a result of these competitive pressures,
dealers were able to negotiate significant changes in the traditional
distribution system with manufacturers. Dealers began to add foreign franchises
and the phenomenon of the multi-franchise automobile dealer emerged, prompting
the significant acquisition and consolidation activities of the 1980's. The
easing of restrictions against multi-franchise dealers, competitive pressures on
undercapitalized dealerships and the aging of dealership owners has led to
further consolidation of the industry. Since 1960, the number of dealership
locations has declined 39% to the 1996 level of approximately 22,000.
Over the past three decades, there has been a trend toward fewer, but
larger, automotive dealerships. In 1996, each of the largest 100 dealer groups
had more than $200 million in revenues. Although significant consolidation has
taken place since its inception, the industry today remains highly fragmented,
with the largest 100 dealer groups generating less than 10% of total sales
revenues and controlling approximately 5% of all franchised dealerships.
Hometown believes that these factors, together with increasing capital
requirements for operating automobile dealerships, lack of a viable exit
strategy and the aging of dealership owners provide an attractive environment
for the Company's consolidation strategy.
Due to intense competition, new vehicle sales were the smallest
proportionate contributors to United States dealers' gross profits during 1996,
earning an average gross margin of 6.5%. The typical dealership currently
generates substantially all of its profits from sales of used vehicles, parts
and service and F&I. The average used vehicle gross margin in 1996 was 11%. As
with retailers generally, automobile dealership profitability varies widely and
depends in part on the effective management of inventory, marketing, quality
control and responsiveness to customers. Since 1991, retail automobile
dealerships in the United States have earned, on average, between 12.9% and
14.1% total gross margin on sales.
OPERATING STRATEGY
Hometown will seek to consolidate operations and increase the profitability
of its existing dealerships by using a strategy that combines its "best in
class" operating practices with the advantages of its
41
<PAGE>
established customer base, local presence and name recognition. Each of the
Company's dealerships will use a core operating strategy specifically designed
to produce a high "shop absorption rate," a high rate of service retention and a
high ratio of retail used to new car sales, all in order to maximize
profitability and provide insulation from the cyclicality of new car sales.
The Company believes that the following factors, coupled with its
established organizational structure, will help it achieve its operating
strategy:
- STRONG REGIONAL FOCUS. The Company's eight franchised dealerships are
located in New Jersey, Connecticut, Massachusetts and Vermont. Its
acquisition program is focused on acquiring additional dealerships in New
England, New Jersey and contiguous portions of the mid-Atlantic region.
The Company believes that proximity of its dealerships to one another will
contribute to ease of management, more effective control of dealership
operations, increased sales from coordinated marketing of new cars, used
cars and livery vehicles and cost savings from coordinated auction
purchasing, car transport and other activities.
- ESTABLISHED CUSTOMER BASE. The Company believes that its existing
dealerships have good local reputations and have strong local name
recognition. Through "owner-loyalty" and similar programs, the Company
believes it has established a customer base that looks to its existing
"hometown" dealership as its first choice in buying replacement vehicles.
- EXPERIENCED MANAGEMENT. Hometown's management is comprised of second and
third generation members of dealer families who have been leaders in the
automotive retailing industry. The executive officers of the Company have
over 130 years of combined experience in the automotive retailing industry
and are members of families who have owned dealerships since 1947. They
are recognized leaders in the automotive retailing industry and have
served at various times in leadership positions in state and national
industry organizations. The Company has also received numerous awards
based on high customer satisfaction index ("CSI") ratings and other
performance measures regularly compiled and monitored by the automobile
Manufacturers. See "Management--Directors and Officers" for additional
information as to the numerous Manufacturer awards and citations earned by
Hometown's senior management and dealerships in recent years.
- PRESENCE IN HIGHER PROFIT MARGIN BUSINESSES
- LIVERY SALES AND SERVICE. The Company's Westwood subsidiary is the
nation's largest seller of Lincoln Town Cars and limousines to livery
car and livery fleet operators. The sale of livery vehicles also tends
to generate significant maintenance and repair business since the
primary concern of livery operators is keeping their cars in use and on
the road for a maximum number of hours per day. A major impediment to
further expansion of livery business has been a lack of suitable
service facilities in areas too distant from Westwood's existing
service location in Emerson, New Jersey to permit the return of livery
cars to that location for servicing. As a first step in expansion of
this livery business, the Company intends to put in place special
financing, sales and prepaid service programs for livery vehicles,
following the Westwood model, at the Shaker Group's Lincoln Mercury
dealership and Bay State Lincoln Mercury and, in such connection, will
modify the service facilities of these dealerships where necessary to
make them more suitable for the servicing of limousines and livery
cars.
- MAINTENANCE AND REPAIR. The Company's Shaker subsidiary's "Lincoln
Mercury Autocare" facility was the pilot for Ford's authorized
free-standing neighborhood service centers for the maintenance and
light repair of cars and trucks. Free-standing service centers are an
innovative attempt by the automotive retail industry to recapture
repair and maintenance business which has been lost in recent decades
to chain and independent service businesses. The service center
encourages customers to deal directly with service personnel and
permits customers to watch the progress of work on their cars by
entering the shop on railed walkways. The service center
42
<PAGE>
also operates during extended hours, provides comfortable customer
waiting areas and quickly services vehicles without prior appointment.
- FOCUS ON HIGHER MARGIN OPERATIONS
- PARTS AND SERVICE. Hometown's dealerships emphasize sales of parts and
service which typically have a higher profit margin than vehicle sales.
For example, during 1996 maintenance and light repair work was retained
at the Company's Shaker subsidiaries on approximately 63.6% of the new
cars sold compared to 20.1% at the average dealership selling Ford,
Lincoln and Mercury vehicles.
- USED CAR SALES. The sale of used vehicles is emphasized at each of the
Company's dealerships. Typically, used vehicle sales generate higher
gross margins than new vehicle sales. During 1997, the Company sold
8,484 used vehicles (combined retail and wholesale) compared to 5,100
new vehicles. The Company seeks to attract customers and enhance buyer
satisfaction by offering multiple financing options and extended
warranties on used vehicles.
- ABILITY TO SOURCE HIGH QUALITY USED VEHICLES. An important component in
selling used vehicles and maintaining high margins on such sales is the
ability to obtain high quality used vehicles at reasonable prices. The
Company obtains its used vehicles through trade-ins and off-lease programs
as well as regular auction buying. Key executives at each dealership have
developed the skills necessary for making effective purchases at regularly
scheduled auctions. The Company believes that auction buying activities
will be enhanced by its ability to use common buyers to fill the needs of
several dealerships, handle its own transportation of vehicles from the
auction to the dealership and obtain discounted prices.
- BRAND DIVERSITY. Hometown's dealerships offer 12 American and Asian
automotive brands including Chevrolet, Chrysler, Dodge, Eagle, Ford,
Isuzu, Jeep, Lincoln, Mercury, Oldsmobile, Plymouth and Toyota. The
Company believes that brand diversity helps to insulate it from changes in
consumer preferences, short supplies of particular automotive models and
negative publicity concerning a particular Manufacturer or vehicle model.
- CENTRALIZED FINANCING AND ADMINISTRATIVE FUNCTIONS. The Company believes
that it will be able to generate cost savings by centrally financing its
new and used car inventories through bank lines of credit rather than the
"floorplan" financing now provided by Manufacturers to its individual
dealerships. Additional cost savings are believed possible through
centralizing accounting, personnel, employee benefits and other functions.
- QUALITY PERSONNEL. The Company employs professional management practices
in all aspects of its operations, including information technology,
employee training, profit-based compensation and cash management. Each
dealership is managed as a profit center by a trained and experienced
general manager who has primary responsibility for decisions relating to
inventory, pricing and personnel. The Company compensates its general
managers and department managers pursuant to various formulas based upon
dealership or department profitability, rather than on sales volume.
Senior management uses computer-based management information systems to
monitor each dealership's sales, profitability and inventory on a daily
basis and to identify areas requiring improvement and provide additional
training where necessary. The Company believes that the application of its
professional management practices provides it with an ability to achieve
levels of profitability superior to industry averages.
GROWTH STRATEGY
The Company's goals are to become, through selected acquisitions, the
leading consolidator and the largest dealer group in New England, to increase
the number of its dealerships in New Jersey and other portions of the
Mid-Atlantic region, to add additional sales locations and maintenance and
repair facilities
43
<PAGE>
for its livery sales business and to establish new factory authorized
free-standing neighborhood maintenance and repair centers in both New England
and the Mid-Atlantic regions.
The Company believes that the Northeast is the most fragmented automotive
retail market in the United States. Though some large dealerships operate in the
area, there are a large number of small to mid-size dealers operating in an area
of heavy population densities. The Company intends to focus its acquisition
strategy on dealerships with annual revenues of $20 million to $60 million per
location (some of which may be part of larger groups), located in urban fringe
or suburban areas. The Company believes that these small to mid-size dealerships
are more likely to provide their customers with convenient access for
maintenance and repair than larger dealerships, as well as being more compatible
with the Company's operating model which requires a high shop absorption and a
high rate of service retention. Also, these dealerships can benefit the most
from the synergies created by being a member of a larger automotive group, such
as cross-utilization of same brand new car inventories, lower cost financing,
swapping of used car inventories, more effective auction positioning and
integration of computer systems. Where dealerships are acquired in close
proximity to other existing Hometown dealerships, the Company may consolidate
their operations to create further efficiencies. Proximity is expected to
facilitate management control of diverse dealerships and make it easier to
implement "best in class" practices.
Upon completion of this Offering, the Company will acquire three dealerships
in Connecticut, Massachusetts and Vermont adding $61,732,000 and $2,248,000,
respectively, to combined pro forma 1997 revenues and income before income taxes
for an aggregate cash consideration of $6.4 million, which will be paid from
proceeds of the Offering, plus the issuance of a $200,000 promissory note and
the assumption of certain liabilities. The Company believes that these
transactions demonstrate the opportunities for acquisition of dealerships in New
England at attractive prices. However, no assurance can be given that the
Company will be able to make additional acquisitions in this or other geographic
areas or that the prices will be comparable to those of the existing
Acquisitions.
Though many manufacturers have imposed limitations on the acquisition of
dealerships by public corporations, the Company believes that, because of
fragmentation of the market in the Northeast, the principal Manufacturers from
whom it holds franchises, are seeking to reduce the number of dealerships
holding their franchises. Accordingly, the Company believes that these
Manufacturers will be inclined to support further growth by Hometown. High CSI
ratings have been identified by certain of its Manufacturers as factors in their
approval of additional acquisitions and each of the Company's dealers has had
historically high ratings.
The Company also believes that its livery sales business can be expanded
throughout the New England and mid-Atlantic regions based on the innovative
sales and marketing practices utilized by its Westwood subsidiary and its
reputation among livery car operators. The major impediment to expansion of this
business had been Westwood's lack of service facilities, which require extended
body lifts, beyond its existing service location in Emerson, New Jersey. Shaker
Lincoln Mercury already has installed such extended car body lifts and the
Company plans to install additional lifts in certain of its other facilities so
that they can service livery vehicles sold. The Company also intends to adopt
Westwood's innovative sales and financing programs to implement sales of livery
vehicles at other locations.
44
<PAGE>
DEALERSHIP OPERATIONS
The Company's established operating practices and procedures, including the
management and pricing of inventories of new and used vehicles, are regularly
reviewed and updated by the general managers and members of the Company's
operating committee, consisting of its six senior executive officers, each of
whom is, or has been, the chief operating officer of a franchised dealership.
Each of the Company's dealerships will use a management structure, currently
used by the Core Operating Companies, that promotes and rewards the achievement
of benchmarks set by senior management and the Operations Committee. Each local
general manager of a Hometown dealership is ultimately responsible for the
operation, personnel and financial performance of that dealership. Each general
manager is complemented with a management team consisting of a new vehicle sales
manager, a used vehicle sales manager, service and parts managers and F&I
managers. The general manager and the other members of each dealership
management team, as long-time members of their local communities, are typically
best able to judge how to conduct day-to-day operations based on the team's
experience in and familiarity with its local market. Certain members of the
Company's senior management also serve as general managers of particular
dealerships. A similar management structure will be implemented for each
Acquisition, as well as subsequent acquisitions.
Each dealership engages in a number of inter-related businesses: new vehicle
sales; used vehicle sales; service and parts operations; and F&I.
NEW VEHICLE SALES. Hometown's dealerships represent 12 American and Asian
brands of lower, mid and higher priced sport and family cars and light trucks,
including sport utility vehicles. The Company believes that offering numerous
new vehicle brands appeals to a variety of customers, minimizes dependence on
any one Manufacturer and reduces its exposure to supply problems and product
cycles. The following table sets forth for 1997, certain information relating to
the brands of new vehicles sold at retail by the Company:
<TABLE>
<CAPTION>
NUMBER OF NEW VEHICLES SOLD
FOR THE YEAR ENDED DECEMBER 31, 1997
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SHAKER WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE
BRANDS (CONN.) (NEW JERSEY) (NEW JERSEY) (MASS.) (VERMONT) (CONN.)
- --------------------------------- ----------- ------------- ------------- ------------- --------------- -------------
LINCOLN/MERCURY.................. 331 1,473 -- 370 -- --
TOYOTA........................... -- -- 960 -- -- --
FORD............................. 765 -- -- -- -- --
DODGE............................ -- -- -- -- 396 42
JEEP............................. 200 -- -- -- 188
CHEVROLET........................ -- -- 377 -- -- --
OLDSMOBILE....................... -- -- 78 -- -- --
PLYMOUTH......................... -- -- -- -- 43 32
CHRYSLER......................... -- -- -- -- 10 68
ISUZU............................ -- -- 62 -- -- --
GEO.............................. -- -- 34 -- -- --
EAGLE............................ 1 -- -- -- -- 1
----- ----- ----- --- --- ---
1,297 1,473 1,511 370 449 331
----- ----- ----- --- --- ---
----- ----- ----- --- --- ---
<CAPTION>
<S> <C> <C>
BRANDS TOTAL PERCENTAGE
- --------------------------------- --------- -----------
LINCOLN/MERCURY.................. 2,174 40.0%
TOYOTA........................... 960 17.7%
FORD............................. 765 14.1%
DODGE............................ 438 8.1%
JEEP............................. 388 7.1%
CHEVROLET........................ 377 7.0%
OLDSMOBILE....................... 78 1.4%
PLYMOUTH......................... 75 1.4%
CHRYSLER......................... 78 1.4%
ISUZU............................ 62 1.2%
GEO.............................. 34 0.6%
EAGLE............................ 2 0.0%
--------- -----
5,431 100.0%
--------- -----
--------- -----
</TABLE>
The Company's new vehicle unit sales include lease transactions. New vehicle
leases generally have short terms which tend to bring the consumer back to the
market sooner than if the purchase were debt financed. In addition, leases
provide a steady source of late-model, off-lease vehicles for used vehicle
inventory. Leased vehicles generally remain under factory warranty for the term
of the lease which allows the dealerships to provide repair service to the
lessee throughout the lease term.
45
<PAGE>
The Company seeks to provide customer-oriented service designed to meet the
needs of its customers and establish lasting relationships that will result in
repeat and referral business. For example, the Company intends to implement the
strategy of the Core Operating Companies by: (i) engaging in extensive follow-up
after a sale in order to develop long-term relationships with its customers;
(ii) training its sales staffs to be able to meet customer needs; (iii)
employing more efficient, non-confrontational selling systems; and (iv) using
computer technology that decreases the time necessary to purchase a vehicle. The
Company believes that its ability to share "best practices" among its
dealerships gives it an advantage over smaller dealerships.
The Company acquires substantially all of its new vehicle inventory from the
Manufacturers. Manufacturers allocate a limited inventory among their franchised
dealers based primarily on sales volume and input from dealers. The Company
finances its inventory purchases through revolving credit arrangements known in
the industry as "floorplan" financing
USED VEHICLE SALES. The Company sells used vehicles at each of its
franchised dealerships. Sales of used vehicles have become an increasingly
significant source of profit for dealerships. Consumer demand for used vehicles
has increased as prices of new vehicles have risen and as more high quality used
vehicles have become available. Furthermore, used vehicles typically generate
higher gross margins than new vehicles because of their limited comparability
and the somewhat subjective nature of their valuation. The Company intends to
emphasize used vehicle sales by maintaining a high quality inventory, providing
competitive prices and extended service contracts for its used vehicles and
continuing to promote used vehicle sales. The Company will also certify that its
used cars meet specified testing and quality standards.
The following table shows the growth of used vehicle sales by the Company
from 1994 through 1997 and the pro forma combined used vehicle sales by the
Company in those years:
NUMBER OF USED AND NEW VEHICLES SOLD
<TABLE>
<CAPTION>
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
SHAKER (CONNECTICUT)
Used Vehicles -- Retail.................................................... 851 1097 1,318 1,256
Used Vehicles -- Wholesale................................................. 951 996 1,144 1,153
New Vehicles............................................................... 1,537 1,216 1,405 1,297
--------- --------- --------- ---------
Total Sales.......................................................... 3,339 3,309 3,867 3,706
WESTWOOD (NEW JERSEY)
Used Vehicles -- Retail.................................................... 258 263 325 377
Used Vehicles -- Wholesale................................................. 382 365 346 265
New Vehicles............................................................... 1,448 1,391 1,438 1,473
--------- --------- --------- ---------
Total Sales.......................................................... 2,088 2,019 2,109 2,115
MULLER (NEW JERSEY)
Used Vehicles -- Retail.................................................... 1,557 1,204 1,421 1,301
Used Vehicles -- Wholesale................................................. 586 807 829 1,260
New Vehicles............................................................... 1,682 1,457 1,524 1,511
--------- --------- --------- ---------
Total Sales.......................................................... 3,825 3,468 3,774 4,072
BAY STATE (MASS.)
Used Vehicles -- Retail.................................................... 552 835 793 748
Used Vehicles -- Wholesale................................................. 443 482 383 395
New Vehicles............................................................... 283 199 389 370
--------- --------- --------- ---------
Total Sales.......................................................... 1,278 1,516 1,565 1,513
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
1994 1995 1996 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
BRATTLEBORO (VERMONT)
Used Vehicles -- Retail.................................................... 577 898 1,001 794
Used Vehicles -- Wholesale................................................. 528 799 1,011 935
New Vehicles............................................................... 378 281 332 449
--------- --------- --------- ---------
Total Sales.......................................................... 1,483 1,978 2,344 2,178
PRIDE (CONNECTICUT)
Used Vehicles -- Retail.................................................... 230 245 249 249
Used Vehicles -- Wholesale................................................. 163 124 154 146
New Vehicles............................................................... 352 299 362 331
--------- --------- --------- ---------
Total Sales.......................................................... 745 668 765 726
TOTAL HOMETOWN
Used Vehicles -- Retail.................................................... 4,025 4,542 5,107 4,725
Used Vehicles -- Wholesale................................................. 3,053 3,573 3,867 4,154
New Vehicles............................................................... 5,680 4,843 5,450 5,431
--------- --------- --------- ---------
Total Sales.......................................................... 12,758 12,958 14,424 14,310
</TABLE>
Sales of used vehicles are dependent on the ability of the dealerships to
obtain a supply of high quality used vehicles and effectively manage that
inventory. New vehicle operations provide a supply of such vehicles through
trade-ins and off-lease vehicles. Hometown supplements its used vehicle
inventory with used vehicles purchased at auctions where manufacturers re-market
lease return, rental buy back and manufacturer demonstration cars. To maintain a
broad selection of high quality used vehicles and to meet local preferences, the
Company acquires used vehicles from trade-ins and a variety of sources
nationwide, including direct purchases and manufacturers' and independent
auctions.
The Company follows an inventory management strategy pursuant to which used
vehicles are offered at progressively lower gross profit margins the longer they
stay in inventory and if not sold at retail by the end of 10 weeks are sold to
another dealer or sold at auction. Pursuant to this strategy the Company
generally maintains only a 30 to 45 day supply of used vehicles. Unsold, excess
or unsuitable vehicles received as trade-ins are sold at auctions or sold
directly to other dealers and wholesalers. Trade-ins may be transferred among
Hometown dealerships to provide balanced inventories of used vehicles at each
location. The Company believes that the Acquisitions and acquisitions of
additional dealerships will expand its market for transfers of used vehicles
among its dealerships and, therefore, increase the ability of each dealership to
maintain a balanced inventory of used vehicles. The Company intends to develop
integrated computer inventory systems that will allow it to coordinate vehicle
transfers between its dealerships.
The Company has taken steps to build customer confidence in its used vehicle
inventory, including participation in the Manufacturers' certification processes
to make used vehicles eligible for new vehicle benefits such as new vehicle
finance rates and extended Manufacturer warranties.
Hometown believes that franchised dealership strengths in offering used
vehicles include: (i) access on new vehicle purchase to trade-ins which are
typically lower mileage and higher quality relative to trade-ins on used car
purchases, (ii) access to late-model, low mileage off-lease vehicles, rental
returns and Manufacturer demos, and (iii) the availability of Manufacturer
certification and extended Manufacturer warranties for higher quality used
vehicles. The Company believes that a well-managed used vehicle operation at
each location affords it an opportunity to: (i) generate additional customer
traffic from a wide variety of prospective buyers, (ii) increase new and used
vehicle sales by aggressively pursuing customer trade-ins, (iii) generate
incremental revenues from customers financially unable or unwilling to purchase
a new vehicle, and (iv) increase ancillary product sales, particularly F&I, to
improve overall profitability.
PARTS AND SERVICE. The Company regards service and repair activities as an
integral part of its overall approach to customer service, providing an
opportunity to foster ongoing relationships with its customers
47
<PAGE>
and deepen customer loyalty. Hometown provides parts and service at each of its
franchised dealerships for the vehicle brands sold by these dealerships.
Maintenance and repair services are provided at 8 locations) one factory
authorized neighborhood service center and one collision repair center, using
approximately 85 service bays. Hometown provides both warranty and non-warranty
service work.
The Company intends to implement an "owner loyalty program" similar to
programs used by the Core Operating Companies to encourage customers to return
to the dealership for all maintenance and light repair work. The program
provides customers with information as to recommended intervals of service and
details all charges for a wide range of maintenance activities and expected
replacements at such intervals. Customers who maintain their vehicles in
accordance with the owner loyalty program recommendations receive various items
of maintenance, such as oil changes, without charge and also receive specified
rebates against new or used vehicle purchases for money spent in Hometown's
service departments. The owner loyalty program is designed to combat the recent
trend for increasing percentages of repair and maintenance work to be performed
at service stations and other independent repair shops, chains of specialized
repair, maintenance and part replacement shops, such as muffler shops, brake
shops, and tire shops. Manufacturers' policies that require warranty work to be
performed at franchised dealerships support the Company's strategy of retaining
maintenance and light repair work.
The parts and service business is less cyclical than new vehicle sales and
provides an important recurring revenue stream to the Company's dealerships. The
Company will use systems, already in place at the Core Operating Companies, that
track its customers' maintenance records and notify owners of vehicles purchased
at the dealerships when their vehicles are due for periodic services. The
Company believes that this practice encourages preventive maintenance rather
than post-breakdown repairs.
Each dealership sells factory-approved parts for vehicle brands and models
sold by that dealership. These parts are either used in repairs made by the
dealership or sold at retail to its customers or at wholesale to independent
repair shops. Each dealership employs its own parts manager and independently
controls its parts inventory and sales. Hometown dealerships which sell the same
new vehicle brands will have access to each other's computerized inventories.
Further, certain Manufacturers have begun to offer discounts on volume purchases
of certain parts and components.
FINANCE, INSURANCE AND OTHER REVENUE. Hometown dealerships arrange
financing for their customers' vehicle purchases, sell vehicle service contracts
and arrange selected types of credit insurance in connection with the financing
of vehicle sales. The dealerships place heavy emphasis on F&I and offer advanced
F&I training to their F&I managers. During 1997, Hometown arranged financing for
approximately 37% of new cars and 55% of used cars sold at retail to its
customers. Typically, the dealerships forward proposed financing contracts to
finance companies owned and operated by the Manufacturers or to selected
commercial banks or other financing parties. The dealerships receive a finance
fee from the lender for arranging the financing and may be assessed a
charge-back against a portion of the finance fee if the contract is terminated
prior to its scheduled maturity for any reason, including early repayment or
default. However, under existing agreements no charge-backs are permitted after
90, or in some cases 120, days except for certain sales to livery car
operations. In addition, Hometown has guaranteed certain automobile financing
loans made by financial institutions to its livery customers for the purchase
new and used limousines. At December 31, 1997 contingent liability on these
guarantees to Ford Motor Credit Co. and two other financial institutions
aggregated $9,732,000, of which guarantees for $800,000 were limited to a
12-month period from the inception of the loan and guarantees of $754,000
covered loans to customers with below average credit ratings. Loan guarantees
for $935,000 were with a financial institution in which an officer, director and
principal stockholder of Hometown is a stockholder. The collectability of such
loans to customers in the livery business can be adversely affected by a decline
in economic conditions. The Company has established reserves for potential
liability arising from such guarantees, which it believes are adequate but not
excessive.
48
<PAGE>
At the time of a new vehicle sale, the Company offers extended service
contracts to supplement the Manufacturer's warranty. Additionally, the Company
sells primary service contracts for used vehicles, as well as service contracts
of third party vendors.
FRANCHISE AGREEMENTS
Each Hometown dealership operates pursuant to a franchise agreement between
the applicable Manufacturer and the dealership. The typical automotive franchise
agreement specifies the locations at which the dealer has the right and the
obligation to sell motor vehicles and related parts and products and to perform
certain approved services in order to serve a specified market area. The
designation of such areas and the allocation of new vehicles among dealerships
are subject to the discretion of the Manufacturer which generally does not
guarantee exclusivity with a specified territory. In addition, a franchise
agreement may impose requirements on the dealer concerning such matters as
showrooms, facilities and equipment for servicing vehicles, maintenance of
inventories of vehicles and parts, maintenance of minimum net working capital
and training of personnel. Compliance with each of these requirements is closely
monitored by the Manufacturer. In addition, Manufacturers require each
dealership to submit a financial statement of operations on a monthly and annual
basis. The franchise agreement also grants the dealer the non-exclusive right to
use and display the Manufacturer's trademarks, service marks and design in the
form and manner approved by the Manufacturer.
Each franchise agreement sets forth the name of the person approved by the
Manufacturer to exercise full managerial authority over the dealership's
operations and the names and ownership percentages of the approved owners of the
dealership and contains provisions requiring the Manufacturer's prior approval
of changes in management or transfers of ownership of the dealership. A number
of Manufacturers prohibit the acquisition of a substantial ownership interest in
the franchised dealer or transactions that may affect management control of the
franchised dealer, in each case without the approval of the Manufacturer. In
connection with approving the Exchange, the Manufacturers will require Hometown
to execute new franchise agreements which may contain different provisions from
the current agreements. For a description of these and other restrictions and
other material terms imposed by the Manufacturers in the franchise agreements,
see "Risk Factors--Manufacturers' Control Over Dealerships" and "Risk Factors -
Dependence on Acquisitions for Growth; Manufacturers' Restrictions on
Acquisitions."
Most franchise agreements expire within one to five years. The Company
expects to renew any expiring agreements in the ordinary course of business. The
typical franchise agreement provides for early termination or non-renewal by the
Manufacturer under certain circumstance such as change of management or
ownership without Manufacturer approval, insolvency or bankruptcy of the
dealership, death or incapacity of the dealer manager, conviction of a dealer
manager or owner of certain crimes, misrepresentation of certain information by
the dealership or dealer manager or owner to the Manufacturer, failure to
adequately operate the dealership, failure to maintain any license, permit or
authorization required for the conduct of business or material breach of other
provisions of the franchise agreement. The dealership is typically entitled to
terminate the franchise agreement at any time without cause.
The automobile franchise relationship is also governed by various federal
and state laws established to protect dealerships from the generally unequal
bargaining power between the parties. The state statutes generally provide that
it is a violation for a manufacturer to terminate, or to fail to renew, a
franchise without good cause. Most statutes also provide that the manufacturer
is prohibited from unreasonably withholding approval for a proposed change in
ownership of the dealership. Generally, in order to withhold approval, the
manufacturer must have material reasons relating to the character, financial
ability or business experience of the proposed transferee. Moreover, certain
states including Connecticut, New Jersey, Massachusetts and Vermont have laws
which grant to pre-existing dealers a right to contest, in court or before an
administrative agency, if a manufacturer establishes a new dealership, or
authorizes the relocation of an existing dealership, to a location within a
defined market area of a pre-existing dealership holding a franchise to sell the
same brand. Accordingly, the relationship between the Manufacturer and
49
<PAGE>
the dealer, particularly as it relates to a manufacturer's rights to terminate,
or to fail to renew, the franchise, is the subject of a substantial body of case
law based upon specific facts in each instance. The above discussion of state
court and administrative holdings and various state laws is based on
management's beliefs and may not be an accurate description of the state court
and administrative holdings and various state laws.
COMPETITION
The automotive retailing industry is extremely competitive and consumers
generally have a number of choices in deciding where to purchase or service a
new or used vehicle.
The Company competes for new vehicle sales with other franchised dealers in
each of its marketing areas. Hometown does not have any cost advantage in
purchasing new vehicles from the Manufacturers and typically relies on sales
expertise, reputation and customer goodwill, the quality of its service and
location of its dealerships to sell new vehicles. In recent years, automobile
dealers have also faced increased competition in the sale or lease of new
vehicles from independent leasing companies, on-line purchasing services and
warehouse clubs. In addition, Ford Motor has announced that it is exploring the
possibility of going into business with some of its dealers to create automotive
superstores in selected markets. The Company believes that the principal
competitive factors in new vehicle sales are the marketing campaigns conducted
by Manufacturers, the ability of dealerships to offer a wide selection of the
most popular vehicles, the location of dealerships and the quality of customer
service. Other competitive factors include customer preference for particular
brands of automobiles, pricing (including Manufacturer rebates and other special
offers) and warranties. The Company believes that its dealerships are
competitive in all of these areas.
In used vehicles, Hometown competes with other franchised dealers,
independent used car dealers, automobile rental agencies and private parties for
supply and resale of used vehicles. The Company believes that the principal
competitive factors in used vehicle sales are the quality and condition of its
used cars, price and the quality of customer service.
The Company competes against other franchised dealers to perform warranty
repairs and against other automobile dealers, franchised and independent service
center chains and independent garages for non-warranty repair and routine
maintenance business. The Company competes with other automobile dealers,
service stores and automotive parts retailers in its parts operations. The
Company believes that the principal competitive factors in parts and service
sales are price, the use of factory approved replacement parts, a dealership's
expertise with a Manufacturer's brands and models, the quality of customer
service and convenience for the customer.
In addition to competition for the sale of vehicles, the Company competes
with publicly and privately owned dealership groups for the acquisition of other
dealerships. Although it is currently the only dealer group with public
ownership located in the Northeast and currently faces only limited competition
in this region from other purchasers of dealerships, publicly owned dealerships
with significantly greater capital resources have acquired a limited number of
dealerships in the Company's current and targeted market areas and the Company
expects increased future competition for dealerships in such areas.
FACILITIES
Set forth in the table below is certain information relating to the
properties that the Company uses in its business. Certain of the leases
described below reflect the terms of new leases which became effective on the
closing of the Offering. See "Certain Transactions -- Leases."
50
<PAGE>
<TABLE>
<CAPTION>
OCCUPANT/TRADE NAME LOCATION USE LEASE/OWN
- --------------------------- --------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Shaker's Lincoln Mercury 831 Straits Turnpike New and used car sales; Lease expires in 2013;
Watertown, CT 06795 service; F & I $240,000 per year with CPI
increases in 2004 and 2009
Lincoln Mercury Autocare 1189 New Haven Rd. Service Owned by dealership
Naugatuck, CT 06770
Family Ford 1200 Wolcott Street New and used car sales; Lease expires in 2013;
Waterbury, CT 06705 service; F & I $240,000 per year with CPI
increases in 2004 and 2009
Shaker's Jeep Eagle 1311 South Main St. New and used car sales; Lease expires in 2013;
Waterbury, CT 06706 service; F & I $72,000 per year with CPI
increases in 2004 and 2009
Westwood Lincoln Mercury 55 Kinderkamack Rd. New and used car sales; Lease expires in 2013;
Emerson, NJ 07630 service; F & I; livery $360,000 per year with CPI
sales increases in 2004 and 2009
Muller Toyota Route 31 and Van Sickles New and used car sales; Lease expires in 2013;
Rd. Clinton, NJ 08809 service; F & I $360,000 per year with CPI
increases in 2004 and 2009
Muller Toyota Route 31 and Spruce St. Used car sales Lease expires in 2000;
Glen Gardner, NJ 08826 $60,000 per year with
increases up to $72,000 per
year
Muller Chevrolet, Route 173 and Voorhees Rd. New and used car sales; Lease expires in 2013;
Oldsmobile, Isuzu Stewartsville, NJ 08865 service; F & I $396,000 per year with CPI
increases in 2004 and 2009
Muller Chevrolet 135 Fifth Street Auto collision repairs Lease expires in 2000 at
Phillipsburg, NJ 08865 $48,000 per year
Bay State Lincoln Mercury 571 Worcester Road New and used car sales; Lease expires in 2013 at
Framingham, MA 01701 service; F & I $360,000 per year for the
first 5 years, $420,000 for
the next 5 years and
$456,000 for the last 5
years; two five-year
options at $480,000 per
year
Brattleboro Chrysler Dodge Route 5, Putney Rd. New and use car service; F Lease expires in 2003 at
Plymouth sales; N. Brattleboro, VT 05304 & I $240,000 per year; one five
year renewal option at the
same rent and option to
purchase at fair market
value of not less than $1.5
million.
</TABLE>
51
<PAGE>
GOVERNMENTAL REGULATIONS
A number of regulations affect Hometown's business of marketing, selling,
financing and servicing automobiles. The Company is also subject to laws and
regulations relating to business corporations generally.
Under New Jersey, Connecticut, Massachusetts and Vermont law, the Company
must obtain a license in order to establish, operate or relocate a dealership or
provide certain automotive repair services. These laws also regulate the
Company's conduct of business, including its advertising and sales practices.
Other states may have similar requirements.
The Company's financing activities are subject to federal truth-in-lending,
consumer leasing and equal credit opportunity regulations, as well as state and
local motor vehicle finance laws, installment finance laws, insurance laws,
usury laws and other installment sales laws. Some states regulate finance fees
that may be paid as a result of vehicle sales. Penalties for violation of any of
these laws or regulations may include revocation of certain licenses, assessment
of criminal and civil fines and penalties and, in certain instances, may create
a private cause of action for individuals. The Company believes that its
dealerships substantially comply with all laws and regulations affecting their
businesses and do not have any material liabilities under such laws and
regulations, and that compliance with all such laws and regulations do not and
will not, individually or in the aggregate, have a material adverse effect on
the Company's capital expenditures, earnings, or competitive position.
ENVIRONMENTAL MATTERS
The Company is subject to a wide range of federal, state and local
environmental laws and regulations, including those governing discharges to the
air and water, storage of petroleum substances and chemicals, handling and
disposal of wastes, and remediation of contamination arising from spills and
releases. As with automobile dealerships generally, and service and parts and
collision repair center operations in particular, the Company's business
involves the generation, use, handling and disposal of hazardous or toxic
substances or wastes. Operations involving the management of hazardous and
non-hazardous wastes are subject to requirements of the federal Resource
Conservation and Recovery Act and comparable state statutes. Pursuant to these
laws, federal and state environmental agencies have established approved methods
for storage, treatment, and disposal of regulated wastes with which the Company
must comply.
Hometown's business also involves the use of aboveground and underground
storage tanks. Under applicable laws and regulations, the Company is responsible
for the proper use, maintenance and abandonment of regulated storage tanks owned
or operated by it and for remediation of subsurface soils and groundwater
impacted by releases from such existing or abandoned aboveground or underground
storage tanks. In addition to these regulated tanks, the Company owns and
operates other underground and aboveground devices or containers (e.g.
automotive lifts and service pits) that may not be classified as regulated
tanks, but which are capable of releasing stored materials into the environment,
thereby potentially obligating the Company to remediate any soils or groundwater
resulting from such releases.
The Company is also subject to laws and regulations governing remediation of
contamination at facilities it operates or to which it sends hazardous or toxic
substances or wastes for treatment, recycling or disposal. The Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"), also known as
the "Superfund" law, imposes liability, without regard to fault or the legality
of the original conduct, on certain classes of persons that are considered to
have contributed to the release of a "hazardous substance" into the environment.
These persons include the owner or operator of the disposal site or sites where
the release occurred and companies that disposed or arranged for the disposal of
the hazardous substances released at such sites. Under CERCLA, these
"responsible parties" may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment, for damages to natural resources and for the costs of certain
health studies, and it is
52
<PAGE>
not uncommon for neighboring landowners and other third parties to file claims
for personal injury and property damage allegedly caused by the release of
hazardous substances.
Further, the Federal Water Pollution Control Act, also known as the Clean
Water Act, and comparable state statutes prohibit discharges of pollutants into
regulated waters without authorized National Pollution Discharge Elimination
System (NPDES) and similar state permits, require containment of potential
discharges of oil or hazardous substances, and require preparation of spill
contingency plans. The Company expects to implement programs that address
wastewater discharge requirements as well as containment of potential discharges
and spill contingency planning.
Environmental laws and regulations have become very complex, making it very
difficult for businesses that routinely handle hazardous and non-hazardous
wastes to achieve and maintain full compliance with all applicable environmental
laws. Like virtually any network of automobile dealerships and vehicle service
facilities, the Company, from time to time, can be expected to experience
incidents and encounter conditions that will not be in compliance with
environmental laws and regulations. However, none of Hometown's dealerships have
been subject to any material environmental liabilities in the past and the
Company does not anticipate that any material environmental liabilities will be
incurred in the future. Although the Company is in the process of establishing
an environmental management program that is intended to reduce the risk of
noncompliance with environmental laws and regulations, environmental laws and
regulations and their interpretation and enforcement are changed frequently and
the Company believes that the trend towards broader and stricter environmental
legislation and regulations is likely to continue. Hence, there can be no
assurance that compliance with environmental laws or regulations or the future
discovery of unknown environmental conditions will not require additional
expenditures by the Company or that such expenditures would not be material. See
"Risk Factors -- Governmental Regulations and Environmental Matters."
EMPLOYEES
As of March 31, 1998, the Company (after giving effect to the Exchange and
the Acquisitions) employed 349 people, of whom approximately 79 were employed in
managerial positions, 72 were employed in non-managerial sales positions, 111
were employed in non-managerial parts and service positions and 87 were employed
in administrative support positions.
Hometown believes that its relationships with its employees are favorable.
None of the employees is represented by a labor union. Because of its dependence
on the Manufacturers, the Company may, however, be affected by labor strikes,
work slowdowns and walkouts at the manufacturing facilities of their
Manufacturers or of suppliers to, or shippers for, their Manufacturers.
53
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their respective
ages as of January 31, 1998 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ ----------- ------------------------------------------
<S> <C> <C>
Salvatore A. Vergopia..................... 58 Chairman of the Board and Chief Executive
Officer
Joseph Shaker............................. 30 President, Chief Operating Officer and
Director
William C. Muller Jr...................... 46 Vice President--New Jersey Operations and
Director
Corey Shaker.............................. 40 Vice President--Connecticut Operations and
Director
Edward A. Vergopia........................ 28 Vice President--Fleet Operations and
Director
James Christ.............................. 41 General Manager--Muller Toyota and
Director
John Rudy................................. 56 Chief Financial Officer and Secretary
Steven Shaker............................. 28 Vice President--Parts and Service
Matthew J. Visconti Jr.(1)................ 41 Vice President--Mergers and Acquisitions
Domenic Colasacco(2)...................... 49 Director
Steven A. Hirsh(2)........................ 58 Director
Louis I. Margolis(2)...................... 53 Director
</TABLE>
- ------------------------
(1) Mr. Visconti will take office immediately after the closing of the Offering.
(2) Messrs. Colasacco, Hirsh and Margolis will take office as directors
effective 45 days after the closing of this Offering.
All directors hold office until the next annual meeting of shareholders and
until their successors are duly elected and qualified. Officers are elected to
serve subject to the discretion of the Board of Directors.
Set forth below is a brief description of the background and business
experience of the executive officers and directors of the Company:
SALVATORE A. VERGOPIA has been Chairman of the Board and Chief Executive
Officer since October 1, 1997. In addition, from 1992 to date, he has been
President and for over 20 years prior thereto, Vice President of Westwood
Lincoln Mercury Sales Inc. Under his management, Westwood has been a winner of
numerous awards, including: (a) Lincoln-Mercury 100 Champions Leadership
Conference award in each of the past 25 years; (b) North American Customer
Excellence Award; and (c) Ford Motor Credit Company's Partners in Quality Award.
In addition to his responsibilities as a dealer, he has served on the Customer
Dispute Settlement Board for New Jersey and Connecticut and is a member and past
Chairman of the Ford Lincoln-Mercury NADA 20 Group. He holds a B.S. degree from
Northern Arizona University.
JOSEPH SHAKER has been the President and Chief Operating Officer since
October 1, 1997 and is in charge of the Company's dealer acquisition program,
including the implementation of such programs as may be necessary to assimilate
new dealers into Hometown's operational model. In addition, from 1991 to date,
he has been the Chief Operating Officer of Shaker's Lincoln Mercury, Shaker's
Jeep Eagle and Lincoln Mercury Autocare in Connecticut. In 1992, at the request
of Ford Motor Company, he developed
54
<PAGE>
the pilot free-standing neighborhood Autocare Center which has become the model
for free-standing neighborhood auto maintenance centers established by Ford
Motor with certain of its other dealers. He also started Shaker's Lincoln
Mercury limousine department in 1992 and has been responsible for its growth and
implementation. He is a Member of the Executive Committee of the NADA 20 Group.
He holds a B.S. (Management) degree from Bentley College.
WILLIAM C. MULLER JR. has been Vice President--New Jersey Operations since
October 1, 1997. In addition, from 1980 to date, he has been the President of
Muller Toyota, Inc. and of Muller Chevrolet, Oldsmobile, Isuzu, Inc. Under his
management, Muller Toyota has been: (a) a 9-time recipient of Toyota's
Prestigious President's Award, given to those dealers with superior levels of
customer satisfaction who also exceed capital standards and have high market
penetration and facilities that meet or exceed Toyota standards; (b) a 13-time
recipient of Toyota Parts Excellence Award; (c) a 9-time winner of Toyota
Service Excellence Award; and (d) a 3-time winner of Toyota's Sales Excellence
Award. He holds a B.A. degree from Fairleigh Dickinson University.
COREY SHAKER has been Vice President--Connecticut Operations since October
1, 1997 and is in charge of Hometown's Company-wide sales training efforts. In
addition, from 1989 to date, he has been Chief Operating Officer and General
Manager of Family Ford Inc. where he was responsible for all aspects of its
operations. He is a member of NADA Ford F01 20 group. He was awarded the Lincoln
Mercury Salesperson of the Nation award in 1980 and is a three time winner of
the Lincoln Mercury Inner Circle award. He holds a B.S. in Business
Administration from Providence College.
EDWARD A. VERGOPIA has been Vice President--Fleet Operations since October
1, 1997. In addition, from 1988 to date, he has been Executive Vice President of
Westwood where, among other responsibilities, he managed the Lincoln Mercury
Division of Spoilers Plus (custom cars) and Westwood Lincoln Mercury Limousine
Department. During those periods, he also worked in the Leasing, Financing and
Parts and Service Departments of Westwood Lincoln Mercury. He holds a B.B.A.
from the University of Miami.
JAMES CHRIST has been General Manager of the Muller Toyota division of the
Company since October 1, 1997. In addition, from 1995 to date, he has been
General Manager of Muller Toyota in Clinton, New Jersey. From March 1986 to
November 1994, he was Vice President and General Manager of Liberty Toyota, Inc.
in Burlington, New Jersey and from August 1989 to November 1994, he was Vice
President of Richardson Imports, Inc. a Lexus dealership, in Cherry Hill, New
Jersey. Prior thereto he had more than 5 years experience in managerial
capacities at Toyota. He holds a B.S. in Business Administration from West
Chester University.
JOHN C. RUDY has been Chief Financial Officer since October 1, 1997 and,
upon the closing of the Offering, will assume full-time status. His
responsibilities include financial reporting, accounting and computer systems.
In addition, from 1992 to date, he has been President of Beacon Business
Services, Inc., a business consulting firm providing business strategy,
financial, and accounting services to small and mid-size businesses. From 1990
to 1992, he directed the Metropolitan New York area troubled business practice
for Coopers & Lybrand, and from 1987 through 1989, served as Chief Financial
Officer for Plymouth Lamston Stores Corporation, a chain of retail stores in New
York City. He holds a Bachelor of Science Degree in Economics from Albright
College in Reading, Pennsylvania, an MBA from Emory University in Atlanta,
Georgia, and is a Certified Public Accountant in New York State.
STEVEN SHAKER has been Vice President in charge of Parts and Service since
October 1, 1997. In addition, from 1992 to date, he has been Director of Parts
and Service of all of the Shaker Group's operations and was instrumental in the
implementation of the pilot program to develop the Ford Motor Company's first
Autocare automobile service center. He holds a B.A. degree from Salve Regina
College.
MATTHEW J. VISCONTI JR. will become Vice President--Mergers and Acquisitions
upon the closing of the Offering. During 1997 he served as one of the organizers
of the Company and consulted with it on merger
55
<PAGE>
and acquisition matters. From January 1996 to December 1996, he was General
Manager of the Ray Catena Company which held Jaguar and Porsche franchises in
Edison, New Jersey. Prior thereto, from July 1994 to December 1995, he was
General Sales Manager of Town Motors in Englewood, New Jersey which held Audi,
Lincoln, Mercury, Porsche, Subaru and Suzuki franchises. From prior to 1992 to
April 1994, he was an owner and President of The Blake Group, Inc., a business
consultant specializing in merger and acquisition transactions in the retail
automobile sector.
DOMENIC COLASACCO is Chairman of the Board and President of United States
Trust Company (USTC), a Boston based firm specializing in trust and investment
management services for institutional and personal clients. Mr. Colasacco has
been serving as the Chief Investment Officer of USTC since 1980. From 1990 to
March 1998, he was also a director of UST Corp., the holding company for USTC
and USTrust, a commercial and retail bank in Greater Boston. He holds both a
bachelors degree and an M.B.A. from Babson College and is a Chartered Financial
Analyst.
STEVEN A. HIRSH has been a portfolio manager for William Harris & Co., a
financial services company, for more than five years. Since 1994 he has also
been Chairman, Chief Executive Officer and President of Astro Communications,
Inc., a manufacturer of strobe lights. Mr. Hirsh has been a director of Complete
Management, Inc., a physician practice management company since 1996 and Market
Guide, Inc, a financial data base company since 1997. He holds a Bachelor of
Science degree from the University of Colorado and a Master of Business
Administration from the University of Chicago.
LOUIS I. MARGOLIS has been a General Partner of Pine Street Associates,
L.P., a private investment partnership that invests in other private limited
partnerships since January 1994. In January 1997, Mr. Margolis formed and is the
President and sole shareholder of Chapel Hill Capital Corp., a financial
services company. From 1991 through 1993, he was a Member of the Management
Committee of Nomura Securities International. From 1993 through 1995, he was
Chairman of Classic Capital Inc., a registered investment advisor. Mr. Margolis
has been a director of Milestone Scientific, Inc., a manufacturer of dental
devices, since 1997. Mr. Margolis has been a member of the Financial Products
Advisory Committee of the Commodity Futures Trading Commission since its
formation in 1986, a Trustee of the Futures Industry Institute since 1991 and a
Trustee of Saint Barnabas Hospital in Livingston, New Jersey since 1994.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has established Compensation and Audit
committees, whose members will be Messrs. Colasacco, Hirsh and Margolis. The
Compensation Committee reviews and recommends to the Board of Directors the
compensation and benefits of all officers of the Company, reviews general policy
matters relating to compensation and benefits of employees of the Company and
administers the issuance of stock options and discretionary cash bonuses to the
Company's officers, employees, directors and consultants. The Audit Committee
meets with management and the Company's independent public accountants to
determine the adequacy of internal controls and other financial reporting
matters. It is the intention of the Company to appoint only independent
directors to the Audit and Compensation Committees.
56
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain summary information for the year
ended December 31, 1997 with respect to compensation paid to Hometown's Chief
Executive Officer and five highest paid other officers by the Core Operating
Companies for services provided to such Core Operating Companies:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION SALARY(1) BONUS(2) OTHER ANNUAL COMPENSATION(3)
- ----------------------------------------------------------- ---------- ---------- ----------------------------
<S> <C> <C> <C>
Salvatore A. Vergopia, Chairman & Chief Executive
Officer.................................................. $ 174,950 $ 380,000 $ 10,557
Joseph Shaker, President and Chief Operating Officer....... $ 81,000 $ 100,000 $ 1,357
William C. Muller Jr., Vice President--New Jersey
Operations............................................... $ 259,247 -- $ 52,444
Corey Shaker, Vice President--Connecticut Operations....... $ 114,400 $ 100,000
Edward A. Vergopia, Vice President--Fleet Operations....... $ 129,388 $ 250,000
James Christ, General Manager--Muller Toyota............... $ 108,000 $ 113,000
</TABLE>
- ------------------------
(1) The dollar value of perquisites and other personal benefits are included in
Other Annual Compensation.
(2) The amounts shown are cash bonuses earned in the specified year and paid in
the first quarter of the following year.
(3) Consists of excess life insurance for Salvatore Vergopia, extra disability
insurance on Joe Shaker, and life insurance on co-owner for William C.
Muller, Jr.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Until after the consummation of the Offering, Hometown will have no
Compensation Committee or other Board committee performing equivalent functions.
Compensation contracts have been approved by the entire Board of Directors,
consisting of: Salvatore A. Vergopia; Joseph Shaker; William C. Muller Jr.;
Corey Shaker; Edward A. Vergopia; and James Christ.
EMPLOYMENT CONTRACTS
In April 1998, Hometown entered into five-year employment agreements,
effective upon the closing of the Offering, with the following key personnel of
the Core Operating Companies: Salvatore A. Vergopia as Chairman and Chief
Executive Officer, Joseph Shaker as President and Chief Operating Officer,
William C. Muller Jr. as Vice President--New Jersey Operations, Corey Shaker as
Vice President-- Connecticut Operations, Edward A Vergopia as Vice
President--Fleet Operations, James Christ as General Manager--Muller Toyota; and
Steven Shaker as Vice President--Parts and Service. The Company also entered
into a five-year employment agreement with Matthew J. Visconti to become Vice
President-- Mergers and Acquisitions. Each agreement provides for an annual base
salary of $200,000, except that the agreement with James Christ provides for an
annual base salary of $150,000 plus an annual bonus equal to five percent of the
pre-tax profits of Muller Toyota, the agreement with Steven Shaker provides for
an annual base salary of $100,000 and the agreement with Mr. Visconti provides
for an annual base salary of $150,000. Each agreement also provides for
participation by the employee in all executive benefit plans and, if employment
is terminated without cause (as defined in the agreement), payment of an amount
equal to the salary which would have been payable over the unexpired term of his
employment agreement.
57
<PAGE>
STOCK OPTIONS
In February 1998, in order to attract and retain persons necessary for the
success of the Company, Hometown adopted its 1998 Stock Option Plan (the "Stock
Option Plan") covering up to 480,000 shares of Class A Common Stock. Pursuant to
the Stock Option Plan officers, directors and key employees of the Company and
consultants to the Company are eligible to receive incentive and/or
non-incentive stock options. The Stock Option Plan, which expires in January
2008, will be administered by the Board of Directors or a committee designated
by the Board of Directors. The selection of participants, allotment of shares,
determination of price and other conditions relating to the purchase of options
will be determined by the Board of Directors, or a committee thereof, in its
sole discretion. Stock options granted under the Stock Option Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Common Stock on the
date of the grant, except that the term of an incentive stock option granted
under the Stock Option Plan to a stockholder owning more than 10% of the
outstanding Common Stock may not exceed five years and its exercise price may
not be less than 110% of the fair market value of the Common Stock on the date
of the grant. As of the effective date of the Offering, options for an aggregate
of 240,000 shares, exercisable at the Offering price during a five-year period,
were granted to eight officers and nine other employees of the Company and were
outstanding under the Stock Option Plan. These options will be exercisable for
one-third of the shares covered thereby on the first anniversary of the date of
the grant and for an additional one-third of the shares covered thereby each
year thereafter. In addition, options for 5,000 shares will be granted to each
of the Company's outside directors upon their taking office. Options granted to
outside directors will be exercisable at the fair market value per share on the
date of grant and will for 50% of the shares covered immediately upon grant and
for the remainder of the shares following one year's service.
58
<PAGE>
CERTAIN TRANSACTIONS
LEASES
The Company has leased from various affiliates the premises occupied by
certain of its dealerships. Each of these governing leases will become effective
as of the closing of the Offering, have a term expiring in 2013, be on a triple
net basis and provide for a consumer price index ("CPI") increase to the base
rent for the five-year periods commencing January 1, 2004 and 2009.
SHAKER GROUP. The Company will lease, for an initial annual base rental of
$240,000, the premises occupied by its Lincoln Mercury dealership in Watertown,
Connecticut from Shaker Enterprises, a Connecticut general partnership whose
seven partners include Joseph Shaker, Corey Shaker, Steven Shaker and Janet
Shaker. Joseph Shaker is President and Chief Operating Officer of Hometown and a
principal stockholder of the Company. Corey Shaker is Vice
President--Connecticut Operations and a principal stockholder of the Company.
Steven Shaker is Vice President--Parts and Service and a principal stockholder
of the Company. Janet Shaker is a principal stockholder of the Company.
MULLER GROUP. The Company will lease, for an initial annual base rental of
$360,000 and $396,000 respectively the premises occupied by its Toyota
dealership in Clinton, New Jersey and its Chevrolet/ Oldsmobile/Isuzu dealership
in Stewartsville, New Jersey from Rellum Realty Company, a New Jersey general
partnership, one of whose two partners is William C. Muller Jr. Mr. Muller is
Vice President--New Jersey operations and, prior to the Offering, was a 9.42%
stockholder of Hometown.
WESTWOOD. The Company will lease, for an initial annual base rental of
$360,000 the premises occupied by its Lincoln Mercury dealership in Emerson, New
Jersey from Salvatore A. Vergopia and his wife. Mr. Vergopia is Chairman of the
Board and Chief Executive Officer of Hometown and, prior to the Offering,
including shares owned by his wife, was a 17.63% stockholder of Hometown.
EXCHANGE
The executive officers, directors and holders of more than five percent of
any class of the Company's voting securities who are listed in the table under
"Principal Stockholders" received their stock in the Exchange except one officer
included in "all Officers and Directors as a Group" who received 60,000 shares
of Class A Common Stock on the organization of Hometown. See "Exchange."
The Company will pay a fee of $175,000 to Matthew J. Visconti at the Closing
of the Offering for his services in connection with the Exchange. Mr. Visconti
was one of the organizers and will, upon the closing of the Offering, become
Vice President--Acquisitions and Mergers of the Company.
LOANS
During the year ended December 31, 1997, a Core Operating Company lent
$59,000 to Corey Shaker, increasing the amount owed by him to that company to
$86,000 at December 31, 1997. The loan bears interest at 6.83% per annum and
will be repaid immediately prior to the closing of the Offering.
During the year ended December 31, 1997, Westwood: (a) lent: (i) $769,000 to
Salvatore A. Vergopia, increasing the amount owed by him to Westwood to
$940,000, which is offset by $1,000,000 previously advanced by Salvatore A.
Vergopia to such company, leaving a net balance of $60,000 owed to Salvatore
Vergopia; and (ii) $7,000 to Edward A. Vergopia, increasing the amount owed by
him to that Core Operating Company to $66,000. In fiscal 1997, Westwood also
received repayment of $10,000 from Worldwide Financing Co. Ltd. ("WFC"),
reducing the amount owed by WFC to $90,000. The loans to and from Salvatore A.
Vergopia each bear interest at prime rate, which was 8.5% in 1997, and the loans
from WFC and Edward A. Vergopia are each non-interest bearing. All of these
loans will be repaid immediately prior to the closing of the Offering. Salvatore
A. Vergopia is Chairman of the Board and Chief Executive Officer and a principal
stockholder of the Company. Edward A. Vergopia is Vice President--Fleet
59
<PAGE>
Operations and a director and principal stockholder of the Company. WFC, which
is not being acquired by the Company, is owned by Salvatore A. Vergopia and his
wife.
During the year ended December 31, 1997, a Core Operating Company lent
Rellum Realty Company $106,000, increasing the amount owed to it by Rellum
Realty at year end to $430,000. The loan was repaid in 1998.
GUARANTEES
A Core Operating Company is the guarantor of a $2,000,000 credit facility
from SEC Funding Corp. ("SFC") pursuant to which loans are made to third party
purchasers of limousines. As at December 31, 1997 loans outstanding under this
credit line were $935,000. SFC is owned by Salvatore and Edward Vergopia and by
a manager at Westwood.
As at March 31, 1998, the Company had aggregate liability of $28,437,000
under its floor plan financing lines of credit, including liabilities of its
subsidiaries, Muller Chevrolet, Muller Toyota and Westwood in the amounts of
$4,148,000, $4,268,000 and $7,493,000, respectively. The floor plan liabilities
of these subsidiaries are guaranteed by affiliates of the Company as follows:
Muller Chevrolet by William Muller Sr. and William Muller Jr; Muller Toyota by
William Muller Sr., William Muller Jr. and James Christ and Westwood by
Salvatore A. Vergopia. Hometown plans to reduce floor plan obligations by
$10,000,000 using a portion of the proceeds of the Offering, of which
approximately $5,600,000 million will be used to reduce liabilities guaranteed
by these affiliates. To the extent that floor plan finance obligations
guaranteed by affiliates are reduced or eliminated through the use of a portion
of the proceeds of the Offering, these affiliates will benefit through the
reduction of contingent liability on their guarantees.
60
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 1998, after
giving pro forma effect to the consummation of the Exchange, by each stockholder
known by the Company to be the beneficial owner of more than 5% of its
outstanding shares, by each director of the Company, by the executive officers
named in the table above and by the directors and executive officers as a group
and as adjusted to effect the issuance of shares by the Company in the Offering.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY PERCENT OF
OWNED OWNED AGGREGATE
BEFORE THIS OFFERING AFTER THIS OFFERING VOTING
----------------------- ----------------------- RIGHTS OF
NAME OF BENEFICIAL OWNER(1) NUMBER(3) PERCENT(2) NUMBER(3) PERCENT(2) ALL CLASSES
- ---------------------------------------------------- ---------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Salvatore A. Vergopia(4)............................ 705,000 17.63 705,000 11.75 17.70
Joseph Shaker....................................... 206,612 5.17 206,612 3.44 5.19
William C. Muller Jr................................ 470,034 11.75 470,034 7.83 11.80
Corey Shaker........................................ 249,100 6.23 249,100 4.15 6.25
Edward A. Vergopia.................................. 235,000 5.88 235,000 3.92 5.90
James Christ........................................ 93,248 2.33 93,248 1.55 2.34
Steven Shaker....................................... 206,424 5.17 206,424 3.44 5.18
Paul Shaker......................................... 218,268 5.46 218,268 3.64 5.48
Janet Shaker........................................ 227,668 5.69 227,668 3.79 5.71
William C. Muller Sr................................ 376,718 9.42 376,718 6.28 9.46
All Officers and Directors as a group
(8 persons)(5).................................... 2,225,418 55.64 2,225,418 37.09 54.50
</TABLE>
- ------------------------
(1) The respective addresses of the beneficial owners are: Salvatore A. Vergopia
and Edward A. Vergopia, c/o Westwood Lincoln Mercury, 55 Kinderkamack Road,
Emerson, New Jersey 07630; Joseph Shaker, c/o Shaker's Inc. 831 Straits
Turnpike Watertown, Connecticut 06795; William C. Muller Jr., James Christ
and William C. Muller Sr. c/o Muller Toyota, Inc., Route 31, PO Box J,
Clinton, New Jersey, 08809; Corey Shaker, Janet Shaker, Steven Shaker and
Paul Shaker, c/o Family Ford, Inc., 1200 Wolcott Street, Waterbury,
Connecticut 06705.
(2) Percentages based on number of shares of all classes.
(3) Class B Common Stock unless otherwise noted.
(4) Includes 225,600 shares owned by his wife Janet.
(5) Includes 60,000 shares of Class A Common Stock owned by one officer.
The Company's officers and directors and holders of more than five percent
of any class of its voting securities have agreed with the Representative that
they will not sell or otherwise dispose of any Common Stock, or any securities
convertible into shares of the Company's Common Stock without the prior written
consent of such Representative until , 1998. After that date, an aggregate
of shares of Common Stock will become eligible for sale pursuant to Rule 144 and
the limitations specified therein.
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 29,760,000 shares of
which 24,000,000 are shares of Class A Common Stock, par value $.001 per share,
3,760,000 are shares of Class B Common Stock, par value $.001 per share, and two
million are shares of Preferred Stock, par value $.001 per share, issuable in
series. As of March 31, 1998 none of the shares of Class B Common Stock or
Preferred Stock were outstanding and 240,000 shares of Class A Common Stock were
outstanding. Upon the closing of the Offering and the simultaneous closings of
the Exchange and the Acquisitions, the Company will issue 3,760,000 shares of
Class B Common Stock to the stockholders of the Core Operating Companies and
2,000,000 shares of Class A Common Stock in the Offering.
COMMON STOCK--CLASS A AND CLASS B
The Class A Common Stock and the Class B Common Stock each have a par value
of $.001 per share and are identical in all respects, except voting rights and
the convertibility of the Class B Common Stock. Subject to any special voting
rights of any series of Preferred Stock that may be issued in the future, the
holders of Class A Common Stock are entitled to one vote per share and the
holders of Class B Common Stock are entitled to ten votes per share. Except as
otherwise required by law, both Class A Common Stock and Class B Common Stock
vote together as one class on all matters to be voted on by stockholders of the
Company, including the election of directors. Class A Common Stock is not
convertible. The Class B Common Stock is convertible into Class A Common Stock
on a share for share basis, at any time at the election of the holder and is
automatically converted into Class A Common Stock upon any transfer to a person
who is not then an officer or director of the Company or of a subsidiary of the
Company. All of the outstanding shares of Class B Common Stock, representing
approximately 94% of the aggregate voting power of the Company upon completion
of the Offering, are beneficially owned by the principals of the Core Operating
Companies, including a majority of the Board of Directors of Hometown. Neither
class of Common Stock has redemption, preemptive or sinking fund rights. Holders
of both classes of Common Stock are entitled to dividends as and when declared
by the Board of Directors from funds legally available therefor and, upon
liquidation, dissolution or winding up of the Company, to participate ratably in
all assets remaining after payment of all liabilities. All shares of Common
Stock issued and outstanding are, and those offered hereby when issued will be,
legally issued, fully-paid and non-assessable. See "Dividend Policy."
PREFERRED STOCK
The Company's Certificate of Incorporation provides that its Board of
Directors has the authority, without further action by the holders of the
outstanding Common Shares, to issue up to two million shares of Preferred Stock
from time to time in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value thereof, if different from
the par value, and to fix the terms of any such series or class, including
dividend rights, dividend rates, conversion or exchange rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price and the liquidation preference of such class or series. The
Company does not have any Preferred Stock outstanding and has no present
intention to issue any Preferred Stock. The designations, rights and preferences
of any Preferred Stock would be set forth in a Certificate of Designation which
would be filed with the Secretary of State of Delaware.
REPRESENTATIVE'S WARRANTS
In connection with this Offering, the Company will sell to the
Representative, at a price of $ per Warrant, Representative's
Warrants, entitling the holders thereof to purchase up to 200,000
62
<PAGE>
shares of Class A Common Stock at a purchase price of $ per share over a
four year period commencing one year from the effective date of the Offering.
REPORTS
The Company intends to furnish to its stockholders annual reports containing
audited financial statements and quarterly reports for the first three quarters
of each fiscal year containing unaudited interim financial information. In
addition, the Company is required to file periodic reports on Forms 8-K, 10-Q
and 10-K with the United States Securities and Exchange Commission and to make
such reports available to its stockholders.
LIMITATION OF DIRECTORS' LIABILITY; INDEMNIFICATION
The Company's Certificate of Incorporation limits the liability to the
Company of individual directors for certain breaches of their fiduciary duty to
the Company. The effect of this provision is to eliminate the liability of
directors for monetary damages arising out of their failure, through negligent
or grossly negligent conduct, to satisfy their duty of care which requires them
to exercise informed business judgment. The liability of directors under the
federal securities laws is not affected. A director may be liable for monetary
damages only if a claimant can show a breach of the individual director's duty
of loyalty to the Company, a failure to act in good faith, intentional
misconduct, a knowing violation of the law, an improper personal benefit or an
illegal dividend or stock purchase.
The Company's Certificate of Incorporation also provides that each director
or officer of the Company serving as a director or officer shall be indemnified
and held harmless by the Company to the fullest extent authorized by the General
Corporation Law of the State of Delaware against all expense, liability and loss
(including attorneys fees, judgments, fines, Employee Retirement Income Security
Act, excise taxes or penalties and amounts paid or to be paid in settlement),
reasonably incurred or suffered by such person in connection therewith.
BUSINESS COMBINATIONS UNDER DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined, generally, as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date on which that person becomes an interested stockholder
unless: (a) before that person became an interested stockholder, the Company's
Board of Directors approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (b) upon
completion of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock outstanding at the time the transaction commenced (excluding
stock held by directors who are also officers of the Company and by employee
stock plans that do not provide employees with the right to determine whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (c) following the transaction in which that person became an interested
stockholder, the business combination is approved by the Company's Board of
Directors and authorized at a meeting of stockholders by the affirmative vote of
the holders of at least two-thirds of the outstanding voting stock not owned by
the interested stockholder. Under Section 203, these restrictions also do not
apply to certain business combinations proposed by an interested stockholder
following the announcement or notification of one of certain extraordinary
transactions involving the Company and a person who was not an interested
stockholder during the previous three years or who became an interested
stockholder with the approval of a majority of the Company's directors, if that
extraordinary transaction is approved or not opposed by a majority of the
directors who were directors before any person became an interested stockholder
in the previous three years or who were recommended for election or elected to
succeed such directors by a majority of such directors the in office.
63
<PAGE>
STOCKHOLDERS' AGREEMENT
The stockholders of the Core Operating Companies have entered into a
Stockholders' Agreement pursuant to which they have agreed, except under certain
circustances, to vote all of their shares, for a period of five years, in favor
of the election to the Board of Directors of Salvatore A. Vergopia, Joseph
Shaker, William C. Muller Jr., Corey Shaker, Edward A. Vergopia and James Christ
and to vote on all other matters in accordance with the recommendations of the
majority of the Board. Salvatore A. Vergopia is Chairman of the Board and Chief
Executive Officer of the Company, and Joseph Shaker is President and Chief
Operating Officer of the Company. Mr. Muller is Vice President--New Jersey
Operations, Corey Shaker, a cousin of Joseph Shaker, is Vice
President--Connecticut Operations, Edward A. Vergopia, the son of Salvatore A.
Vergopia, is Vice President--Fleet Operations and James Christ is General
Manager--Muller Toyota. These six directors, beneficially own approximately
52.1% of the Company's outstanding Class B Common Stock which, after the
Offering, will represent approximately 49.2% of the combined voting power of all
classes of Common Stock and, accordingly, as long as they vote as required by
the Stockholders' Agreement, will be in a position to elect all of the persons
chosen by them. Further, such control could preclude any unsolicited acquisition
of the Company and consequently affect the market price of the Common Stock
offered hereby.
LISTINGS ON NASDAQ NATIONAL MARKET
Application has been made for quotation of the Company's Class A Common
Stock on the Nasdaq National Market under the symbol "HCAR."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Shares is Continental Stock
Transfer and Trust Company, 2 Broadway, New York, New York 10004.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 2,240,000
shares of Class A Common Stock and 3,760,000 shares of Class B Common Stock. Of
these shares, the 2,000,000 shares (or a maximum of 2,300,000 shares of Class A
Common Stock in the event that the Representative exercises its over-allotment
option in full) sold in the Offering, will be freely tradeable without
restrictions under the Securities Act. The remaining 240,000 outstanding shares
of Class A Common Stock and 3,760,000 of Class B Common Stock were issued by the
Company in private transactions in reliance upon one or more exemptions under
the Securities Act, are "restricted securities" within the meaning of Rule 144
under that Act, and may be resold in a public distribution only if registered
under the Securities Act or pursuant to an exemption therefrom, including Rule
144. In general, under Rule 144 a person, including an affiliate of the Company,
who has beneficially owned restricted securities for at least one year is
entitled to sell within any three-month period a number of shares that does not
exceed the greater of 1% of the then outstanding Common Shares and the average
weekly trading volume in composite trading on all exchanges during the four
calendar weeks preceding such sale. In addition, sales under Rule 144 may be
made only through unsolicited "broker's transactions" or to a "market maker" and
are subject to various other conditions.
The Company's executive officers, directors and holders of more than 5% of
its voting securities have agreed with the Representative that they will not
sell or otherwise dispose of any Common Stock or any securities convertible into
Common Stock of the Company without the prior written consent of such
Representatives until , 1999 (the "lock-up period"). After the lock-up
period, such shares of Common Stock will be eligible for sale in the public
market pursuant to Rule 144 if the conditions of that Rule have been met. The
Company is unable to estimate the amount of restricted securities that will be
sold under Rule 144 because this will depend, among other factors, on the market
price for the Common Shares and the personal circumstances of the sellers.
In addition, 240,000 shares of Class A Common Stock are subject to
outstanding options that have been granted to officers, directors and key
employees.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among the
Company and the Underwriters named below (the "Underwriters"), the Company has
agreed to sell to the Underwriters, for whom Paulson Investment Company, Inc. is
acting as representative (in such capacity, the "Representative"), and the
Underwriters have severally and not jointly agreed to purchase the shares of
Class A Common Stock set forth below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- -------------------------------------------------------------------------------- ------------
<S> <C>
Paulson Investment Company, Inc.................................................
Total..................................................................... 2,000,000
------------
------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by their
counsel and various other conditions. The Underwriters are obligated to purchase
all of the above shares if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of Class A Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share.
The Underwriters may allow, and such dealers may allow, a concession not in
excess of $ per share to certain other dealers. After the Offering, the
offering price and other selling terms may be changed by the Representative. The
Company has granted to the Underwriters an option exercisable during the 45-day
period commencing on the date of this Prospectus to purchase from the Company,
at the offering price less underwriting discount, up to an aggregate of 300,000
shares of Class A Common Stock for the sole purpose of covering over-allotments,
if any. To the extent that the Underwriters exercise the option, each
Underwriter will have a firm commitment to purchase approximately the same
percentage thereof that the total number of shares shown in the above table
bears to the total shown, and the Company will be obligated, pursuant to the
option, to sell such additional shares to the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants (the "Representative's
Warrants") to purchase up to 200,000 shares of its Class A Common Stock. The
Representative's Warrants are exercisable for a period of four years commencing
one year from the date of this Prospectus at an exercise price of $ per
share. The Representative's Warrants provide for protection against dilution in
the event of stock splits, stock dividends, mergers and other changes in
capitalization. The Representative's Warrants also provide for adjustment of the
type of securities issuable upon exercise of the Representative's Warrants to
reflect changes in the Class A Common Stock. The Representative's Warrants grant
to the holders thereof certain rights with respect to the registration under the
Securities Act of the securities issuable upon exercise of the Representative's
Warrants.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration
Statement, of which this Prospectus forms a part. See "Available Information."
65
<PAGE>
LEGAL MATTERS
Morse, Zelnick, Rose & Lander, LLP, 450 Park Avenue, New York, New York
10022, counsel to the Company, will render an opinion that the shares of Class A
Common Stock offered hereby, when issued and paid for in accordance with the
terms of the Underwriting Agreement, will be duly authorized, validly issued,
fully paid and nonassessable. Greenberg Traurig Hoffman Lipoff Rosen & Quentel,
200 Park Avenue, New York, New York 10166, has acted as counsel to the
Underwriters in connection with the Offering. Partners in Morse, Zelnick, Rose &
Lander, LLP own an aggregate of 60,000 shares of Class A Common Stock.
EXPERTS
The financial statements and schedules included in this prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
66
<PAGE>
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended. The Company has filed with the
Securities and Exchange Commission (the "Commission") a Registration Statement
on Form S-1 (the "Registration Statement") under the Securities Act, with
respect to the offer and sale of Common Stock pursuant to this Prospectus. This
Prospectus, filed as a part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement or the exhibits and
schedules thereto in accordance with the rules and regulations of the Commission
and reference is hereby made to such omitted information. Statements made in
this Prospectus concerning the contents of any contract, agreement or other
document filed as an exhibit to the Registration Statement are summaries of the
terms of such contract, agreement or document and are not necessarily complete.
Reference is made to each such exhibit for a more complete description of the
matters involved and such statements shall be deemed qualified in their entirety
by such reference. The Registration Statement and the exhibits and schedules
thereto filed with the Commission may be inspected, without charge, and copies
may be obtained at prescribed rates, at the public reference facility maintained
by the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the Commission
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and
Northwestern Atrium Center, 500 West Madison Street, Suite 11400, Chicago,
Illinois 60661. The Commission also maintains a Website (http://www.sec.gov)
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. For further
information pertaining to the Common Stock offered by this Prospectus and the
Company, reference is made to the Registration Statement.
The Company intends to furnish to its stockholders annual reports containing
audited financial statements certified by independent auditors and quarterly
reports for the first three quarters of each fiscal year containing unaudited
financial statements.
This Prospectus does not contain all of the information set forth in the
Registration Statement on Form S-l, of which this Prospectus forms a part, and
the exhibits thereto which the Company has filed with the SEC under the
Securities Act, to which reference is hereby made for further information
concerning the Company and the shares of Class A Common Stock offered hereby.
67
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
INDEX TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Basis of Presentation................................................................... F-2
Unaudited Pro Forma Balance Sheets, March 31, 1998...................................... F-4
Unaudited Pro Forma Statements of Operations, December 31, 1997......................... F-5
Unaudited Pro Forma Statements of Operations, March 31, 1998............................ F-6
Notes to the Unaudited Pro Forma Financial Statements................................... F-7
</TABLE>
THE COMPANIES
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
<TABLE>
<S> <C>
HOMETOWN:
Hometown Auto Retailers, Inc.
SHAKER:
E.R.R. Enterprises, Inc. and Subsidiaries
Shaker's, Inc.
Family Ford, Inc.
Family Rental, Inc.
Shaker's Lincoln Mercury
Auto Care, Inc.
WESTWOOD:
Westwood Lincoln Mercury Sales, Inc.
MULLER:
Muller Toyota, Inc.
Muller Chevrolet, Oldsmobile, Isuzu, Inc. (Note 1)
William Chevrolet, Inc. (Inactive)(Note 1)
BAY STATE:
Leominster Lincoln Mercury, Inc.
(DBA Bay State Lincoln Mercury)
BRATTLEBORO:
Brattleboro Chrysler Plymouth Dodge, Inc.
PRIDE:
Pride Auto Centers, Inc.
</TABLE>
- ------------------------
Notes:
(1) The independent operations of William Chevrolet, Inc. have been discontinued
and for presentation purposes, the residual balance sheet accounts have been
combined with Muller Chevrolet, Oldsmobile, Isuzu, Inc..
F-1
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership. The unaudited pro forma
combined financial statements give effect to the Exchange, the Acquisitions and
consummation of the Offering as discussed below:
EXCHANGE
In May 1997, the Core Operating Companies agreed, in principle, to combine
their dealerships in Hometown. Effective, as of July 1, 1997, the stockholders
of the Core Operating Companies entered into an Exchange Agreement pursuant to
which they agreed to exchange all of the outstanding shares of four corporations
operating six franchised dealerships, one collision repair center and one
factory authorized freestanding auto service center, for 3,760,000 shares of
Hometown Class B Common Stock as follows: 1,880,000 shares to the stockholders
of Shaker; 940,000 shares to the shareholders of Westwood; and 940,000 shares to
the stockholders of Muller.
The consideration to be paid by the Company to each of the stockholders in
the Core Operating Companies was determined by negotiations among the respective
principals of the Core Operating Companies as to the relative value of each of
the dealerships, which they controlled. As such, no one individual determined
the consideration to be paid. The Company and the principals of the Core
Operating Companies did not use an independent third party to determine the
relative values of each dealership but agreed among themselves on the values
attributable to each based on an evaluation of operating results, prospects for
growth and financial position.
The Exchange agreement is subject to certain conditions including, among
others: (i) the continuing accuracy on the closing date of the representations
and warranties of the applicable Core Operating Companies and the Company; (ii)
the performance of each of the covenants by the applicable Core Operating
Companies (iii) the receipt of all permits, approvals and consents required for
transfer of ownership of the Core Operating Companies and their assets including
the consent of the applicable manufacturers.
ACQUISITIONS
In July and August 1997, and May 1998 under the direction of its Core
Operating Companies, the Company entered into three agreements (the
"Acquisitions") to acquire certain assets and liabilities of three dealerships
in Connecticut, Massachusetts and Vermont for an aggregate consideration of $6.7
million plus the assumption of certain liabilities. A portion of the proceeds
from the Offering will be applied to the purchase price of the Acquisitions.
Each of the Acquisitions is subject to satisfaction of various conditions
precedent, including the achieving by each of the sellers of certain levels of
income, the receipt of factory consents from all automobile manufacturers whose
franchises are held by each of the sellers and the Closing of the Offering being
made hereby on or prior to July 31, 1998.
INITIAL PUBLIC OFFERING (THE OFFERING)
The net proceeds to the Company from the sale of 2,000,000 shares of Class A
Common Stock, based upon an assumed initial public offering price of $10.00 per
share, are estimated to be $17.2 million ($19.9 million if the Underwriters'
over-allotment option for an additional 300,000 shares is exercised in full)
after deducting the underwriting discount and estimated expenses of this
Offering. Of the net proceeds, approximately $6.4 million will be used to pay
the cash portion of the purchase price of the Acquisitions. In addition,
approximately $.8 million will be used to repay indebtedness with a weighted
average interest rate of approximately 10.1%. The remainder of the net proceeds
will be used for working capital and general corporate purposes, including
possible use in additional acquisitions of dealerships and for expansion of the
livery sales business. Pending such allocation of the remainder, that portion of
the proceeds will be used to reduce floor plan financing indebtedness.
F-2
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
Hometown, the Core Operating Companies, and the Acquisitions are hereinafter
referred to as the Company. The Exchange and the Acquisitions have been
accounted for using the purchase method of accounting. Shaker, the parent of one
group of Core Operating Companies, has been identified as the acquiror for
financial statement presentation purposes in accordance with SAB No. 97 because
its stockholders hold the largest single number of shares of Class B Common
Stock in the Exchange, which shares represent the single largest voting interest
in the Company. The unaudited pro forma combined financial statements also give
effect to the issuance of Common Stock, which was issued by the Company to the
sellers of the Core Operating Companies. These statements are based on the
historical financial statements of the Core Operating Companies and Acquisitions
and the estimates and assumptions set forth below and should be read in
conjunction with such financial statements and related notes thereto included in
this document.
The unaudited pro forma combined balance sheet gives effect to these
transactions (the Exchange, the Acquisitions and the Offering) as if they had
occurred on January 1, 1997. The unaudited pro forma combined statements of
operations for the year ended December 31, 1997 and the three months ended March
31, 1998 give effect to these transactions as if they had occurred at January 1,
1997.
The Company believes that the accompanying unaudited pro forma combined
financial information contains all the material adjustments necessary to fairly
present its financial position as of December 31, 1997 and March 31, 1998,
respectively. The unaudited pro forma financial information presented does not
purport to be indicative of the financial position or operating results which
would have been achieved had the acquisitions taken place at the dates indicated
and should not be construed as representative of the Company's financial
position or results of operations for any future date or period.
The unaudited pro forma adjustments are based on available information and
upon certain assumptions that the Company believes are reasonable under the
circumstances; however, the actual recording of the acquisitions will be based
on ultimate appraisals, evaluations and estimates of fair value. If these
appraisals and evaluations identify assets with lives shorter than 40 years,
such assets will be amortized over their expected useful lives. Periodically,
but no less than annually, the Company will evaluate the relative fair market
value of the intangible assets identified in its acquisitions by estimating the
future earnings streams of the related business lines and comparing the present
value of the result of that estimation to the stated value of the related
assets. Impairments, if any, will be charged to operations when identified.
F-3
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED PRO FORMA BALANCE SHEETS
AS OF MARCH 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
MULLER
---------------------- BAY STATE BRATTLEBORO
HOMETOWN SHAKER WESTWOOD TOYOTA CHEVY (8) (8)
------------- --------- ----------- ----------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents............ $ 52 $ 3,608 $ 284 $ 314 $ 200 -- --
Accounts receivable, net............. -- 1,249 1,844 1,020 164 -- --
Inventories.......................... -- 8,321 7,889 3,626 3,751 1,070 2,534
Prepaid expenses and other current
assets............................. 273 462 256 30 105 -- --
Deferred income taxes................ -- 167 213 -- -- -- --
----- --------- ----------- ----------- --------- ----------- ------
Total current assets............. 325 13,807 10,486 4,990 4,220 1,070 2,534
Property and equipment, net............ -- 1,277 227 800 289 252 50
Receivable from finance companies...... -- -- -- 1,002 290 -- --
Due from related parties............... -- 278 193 932 -- -- --
Deferred income taxes.................. -- 683 -- -- -- -- --
Excess of purchase price over net book
value of assets acquired............. -- -- -- -- -- -- --
Other assets........................... -- 7 203 -- 208 -- --
----- --------- ----------- ----------- --------- ----------- ------
Total assets..................... $ 325 $ 16,052 $ 11,109 $ 7,724 $ 5,007 $ 1,322 $ 2,584
----- --------- ----------- ----------- --------- ----------- ------
----- --------- ----------- ----------- --------- ----------- ------
Current Liabilities
Floor plan notes payable............. $ -- $ 7,417 $ 7,493 $ 4,268 $ 4,148 $ 955 $ 2,142
Accounts payable and accrued
expenses........................... -- 3,070 1,005 1,098 341 -- --
Current maturities of long-term
debt............................... -- 253 2 69 140 -- --
Other current bank borrowings........ -- 100 1,000 -- 200 -- --
Advances from officers and
affilitates........................ 325 -- -- -- -- 367 442
Income taxes pabale.................. -- 146 132 208 -- -- --
----- --------- ----------- ----------- --------- ----------- ------
Total current liabilities........ 325 10,986 9,632 5,643 4,829 1,322 2,584
Long-term debt......................... -- 107 6 563 226 -- --
Long-term deferred income taxes........ -- 164 -- -- -- -- --
Due to related parites................. -- 920 -- 5 875 -- --
Other long-term liabilities............ -- 52 -- 206 -- -- --
Stockholders' Equity
Common stock......................... -- 69 60 30 345 -- --
Additional paid-in capital........... -- -- 76 96 811 -- --
Treasury stock, at cost.............. -- -- -- (890) -- -- --
Retained earnings (deficit).......... -- 3,754 1,335 2,071 (2,079) -- --
----- --------- ----------- ----------- --------- ----------- ------
Total stockholders' equity
(deficit)...................... -- 3,823 1,471 1,307 (923) -- --
----- --------- ----------- ----------- --------- ----------- ------
Total liabilities and
stockholders' equity........... $ 325 $ 16,052 $ 11,109 $ 7,724 $ 5,007 $ 1,322 $ 2,584
----- --------- ----------- ----------- --------- ----------- ------
----- --------- ----------- ----------- --------- ----------- ------
<CAPTION>
PURCHASE &
ACCOUNTING I.P.O.
PRIDE ADJUSTMENTS PROCEEDS PRO FORMA
(8) SUB-TOTAL (4) (5) AS ADJUSTED
--------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents............ -- $ 4,458 $ (2,975) $ 246 $ 1,729
Accounts receivable, net............. -- 4,277 -- -- 4,277
Inventories.......................... 2,388 29,579 (19) -- 29,560
Prepaid expenses and other current
assets............................. -- 1,126 (325) (414) 387
Deferred income taxes................ -- 380 -- -- 380
--------- ----------- ------------- ----------- -------------
Total current assets............. 2,388 39,820 (3,319) (168) 36,333
Property and equipment, net............ 50 2,945 -- -- 2,945
Receivable from finance companies...... -- 1,292 -- -- 1,292
Due from related parties............... -- 1,403 (1,138) -- 265
Deferred income taxes.................. -- 683 -- -- 683
Excess of purchase price over net book
value of assets acquired............. -- -- 15,959 -- 15,959
Other assets........................... -- 418 -- -- 418
--------- ----------- ------------- ----------- -------------
Total assets..................... $ 2,438 $ 46,561 $ 11,502 $ (168) $ 57,895
--------- ----------- ------------- ----------- -------------
--------- ----------- ------------- ----------- -------------
Current Liabilities
Floor plan notes payable............. $ 2,014 $ 28,437 $ -- $ (10,000) $ 18,437
Accounts payable and accrued
expenses........................... -- 5,514 (2,325) (175) 3,014
Current maturities of long-term
debt............................... -- 464 61 (167) 358
Other current bank borrowings........ -- 1,300 -- -- 1,300
Advances from officers and
affilitates........................ 424 1,558 4,875 (6,433) --
Income taxes pabale.................. -- 486 -- -- 486
--------- ----------- ------------- ----------- -------------
Total current liabilities........ 2,438 37,759 2,611 (16,775) 23,595
Long-term debt......................... -- 902 139 (593) 448
Long-term deferred income taxes........ -- 164 119 -- 283
Due to related parites................. -- 1,800 (1,613) -- 187
Other long-term liabilities............ -- 258 -- -- 258
Stockholders' Equity
Common stock......................... -- 504 (500) 2 6
Additional paid-in capital........... -- 983 11,302 17,198 29,483
Treasury stock, at cost.............. -- (890) 890 -- --
Retained earnings (deficit).......... -- 5,081 (1,446) -- 3,635
--------- ----------- ------------- ----------- -------------
Total stockholders' equity
(deficit)...................... -- 5,678 10,246 17,200 33,124
--------- ----------- ------------- ----------- -------------
Total liabilities and
stockholders' equity........... $ 2,438 $ 46,561 $ 11,502 $ (168) $ 57,895
--------- ----------- ------------- ----------- -------------
--------- ----------- ------------- ----------- -------------
</TABLE>
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Unaudited Pro Forma Financial Statements are an
integral part of this Balance Sheet.
F-4
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MULLER BAY
-------------------- STATE BRATTLEBORO PRIDE SUB-
HOMETOWN SHAKER WESTWOOD TOYOTA CHEVY (8) (8) (8) TOTAL
------------- --------- ----------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
New vehicle
sales......... $ -- $ 29,345 $ 45,470 $ 21,604 $ 11,704 $ 9,890 $ 9,038 $ 7,437 $ 134,488
Used vehicle
sales......... -- 21,800 8,396 14,454 5,542 12,459 12,928 3,448 79,027
Parts and
service
sales......... -- 6,727 4,352 3,096 1,811 2,066 2,024 1,224 21,300
Other dealership
revenues,
net........... -- 1,624 731 1,102 675 301 594 323 5,350
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
Total
revenues.... -- 59,496 58,949 40,256 19,732 24,716 24,584 12,432 240,165
Cost of sales..... -- 51,226 52,770 34,760 16,881 21,502 20,986 10,898 209,023
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
Gross profit.. -- 8,270 6,179 5,496 2,851 3,214 3,598 1,534 31,142
Amortization of
excess of
purchase price
over net book
value of assets
acquired........ -- -- -- -- -- -- --
Selling, general
and
administrative
expenses........ 1 7,715 5,594 4,569 2,714 1,934 3,314 1,452 27,293
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
Income (loss)
from
operations.. (1) 555 585 927 137 1,280 284 82 3,849
Other income
(expense)
Interest
expense, net.. -- (189) (295) (219) (293) (272) (72) (54) (1,394)
Other income
(expense),
net........... -- 116 (39) 26 (53) 9 (41) (3) 15
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
Income (loss)
before
taxes....... (1) 482 251 734 (209) 1,017 171 25 2,470
Provision for
income taxes.... -- 166 106 36 -- 52 -- -- 360
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
Net income
(loss)...... $ (1) $ 316 $ 145 $ 698 $ (209) $ 965 $ 171 25 $ 2,110
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
Earnings per share, basic and diluted (note 7)...............................................................................
Weighted average shares......................................................................................................
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS AS
(6) ADJUSTED
----------- -----------
<S> <C> <C>
Revenues
New vehicle
sales......... $ -- $ 134,488
Used vehicle
sales......... -- 79,027
Parts and
service
sales......... -- 21,300
Other dealership
revenues,
net........... -- 5,350
----------- -----------
Total
revenues.... -- 240,165
Cost of sales..... -- 209,023
----------- -----------
Gross profit.. -- 31,142
Amortization of
excess of
purchase price
over net book
value of assets
acquired........ 399 399
Selling, general
and
administrative
expenses........ (2,698) 24,595
----------- -----------
Income (loss)
from
operations.. 2,299 6,148
Other income
(expense)
Interest
expense, net.. 1,113 (281)
Other income
(expense),
net........... -- 15
----------- -----------
Income (loss)
before
taxes....... 3,412 5,882
Provision for
income taxes.... 1,993 2,353
----------- -----------
Net income
(loss)...... $ 1,419 $ 3,529
----------- -----------
----------- -----------
Earnings per share $ 0.59
Weighted average s 6,000,000
</TABLE>
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Unaudited Pro Forma Financial Statements are an
integral part of this statement.
F-5
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MULLER BAY
-------------------- STATE BRATTLEBORO PRIDE SUB-
HOMETOWN SHAKER WESTWOOD TOYOTA CHEVY (8) (8) (8) TOTAL
------------- --------- ----------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
New vehicle
sales........... $ -- $ 5,967 $ 12,599 $ 4,598 $ 2,535 $ 1,980 $ 2,400 $ 1,351 $ 31,430
Used vehicle
sales........... -- 5,723 4,273 3,265 1,205 2,356 2,598 441 19,861
Parts and service
sales........... -- 1,613 1,121 848 463 555 362 300 5,262
Other dealership
revenues, net... -- 441 397 354 119 80 65 44 1,500
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
Total revenues.. -- 13,744 18,390 9,065 4,322 4,971 5,425 2,136 58,053
Cost of sales....... -- 11,612 16,502 7,763 3,710 4,133 4,735 1,820 50,275
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
Gross profit.... -- 2,132 1,888 1,302 612 838 690 316 7,778
Amortization of
excess of purchase
price over net
book value of
assets acquired... -- -- -- -- -- -- --
Selling, general and
administrative
expenses.......... -- 4,194 1,432 1,097 629 481 511 332 8,676
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
Income (loss)
from
operations.... -- (2,062) 456 205 (17) 357 179 (16) (898)
Other income
(expense)
Interest expense,
net............. 1 (57) (132) (68) (113) (54) (42) (12) (477)
Other income
(expense), net.. -- (6) (9) (7) (24) 9 26 -- (11)
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
Income (loss)
before taxes.. 1 (2,125) 315 130 (154) 312 (163) (28) (1,386)
Provision for income
taxes............. -- (850) 132 8 -- 18 -- -- (692)
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
Net income
(loss)........ $ (1) $ (1,275) $ 183 $ 122 $ (154) $ 294 $ 163 (28) $ 694
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
----- --------- ----------- --------- --------- --------- ----------- --------- ---------
Earnings per share, basic and diluted (note 7).................................................................................
Weighted average shares........................................................................................................
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS AS
(6) ADJUSTED
----------- -----------
<S> <C> <C>
Revenues
New vehicle
sales........... $ -- $ 31,430
Used vehicle
sales........... -- 19,861
Parts and service
sales........... -- 5,262
Other dealership
revenues, net... -- 1,500
----------- -----------
Total revenues.. -- 58,053
Cost of sales....... -- 50,275
----------- -----------
Gross profit.... -- 7,778
Amortization of
excess of purchase
price over net
book value of
assets acquired... 100 100
Selling, general and
administrative
expenses.......... (2,688) 5,988
----------- -----------
Income (loss)
from
operations.... 2,588 1,690
Other income
(expense)
Interest expense,
net............. 327 (150)
Other income
(expense), net.. -- (11)
----------- -----------
Income (loss)
before taxes.. 2,915 1,529
Provision for income
taxes............. 1,304 612
----------- -----------
Net income
(loss)........ $ 1,611 $ 917
----------- -----------
----------- -----------
Earnings per share, $ 0.15
Weighted average sha 6,000,000
</TABLE>
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Unaudited Pro Forma Financial Statements are an
integral part of this statement.
F-6
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. HOMETOWN AUTO RETAILERS, INC.
Hometown Auto Retailers, Inc. has conducted no operations to date and has
acquired the Core Operating Companies and Acquisitions on the date of this
Prospectus and will consummate those transactions on the closing of the
Offering. Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
2. BASIS OF COMBINATIONS
The unaudited pro forma combined financial statements give effect to: the
acquisitions of substantially all of the net assets of (a) Shaker, (b) Westwood,
and (c) Muller (the "Exchange"); the acquisition of the business and certain
assets and liabilities of (d) Bay State, (e) Brattleboro and (f) Pride (the
"Acquisitions"); the pro forma adjustments necessitated by the combinations; and
the consummation of the Offering of 2,000,000 shares of the Common Stock of
Hometown. The Exchange and the Acquisitions were accounted for using the
purchase method of accounting. These statements are based on the historical
financial statements of the Core Operating Companies and the Acquisitions and
the estimates and assumptions as discussed in these footnotes.
3. CONSIDERATION PAID TO CORE OPERATING COMPANIES AND THE ACQUISITIONS
The following table sets forth the consideration to be paid to the
stockholders of the Core Operating Companies (excluding Shaker), the
Acquisitions and the Associated Transaction Costs, along with the estimated
"Excess of purchase price over net book value of assets acquired". For
presentation purposes, Muller represents the total of Muller Toyota, Muller
Chevrolet, and William Chevrolet (a discontinued operation):
<TABLE>
<CAPTION>
ASSOCIATED
WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE COSTS TOTAL
----------- --------- ----------- ----------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE DATA)
Cash......................................... $ -- $ -- $ 3,000 $ 2,708 $ 725 $ 175 $ 6,608
Common Stock................................. 6,110 6,110 -- -- -- -- 12,220
Promissory Note.............................. -- -- -- -- 200 -- 200
Other Consideration.......................... -- -- -- -- 19 -- 19
----------- --------- ----------- ----------- --------- ----------- ----------
Total.................................. 6,110 6,110 3,000 2,708 944 175 19,047
Less: Book value of net tangible assets
acquired................................... 1,471 384 367 442 424 -- 3,088
----------- --------- ----------- ----------- --------- ----------- ----------
Excess of purchase price over net book value
of assets acquired......................... $ 4,639 $ 5,726 $ 2,633 $ 2,266 $ 520 $ 175 $ 15,959
----------- --------- ----------- ----------- --------- ----------- ----------
----------- --------- ----------- ----------- --------- ----------- ----------
Number of shares............................. 940,000 940,000 -- -- -- -- 1,880,000
</TABLE>
The Company's executive officers, directors and 5% stockholders have agreed
with the Representative that they will not sell or otherwise dispose of any
Common Stock or any securities convertible into Common Stock of the Company
without the prior written consent of the Representative until ,
. The fair value of these shares, which has been supported through
independent appraisals, has been adjusted to reflect, among other things, these
restrictions. After the lock-up period, such shares of Common Stock will be
eligible for sale in the public market pursuant to Rule 144 if the conditions of
that Rule have been met. The Company is unable to estimate the amount of
restricted
F-7
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
3. CONSIDERATION PAID TO CORE OPERATING COMPANIES AND THE ACQUISITIONS
(CONTINUED)
securities that will be sold under Rule 144 because this will depend, among
other factors, on the market price for the shares of Common Stock and the
personal circumstances of the sellers.
Based upon management's preliminary analysis, it is anticipated that the
historical carrying value of the assets and liabilities of the Core Operating
Companies and the Acquisitions will approximate fair value. The amount of
"Excess of purchase price over net book value of assets acquired" subsequent to
the Exchange and the Acquisitions is estimated to be $16 million. The Company
will use an estimated life of 40 years for the amortization of goodwill.
Management of Hometown has not currently identified any other material tangible
or identifiable intangible assets of the Core Operating Companies to which a
portion of the purchase price could reasonably be allocated.
4. UNAUDITED PRO FORMA BALANCE SHEETS--PURCHASE AND ACCOUNTING ADJUSTMENTS:
The following table sets forth the accounting adjustments required to
reflect the purchase of the Core Operating Companies and the Acquisitions, the
recording of the Associated Transaction Costs, the settlement of certain related
party payables and a distribution to the owners of Shaker and pro forma tax
adjustments. For presentation purposes, Muller represents the total of Muller
Toyota, Muller Chevrolet and William Chevrolet:
<TABLE>
<CAPTION>
ASSOCIATED
COSTS &
RELATED
DEBIT (CREDIT) SHAKER WESTWOOD MULLER BAY STATE BRATTLEBORO PRIDE PARTIES(A)
- --------------------------------------- ----------- ----------- --------- ----------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents.............. $ -- $ -- $ -- $ -- $ -- $ -- $ (2,975)
Inventories............................ -- -- -- -- -- (19) --
Prepaid expenses and other current
assets............................... -- -- -- -- -- -- (325)
Due from related parties............... -- -- -- -- -- -- (1,138)
Excess of purchase price over net book
value of assets acquired............. -- 4,639 5,726 2,633 2,266 520 175
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued
expenses............................. -- -- -- -- -- -- 2,325
Current maturities of long-term debt... -- -- -- -- -- (61) --
Advances from officers and
affiliates........................... -- -- -- (2,633) (2,266) (301) 325
Long-term debt......................... -- -- -- -- -- (139) --
Long-term deferred income taxes........ -- -- -- -- -- -- --
Due to related parties................. -- -- -- -- -- -- 1,613
Common stock........................... 67 59 374 -- -- -- --
Additional paid-in capital............. (67) (6,033) (5,202) -- -- -- --
Treasury stock at cost................. -- -- (890) -- -- -- --
Retained earnings (deficit)............ -- 1,335 (8) -- -- -- --
----- ----------- --------- ----------- ----------- --------- -----------
Total purchase adjustments......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
----- ----------- --------- ----------- ----------- --------- -----------
----- ----------- --------- ----------- ----------- --------- -----------
<CAPTION>
TAX
DEBIT (CREDIT) ADJUST(B) TOTAL
- --------------------------------------- ------------- ---------
<S> <C> <C>
ASSETS:
Cash and cash equivalents.............. $ -- $ (2,975)
Inventories............................ -- (19)
Prepaid expenses and other current
assets............................... -- (325)
Due from related parties............... -- (1,138)
Excess of purchase price over net book
value of assets acquired............. -- 15,959
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accounts payable and accrued
expenses............................. -- 2,325
Current maturities of long-term debt... -- (61)
Advances from officers and
affiliates........................... -- (4,875)
Long-term debt......................... -- (139)
Long-term deferred income taxes........ (119) (119)
Due to related parties................. -- 1,613
Common stock........................... -- 500
Additional paid-in capital............. -- (11,302)
Treasury stock at cost................. -- (890)
Retained earnings (deficit)............ 119 1,446
----- ---------
Total purchase adjustments......... $ -- $ --
----- ---------
----- ---------
</TABLE>
- ------------------------
(a) Includes the pro forma adjustments to reflect the accrual of the Associated
Transaction costs, the settlement of certain Related Party Payables,
elimination of offseting related party accounts and a payment of an accrued
bonus to the owners of Shaker before closing of the offering.
(b) Includes pro forma adjustments to reflect the effect of the S Corporations
changing to C Corporations and the tax effect of inventory conformity
adjustments.
F-8
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
5. UNAUDITED PRO FORMA BALANCE SHEETS--OFFERING PROCEEDS:
The following table sets forth adjustments based on receipt of the net
Offering Proceeds:
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DEBIT (CREDIT) (A) (B) (C) (D) (E) (F) TOTAL
- ---------------------------------------------- ---------- --------- --------- --------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents..................... $ 17,614 $ (3,000) $ (2,708) $ (725) $ (935) $ (10,000) $ 246
Prepaid expenses and other current assets..... (414) -- -- -- -- -- (414)
LIABILITIES AND SHAREHOLDERS' EQUITY:
Floor plan notes payable...................... -- -- -- -- -- 10,000 10,000
Accounts payable and accrued expenses......... -- -- -- -- 175 -- 175
Current maturities of long-term debt.......... -- -- -- -- 167 -- 167
Advances from officers and affiliates......... -- 3,000 2,708 725 -- -- 6,433
Long-term debt................................ -- -- -- -- 593 -- 593
Common stock.................................. (2) -- -- -- -- -- (2)
Additional paid-in capital.................... (17,198) -- -- -- -- -- (17,198)
---------- --------- --------- --------- ---------- ---------- ----------
Total pro forma adjustments............... $ -- $ -- $ -- $ -- $ -- $ -- $ --
---------- --------- --------- --------- ---------- ---------- ----------
---------- --------- --------- --------- ---------- ---------- ----------
</TABLE>
- ------------------------
(a) Reflects the proceeds from the issuance of 2,000,000 shares of Hometown
Auto Retailers, Inc. Class A Common Stock net of estimated Offering
costs (based on an assumed Offering price of $10 per share). Offering
costs consist primarily of underwriting discounts and commissions,
accounting fees, legal fees and printing expenses.
(b)(c)(d) Reflects the settlement of the acquisition of (b) Bay State (c)
Brattleboro and (d) Pride in exchange for the accrued cash portion of
the purchase price to be paid from the Offering proceeds. See
"Consideration paid to Core Operating Companies and the Acquisitions"
in footnote 3 for the allocation of the purchase price.
(e) Reflects the pay-down of certain long-term debt and the settlement of
the Associated Transaction Costs with the proceeds from the Offering.
(f) Reflects the temporary pay-down of floorplan obligations with proceeds
from the Offering of which $5,600,000 will be used to repay
indebtedness that has been guaranteed by certain affiliates of the
Company.
F-9
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
6. UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS--PRO FORMA ADJUSTMENTS
The following table sets forth the components of the pro forma adjustments:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEBIT (CREDIT) (A) (B) (C) (D) (E)
- ------------------------------------------------------------------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amortization of excess purchase price over net book value of assets
acquired......................................................... $ 399 $ -- $ -- $ -- $ --
Selling, general and administrative expenses....................... -- (2,654) (44) -- --
Other income (expense) Interest expense, net....................... -- -- -- 160 (1,273)
Provision for income taxes......................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Net income......................................................... $ 399 $ (2,654) $ (44) $ 160 $ (1,273)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
<S> <C> <C>
DEBIT (CREDIT) (F) TOTAL
- ------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Amortization of excess purchase price over net book value of assets
acquired......................................................... $ -- $ 399
Selling, general and administrative expenses....................... -- (2,698)
Other income (expense) Interest expense, net....................... -- (1,113)
Provision for income taxes......................................... 1,993 1,993
--------- ---------
Net income......................................................... $ 1,993 $ (1,419)
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
DEBIT (CREDIT) (A) (B) (C) (D) (E)
- ------------------------------------------------------------------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amortization of excess purchase price over net book value of assets
acquired......................................................... $ 100 $ -- $ -- $ -- $ --
Selling, general and administrative expenses....................... -- (2,683) (5) -- --
Other income (expense) Interest expense, net....................... -- -- -- 19 (346)
Provision for income taxes......................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Net income......................................................... $ 100 $ (2,683) $ (5) $ 19 $ (346)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
<CAPTION>
<S> <C> <C>
DEBIT (CREDIT) (F) TOTAL
- ------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Amortization of excess purchase price over net book value of assets
acquired......................................................... $ -- $ 100
Selling, general and administrative expenses....................... -- (2,688)
Other income (expense) Interest expense, net....................... -- (327)
Provision for income taxes......................................... 1,304 1,304
--------- ---------
Net income......................................................... $ 1,304 $ (1,611)
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(a) Reflects the amortization of the "excess purchase price over net book value
of assets acquired" using an estimated useful life of 40 years.
(b) Adjusts compensation expense and management fees to the level that certain
management employees and owners of the Core Operating Companies and the
Acquisitions will contractually receive subsequent to the closing of the
Exchange and the Acquisitions. The Company has entered into five-year
employment agreements with each of following: Salvatore A. Vergopia as
Chairman and Chief Executive Officer; Joseph Shaker as President and Chief
Operating Officer; William C. Muller Jr. as Vice President--New Jersey
Operations; Corey Shaker as Vice President--Connecticut Operations; Edward A
Vergopia as Vice President--Fleet Operations; James Christ as General
Manager--Muller Toyota; and Steven Shaker as Vice President--Parts and
Service. Each agreement provides for an annual base salary of $200,000,
except that the agreement with James Christ provides for an annual base
salary of $150,000 plus an annual bonus equal to five percent of the pre-tax
profits of Muller Toyota and the agreement with Steven Shaker provides for
an annual base salary of $100,000. Each agreement also provides for
participation by the employee in all executive benefit plans and, if
employment is terminated without cause (as defined in the agreement),
payment of an amount equal to the salary which would have been payable over
the unexpired term of his employment agreement.
(c) Adjusts rent expense to reflect newly negotiated fair market value leases.
(d) Reflects a reduction to interest income on Cash and Cash Equivalents not
realized as part of the Exchange and the Acquisitions offset by the
reduction of interest expense on certain long-term debt that will be
liquidated out of proceeds of the Offering and the reduction of interest
expense on debt and leases not assumed as part of the transactions with the
acquired dealerships.
(e) Reflects the pro forma decrease in interest expense resulting from the
temporary repayment of floor plan obligations with proceeds from the
Offering in the amount of $10 million with a weighted average interest rate
of 9.5%. Also includes interest savings for refinancing the balance of the
floor plan obligations with a commercial lender at 7.5%.
(f) Reflects the incremental provision for federal and state income taxes
relating to the pro forma adjustments described above and the loss of
S-corporation status of Muller Toyota, Muller Chevrolet, Bay State and
Brattleboro.
F-10
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
7. EARNINGS PER SHARE
Statement of Financial Accounting Standard No. 128 "Earnings Per Share"
("SFAS 128"). SFAS No. 128 requires the presentation of basic earnings per share
and diluted earnings per share. "Basic earnings per share" represents net income
divided by the weighted average shares outstanding. "Diluted earnings per share"
represents net income divided by weighted average shares outstanding adjusted
for the incremental dilution of outstanding stock options. In this pro forma
situation, the consideration of outstanding stock options is not dilutive.
F-11
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
8. RECONCILIATION OF THE ACQUISITIONS' HISTORICAL BALANCE SHEET AND STATEMENT OF
OPERATIONS
The following table sets forth the pro forma accounting adjustments required
to reflect the purchase of the Acquisitions (in thousands):
<TABLE>
<CAPTION>
BAY STATE BRATTLEBORO PRIDE
------------------------------------- ------------------------------------- ------------------------
PURCHASE PURCHASE PURCHASE
ADJUSTMENT ADJUSTED ADJUSTMENT ADJUSTED ADJUSTMENT
HISTORICAL (A) TOTAL HISTORICAL (A) TOTAL HISTORICAL (A)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and cash
equivalents..... $ 1,091 $ (1,091) $ -- $ 446 $ (446) $ -- $ 83 $ (83)
Accounts
receivable,
net............. 221 (221) -- 151 (151) -- 189 (189)
Inventories....... 1,886 (816) 1,070 2,534 -- 2,534 2,388 --
Prepaid expenses
and other
current assets.. 13 (13) -- 2 (2) -- 60 (60)
Property and
equipment,
net............. 252 -- 252 381 (331) 50 49 1
Due from related
parties......... 214 (214) -- -- -- -- -- --
Other assets...... 173 (173) -- 13 (13) -- 6 (6)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
Assets...... $ 3,850 $ (2,528) $ 1,322 $ 3,527 $ (943) $ 2,584 $ 2,775 $ (337)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Floor plan notes
payable......... 2,008 (1,053) $ 955 2,429 (287) $ 2,142 2,178 (164)
Accounts payable
and accrued
Expenses........ 234 (234) -- 261 (261) -- 113 (113)
Current maturities
of long-term
debt............ 26 (26) -- 70 (70) -- -- --
Other current bank
borrowings...... -- -- -- 57 (57) -- -- --
Advances from
officers and
Affiliates...... 511 (144) 367 -- 442 442 -- 424
Income taxes
payable......... 8 (8) -- -- -- -- -- --
Long-term debt.... 40 (40) -- 134 (134) -- -- --
Due to related
parties......... -- -- -- 252 (252) -- 50 (50)
Other long-term
liabilities..... 12 (12) -- -- -- -- -- --
Common stock...... 25 (25) -- 33 (33) -- 2 (2)
Additional paid-in
capital......... 310 (310) -- -- -- -- 529 (529)
Retained earnings
(deficit)....... 676 (676) -- 291 (291) -- (97) 97
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
liabilities
and
stockholders'
equity...... $ 3,850 $ (2,528) $ 1,322 $ 3,527 $ (943) $ 2,584 $ 2,775 $ (337)
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
ADJUSTED
TOTAL
-----------
<S> <C>
ASSETS:
Cash and cash
equivalents..... $ --
Accounts
receivable,
net............. --
Inventories....... 2,388
Prepaid expenses
and other
current assets.. --
Property and
equipment,
net............. 50
Due from related
parties......... --
Other assets...... --
-----------
Total
Assets...... $ 2,438
-----------
-----------
LIABILITIES AND
STOCKHOLDERS'
EQUITY:
Floor plan notes
payable......... $ 2,014
Accounts payable
and accrued
Expenses........ --
Current maturities
of long-term
debt............ --
Other current bank
borrowings...... --
Advances from
officers and
Affiliates...... 424
Income taxes
payable......... --
Long-term debt.... --
Due to related
parties......... --
Other long-term
liabilities..... --
Common stock...... --
Additional paid-in
capital......... --
Retained earnings
(deficit)....... --
-----------
Total
liabilities
and
stockholders'
equity...... $ 2,438
-----------
-----------
</TABLE>
- ------------------------
(a) Purchase adjustments reflect the adjustments necessary to present only the
assets and liabilities being acquired. The acquired assets exclude cash,
accounts receivable, inventories of used vehicles (Bay State only) and other
miscellaneous assets. The liabilities assumed include only the floor plan
notes payable related to the vehicles inventories being acquired. The
advances from officers and affiliates amounts have been adjusted to reflect
the cash amounts due to the seller at closing relating to the net assets
being acquired. Assets not acquired and liabilities not assumed will be
retained by the sellers. No purchase adjustments are
F-12
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS (CONTINUED)
8. RECONCILIATION OF THE ACQUISITIONS' HISTORICAL BALANCE SHEET AND STATEMENT OF
OPERATIONS (CONTINUED)
necessary to the pro forma statement of operations due to the fact that all
assets required to continue the business in the same fashion are being
acquired and leases for the dealership locations have been executed.
9. UNAUDITED PRO FORMA DEFERRED TAX ASSETS AND LIABILITIES
Deferred income taxes are provided for temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
<TABLE>
<CAPTION>
3/31/98
-----------
<S> <C>
DEFERRED TAX ASSETS
Reserves and accruals not deductible until paid................................ $ 831
Net operating loss carry forward............................................... 845
Depreciation................................................................... 5
Other.......................................................................... 8
DEFERRED TAX LIABILITIES
Depreciation................................................................... (72)
Inventory...................................................................... (745)
Other.......................................................................... (92)
-----------
Net deferred tax asset......................................................... $ 780
-----------
-----------
</TABLE>
F-13
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants............................................. F-16
Balance Sheets, Hometown and Brattleboro for the year ended December 31, 1997 and
Shaker, Westwood, Muller Toyota, Muller Chevrolet and Bay State for the years
ending December 31, 1997 and 1996.................................................. F-17
Statements of Operations, Hometown and Brattleboro for the year ended December 31,
1997, and Shaker, Westwood, Muller Toyota, Muller Chevrolet and Bay State for the
years ended December 31, 1997, 1996 and 1995....................................... F-18
Statements of Stockholders' Equity, Hometown and Brattleboro for the year ended
December 31, 1997, and Shaker, Westwood, Muller Toyota, Muller Chevrolet and Bay
State for the years ended December 31, 1997, 1996 and 1995......................... F-19
Statements of Cash Flows, Hometown and Brattleboro for the year ended December 31,
1997, and Shaker, Westwood, Muller Toyota, Muller Chevrolet and Bay State for the
years ended December 31, 1997, 1996 and 1995....................................... F-20
Notes to the Financial Statements.................................................... F-21
</TABLE>
F-14
<PAGE>
INDEX TO CORE OPERATING COMPANIES AND ACQUISITIONS
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
<TABLE>
<S> <C>
Hometown:
Hometown Auto Retailers, Inc.
Shaker:
E.R.R. Enterprises, Inc. and Subsidiaries
Shaker's, Inc.
Family Ford, Inc.
Family Rental, Inc.
Shaker's Lincoln Mercury Auto Care, Inc.
Westwood:
Westwood Lincoln Mercury Sales, Inc.
Muller:
Muller Toyota, Inc.
Muller Chevrolet, Oldsmobile, Isuzu, Inc. (Note 1)
William Chevrolet, Inc. (Inactive)(Note 1)
Bay State:
Leominster Lincoln Mercury, Inc.
(DBA Bay State Lincoln Mercury)
Brattleboro:
Brattleboro Chrysler Plymouth Dodge, Inc. (Note 2)
</TABLE>
- ------------------------
(1) The independent operations of William Chevrolet, Inc. have been discontinued
and for presentation purposes, the residual balance sheet accounts have been
combined with Muller Chevrolet, Oldsmobile, Isuzu, Inc.
(2) Certain financials have been excluded from this presentation, as their
operations are not significant subsidiaries under SAB 80.
F-15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: Hometown Auto Retailers, Inc, E.R.R. Enterprises, Inc., Westwood Lincoln
Mercury Sales, Inc., Muller Toyota, Inc., Muller Chevrolet, Oldsmobile, Isuzu,
Inc., Leominster Lincoln Mercury, Inc., and Brattleboro Chrysler Plymouth Dodge,
Inc. (collectively "the Companies"):
We have audited the accompanying financial statements, as identified in the
index on page F-14. These financial statements are the responsibility of the
respective management of each of the Companies. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Companies and the
results of their operations and their cash flows for the periods identified in
the index on page F-14, are in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New York, NY
March 6, 1998
F-16
<PAGE>
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HOMETOWN SHAKER WESTWOOD MULLER TOYOTA
------------- -------------------- ---------------------- ------------------------
12/31/97 12/31/97 12/31/96 12/31/97 12/31/96 12/31/97 12/31/96
------------- --------- --------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents........ $ 47 $ 3,539 $ 3,081 $ 312 $ 260 $ 614 $ 579
Accounts receivable, net......... -- 914 1,091 1,933 1,580 495 208
Inventories...................... -- 7,609 8,504 10,545 6,478 3,972 3,743
Prepaid expenses and other
current assets................. 103 234 68 251 286 16 5
Deferred income taxes............ -- -- -- 205 217 -- --
----- --------- --------- --------- ----------- ----------- -----------
Total current assets........... 150 12,296 12,744 13,246 8,821 5,097 4,535
Property and equipment, net........ -- 1,346 1,428 238 280 808 819
Receivable from finance
companies........................ -- -- -- -- -- 990 873
Due from related parties........... -- 294 558 1,096 330 1,184 664
Deferred income taxes.............. -- -- -- -- -- -- 128
Other assets....................... -- 106 68 102 26 -- 5
----- --------- --------- --------- ----------- ----------- -----------
Total Assets................... $ 150 $ 14,042 $ 14,798 $ 14,682 $ 9,457 $ 8,079 $ 7,024
----- --------- --------- --------- ----------- ----------- -----------
----- --------- --------- --------- ----------- ----------- -----------
Current Liabilities
Floor plan notes payable......... $ -- $ 6,761 $ 7,649 $ 10,179 $ 6,003 $ 4,492 $ 4,315
Accounts payable and accrued
expenses....................... 1 463 451 1,207 695 1,113 1,063
Current maturities of long-term
debt........................... -- 278 65 2 3 164 157
Other current bank borrowings.... -- 85 101 1,000 500 200 --
Advances from officers and
affilities..................... 150 -- -- -- -- -- --
Income taxes payable............. -- 146 340 -- 104 37 154
----- --------- --------- --------- ----------- ----------- -----------
Total current liabilities...... 151 7,733 8,606 12,388 7,305 6,006 5,689
Long-term debt..................... -- 107 386 6 9 600 762
Long-term deferred income taxes.... -- 164 150 -- -- -- --
Due to related parties............. -- 888 845 1,000 1,000 -- --
Other long-term liabilities........ -- 52 29 -- -- 288 86
Stockholders' Equity
Common stock..................... -- 69 69 60 60 30 30
Additional paid-in capital....... -- -- -- 76 76 96 96
Treasury stock, at cost.......... -- -- -- -- -- (890) (890)
Retained earnings (deficit)...... (1) 5,029 4,713 1,152 1,007 1,949 1,251
----- --------- --------- --------- ----------- ----------- -----------
Total stockholders' equity
(deficit).................... (1) 5,098 4,782 1,288 1,143 1,185 487
----- --------- --------- --------- ----------- ----------- -----------
Total liabilities and
stockholders' equity......... $ 150 $ 14,042 $ 14,798 $ 14,682 $ 9,457 $ 8,079 $ 7,024
----- --------- --------- --------- ----------- ----------- -----------
----- --------- --------- --------- ----------- ----------- -----------
<CAPTION>
MULLER CHEVROLET BAY STATE BRATTLEBORO
------------------------ ------------------------ -----------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current Assets
Cash and cash equivalents........ $ 148 $ 29 $ 888 $ 1,052 $ 54
Accounts receivable, net......... 156 173 175 232 135
Inventories...................... 5,169 4,061 2,805 3,900 3,406
Prepaid expenses and other
current assets................. 11 -- 18 40 --
Deferred income taxes............ -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Total current assets........... 5,484 4,263 3,886 5,224 3,595
Property and equipment, net........ 289 434 278 357 383
Receivable from finance
companies........................ 294 231 -- -- --
Due from related parties........... -- -- 214 227 --
Deferred income taxes.............. -- -- -- -- --
Other assets....................... 210 234 177 191 14
----------- ----------- ----------- ----------- -----------
Total Assets................... $ 6,277 $ 5,162 $ 4,555 $ 5,999 $ 3,992
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Current Liabilities
Floor plan notes payable......... $ 5,405 $ 4,364 $ 2,972 $ 3,787 $ 3,188
Accounts payable and accrued
expenses....................... 286 393 187 388 158
Current maturities of long-term
debt........................... 80 126 26 17 70
Other current bank borrowings.... 200 -- -- -- --
Advances from officers and
affilities..................... -- -- 474 -- --
Income taxes payable............. -- -- 3 62 --
----------- ----------- ----------- ----------- -----------
Total current liabilities...... 5,971 4,883 3,662 4,254 3,416
Long-term debt..................... 321 499 51 33 148
Long-term deferred income taxes.... -- -- -- -- --
Due to related parties............. 754 340 -- -- 252
Other long-term liabilities........ -- -- 13 18 --
Stockholders' Equity
Common stock..................... 345 345 25 25 33
Additional paid-in capital....... 811 811 310 310 --
Treasury stock, at cost.......... -- -- -- -- --
Retained earnings (deficit)...... (1,925) (1,716) 494 1,359 143
----------- ----------- ----------- ----------- -----------
Total stockholders' equity
(deficit).................... (769) (560) 829 1,694 176
----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders' equity......... $ 6,277 $ 5,162 $ 4,555 $ 5,999 $ 3,992
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Financial Statements are an integral part of these
Balance Sheets.
F-17
<PAGE>
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MULLER
HOMETOWN SHAKER WESTWOOD TOYOTA
----------- ------------------------------------- ------------------------------------- -----------
12/31/97 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95 12/31/97
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
New vehicle sales... $ -- $ 29,345 $ 30,511 $ 25,713 $ 45,470 $ 43,211 $ 41,507 $ 21,604
Used vehicle
sales............. -- 21,800 22,429 18,260 8,396 7,990 7,189 14,454
Parts and service
sales............. -- 6,727 7,406 6,565 4,352 4,586 4,193 3,096
Other dealership
revenues, net..... -- 1,624 1,876 1,482 731 742 669 1,102
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
revenues........ -- 59,496 62,222 52,020 58,949 56,529 53,558 40,256
Cost of sales
New vehicle sales... -- 27,505 28,316 23,668 42,985 41,124 39,663 20,095
Used vehicle
sales............. -- 20,048 20,855 16,969 7,651 7,579 6,925 13,117
Parts and service
sales............. -- 3,673 3,905 3,552 2,134 2,363 2,129 1,548
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost of sales......... -- 51,226 53,076 44,189 52,770 51,066 48,717 34,760
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........ -- 8,270 9,146 7,831 6,179 5,463 4,841 5,496
Selling, general and
administrative
expenses............ 1 7,715 8,049 6,961 5,594 4,699 4,463 4,569
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations........ (1) 555 1,097 870 585 764 378 927
Other income (expense)
Interest expense,
net............... -- (189) (384) (555) (295) (360) (184) (219)
Other income
(expense), net.... -- 116 1 16 (39) (36) 6 26
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss)
before taxes.... (1) 482 714 331 251 368 200 734
Provision (benefit)
for income taxes.... -- 166 321 118 106 160 88 36
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)... $ (1) $ 316 $ 393 $ 213 $ 145 $ 208 $ 112 $ 698
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
S-Corporation pro
forma provision
(benefit) for income
taxes (unaudited)... -- -- -- -- -- -- -- 251
-----------
Pro forma net income
(loss)
(unaudited)......... $ 447
-----------
-----------
<CAPTION>
MULLER CHEVROLET BAY STATE
------------------------------------- -------------------------------------
12/31/96 12/31/95 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C>
Revenues
New vehicle sales... $ 19,142 $ 17,776 $ 11,704 $ 13,818 $ 11,687 $ 9,890 $ 9,640 $ 4,258
Used vehicle
sales............. 12,604 7,963 5,542 6,711 5,372 12,459 12,879 14,708
Parts and service
sales............. 3,013 2,906 1,811 1,812 1,336 2,066 1,847 1,306
Other dealership
revenues, net..... 1,227 1,267 675 964 962 301 205 211
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
revenues........ 35,986 29,912 19,732 23,305 19,357 24,716 24,571 20,483
Cost of sales
New vehicle sales... 17,761 16,554 10,918 13,101 11,103 9,198 8,921 4,057
Used vehicle
sales............. 11,503 7,072 5,025 6,327 4,805 11,271 11,474 13,609
Parts and service
sales............. 1,605 1,599 938 962 776 1,033 933 600
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost of sales......... 30,869 25,225 16,881 20,390 16,684 21,502 21,328 18,266
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit........ 5,117 4,687 2,851 2,915 2,673 3,214 3,243 2,217
Selling, general and
administrative
expenses............ 4,293 4,276 2,714 2,792 3,174 1,934 1,687 1,228
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from
operations........ 824 411 137 123 (501) 1,280 1,556 989
Other income (expense)
Interest expense,
net............... (257) (494) (293) (251) (287) (272) (265) (193)
Other income
(expense), net.... (21) (48) (53) (12) (20) 9 (5) 1
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss)
before taxes.... 546 (131) (209) (140) (808) 1,017 1,286 797
Provision (benefit)
for income taxes.... 216 (55) -- -- -- 52 67 44
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income (loss)... $ 330 $ (76) $ (209) $ (140) $ (808) $ 965 $ 1,219 $ 753
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
S-Corporation pro
forma provision
(benefit) for income
taxes (unaudited)... -- -- (66) (42) (276) 345 434 271
----------- ----------- ----------- ----------- ----------- -----------
Pro forma net income
(loss)
(unaudited)......... $ (143) $ (98) $ (532) $ 620 $ 785 $ 482
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
BRATTLEBORO
-------------
12/31/97
-------------
Revenues
New vehicle sales... $ 9,038
Used vehicle
sales............. 12,928
Parts and service
sales............. 2,024
Other dealership
revenues, net..... 594
------
Total
revenues........ 24,584
Cost of sales
New vehicle sales... 8,371
Used vehicle
sales............. 11,459
Parts and service
sales............. 1,156
------
Cost of sales......... 20,986
------
Gross profit........ 3,598
Selling, general and
administrative
expenses............ 3,314
------
Income (loss) from
operations........ 284
Other income (expense)
Interest expense,
net............... (72)
Other income
(expense), net.... (41)
------
Income (loss)
before taxes.... 171
Provision (benefit)
for income taxes.... --
------
Net income (loss)... $ 171
------
------
S-Corporation pro
forma provision
(benefit) for income
taxes (unaudited)... 67
------
Pro forma net income
(loss)
(unaudited)......... $ 104
------
------
</TABLE>
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-18
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
HOMETOWN SHAKER WESTWOOD
------------- ------------------------------------- -------------------------------------
12/31/97 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95
------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Common Stock:
Balance........................ $ -- $ 69 $ 69 $ 69 $ 60 $ 60 $ 60
----- ----------- ----------- ----------- ----------- ----------- -----
Additional Paid-in Capital
Balance, Beginning of period... $ -- $ -- $ -- $ -- $ 76 $ 76 $ 76
Capital contribution
(disbursement)............... -- -- -- -- -- -- --
----- ----------- ----------- ----------- ----------- ----------- -----
Balance, End of period......... $ -- $ -- $ -- $ -- $ 76 $ 76 $ 76
----- ----------- ----------- ----------- ----------- ----------- -----
Treasury Stock, at cost
Balance........................ $ -- $ -- $ -- $ -- $ -- $ -- $ --
----- ----------- ----------- ----------- ----------- ----------- -----
Retained Earnings (Deficit)
Balance, Beginning of period... $ -- $ 4,713 $ 4,320 $ 4,107 $ 1,007 $ 799 $ 687
Net Income (Loss).............. (1) 316 393 213 145 208 112
Dividends...................... -- -- -- -- -- -- --
----- ----------- ----------- ----------- ----------- ----------- -----
Balance, End of period......... $ (1) $ 5,029 $ 4,713 $ 4,320 $ 1,152 $ 1,007 $ 799
----- ----------- ----------- ----------- ----------- ----------- -----
Total Stockholders' Equity
(Deficit).................... $ (1) $ 5,098 $ 4,782 $ 4,389 $ 1,288 $ 1,143 $ 935
----- ----------- ----------- ----------- ----------- ----------- -----
----- ----------- ----------- ----------- ----------- ----------- -----
<CAPTION>
MULLER TOYOTA MULLER CHEVROLET BAY STATE
------------------------------------- ------------------------------------- -----------
12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95 12/31/97
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C>
Common Stock:
Balance........................ $ 30 $ 30 $ 30 $ 345 $ 345 $ 345 $ 25
----------- ----------- ----- ----------- ----------- ----------- -----------
Additional Paid-in Capital
Balance, Beginning of period... $ 96 $ 96 $ 207 $ 811 $ 811 $ 811 $ 310
Capital contribution
(disbursement)............... -- -- (111) -- -- -- --
----------- ----------- ----- ----------- ----------- ----------- -----------
Balance, End of period......... $ 96 $ 96 $ 96 $ 811 $ 811 $ 811 $ 310
----------- ----------- ----- ----------- ----------- ----------- -----------
Treasury Stock, at cost
Balance........................ $ (890) $ (890) $ (890) $ -- $ -- $ -- $ --
----------- ----------- ----- ----------- ----------- ----------- -----------
Retained Earnings (Deficit)
Balance, Beginning of period... $ 1,251 $ 921 $ 997 $ (1,716) $ (1,576) $ (768) $ 1,359
Net Income (Loss).............. 698 330 (76) (209) (140) (808) 965
Dividends...................... -- -- -- -- -- -- (1,830)
----------- ----------- ----- ----------- ----------- ----------- -----------
Balance, End of period......... $ 1,949 $ 1,251 $ 921 $ (1,925) $ (1,716) $ (1,576) $ 494
----------- ----------- ----- ----------- ----------- ----------- -----------
Total Stockholders' Equity
(Deficit).................... $ 1,185 $ 487 $ 157 $ (769) $ (560) $ (420) $ 829
----------- ----------- ----- ----------- ----------- ----------- -----------
----------- ----------- ----- ----------- ----------- ----------- -----------
<CAPTION>
BRATTLEBORO
-------------
12/31/96 12/31/95 12/31/97
----------- ----------- -------------
Common Stock:
Balance........................ $ 25 $ 25 $ 33
----------- ----- -----
Additional Paid-in Capital
Balance, Beginning of period... $ -- $ -- $ --
Capital contribution
(disbursement)............... 310 -- --
----------- ----- -----
Balance, End of period......... $ 310 $ -- $ --
----------- ----- -----
Treasury Stock, at cost
Balance........................ $ -- $ -- $ --
----------- ----- -----
Retained Earnings (Deficit)
Balance, Beginning of period... $ 732 $ 513 $ 192
Net Income (Loss).............. 1,219 753 171
Dividends...................... (592) (534) (220)
----------- ----- -----
Balance, End of period......... $ 1,359 $ 732 $ 143
----------- ----- -----
Total Stockholders' Equity
(Deficit).................... $ 1,694 $ 757 $ 176
----------- ----- -----
----------- ----- -----
</TABLE>
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-19
<PAGE>
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HOMETOWN SHAKER WESTWOOD
------------- ------------------------------------- ------------------------
12/31/97 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96
------------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C> <C>
Net income (loss).............................. $ (1) $ 316 $ 393 $ 213 $ 145 $ 208
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities--
Loss (gain) on disposal of property.......... -- -- -- -- -- --
Depreciation and amortization................ -- 184 149 134 29 63
Deferred income taxes........................ -- 14 (2) 215 12 (94)
Provision for finance reserves............... -- -- -- -- -- --
Changes in assets and liabilities:
Accounts receivable, net................... -- 177 (142) 136 (353) (51)
Inventories................................ -- 895 1,265 (152) (4,067) (197)
Prepaid expenses and other current assets.. (103) (166) (77) 174 35 (243)
Receivable from finance company............ -- -- -- -- -- --
Other assets............................... -- (38) 30 (77) (76) (15)
Floor plan notes payable................... -- (888) (811) (162) 4,176 (505)
Accounts payable and accrued expenses...... 1 12 (31) (99) 512 (29)
Income taxes payable....................... -- (194) 227 (7) (104) 30
Other long term liabilities................ -- 23 16 14 -- --
------ ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities................................. (103) 335 1,017 389 309 (833)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........... -- (102) (18) (419) (9) (113)
Proceeds from sale of property and
equipment.................................. -- -- -- -- 22 7
------ ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities................................. -- (102) (18) (419) 13 (106)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings...... -- 60 56 276 -- --
Principal payments of long-term debt......... -- (126) (145) (59) (4) (5)
Other current bank borrowings, net of
repayments................................. -- (16) (67) 10 500 500
Advance to/from officers and affiliates...... 150 -- -- -- -- 137
Due from/to related parties.................. -- 307 495 146 (766) (168)
Capital contributions and (disbursements).... -- -- -- -- -- --
Dividends paid............................... -- -- -- -- -- --
------ ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing
activities................................. 150 225 339 373 (270) 464
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........................... 47 458 1,338 343 52 (475)
CASH AND CASH EQUVALENTS, beginning of
period....................................... -- 3,081 1,743 1,400 260 735
------ ----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUVALENTS, end of period........ $ 47 $ 3,539 $ 3,081 $ 1,743 $ 312 $ 260
------ ----------- ----------- ----------- ----------- -----------
------ ----------- ----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for--Interest...................... $ -- $ 427 $ 595 $ 736 $ 302 $ 386
Cash paid for--Taxes......................... -- 245 96 49 186 230
<CAPTION>
MULLER TOYOTA MULLER CHEVROLET
------------------------------------- ------------------------
12/31/95 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96
----------- ----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C> <C> <C>
Net income (loss).............................. $ 112 $ 698 $ 330 $ (76) $ (209) $ (140)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities--
Loss (gain) on disposal of property.......... -- -- -- -- 60 --
Depreciation and amortization................ 57 37 29 10 128 50
Deferred income taxes........................ (109) 128 (43) (4) -- --
Provision for finance reserves............... -- -- 175 780 -- 125
Changes in assets and liabilities:
Accounts receivable, net................... (81) (287) 24 (194) 17 (145)
Inventories................................ 638 (229) (508) 907 (1,108) (187)
Prepaid expenses and other current assets.. 138 (11) 19 (15) (11) 12
Receivable from finance company............ -- (117) (420) (1,252) (63) 161
Other assets............................... 32 5 39 (58) 4 (6)
Floor plan notes payable................... 310 177 723 (392) 1,041 1
Accounts payable and accrued expenses...... 170 50 33 222 (107) (90)
Income taxes payable....................... 73 (117) 154 (50) -- --
Other long term liabilities................ -- 202 (80) 167 -- --
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating 536
activities................................. 1,340 475 45 (248) (219)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........... (86) (26) (155) (9) (23) (355)
Proceeds from sale of property and --
equipment.................................. -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) investing (26)
activities................................. (86) (155) (9) (23) (355)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings...... -- -- 180 -- -- 545
Principal payments of long-term debt......... (12) (155) (97) (91) (224) (131)
Other current bank borrowings, net of 200
repayments................................. (950) -- -- 200 --
Advance to/from officers and affiliates...... (140) -- -- -- -- --
Due from/to related parties.................. 293 (520) (63) (218) 414 99
Capital contributions and (disbursements).... -- -- -- (111) -- --
Dividends paid............................... -- -- -- (111) -- --
----------- ----------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing (475)
activities................................. (809) 20 (420) 390 513
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........................... 445 35 340 (384) 119 (61)
CASH AND CASH EQUVALENTS, beginning of 579
period....................................... 290 239 623 29 90
----------- ----------- ----------- ----------- ----------- -----------
CASH AND CASH EQUVALENTS, end of period........ $ 735 $ 614 $ 579 $ 239 $ 148 $ 29
----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for--Interest...................... $ 207 $ 219 $ 257 $ 494 $ 211 $ 264
Cash paid for--Taxes......................... 124 26 62 63 16 --
<CAPTION>
BAY STATE BRATTLEBORO
------------------------------------- -------------
12/31/95 12/31/97 12/31/96 12/31/95 12/31/97
----------- ----------- ----------- ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (808) $ 965 $ 1,219 $ 753 $ 171
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities--
Loss (gain) on disposal of property.......... -- -- -- -- --
Depreciation and amortization................ 57 98 74 10 10
Deferred income taxes........................ -- -- -- -- --
Provision for finance reserves............... 145 -- -- -- --
Changes in assets and liabilities:
Accounts receivable, net................... 671 57 13 (85) (52)
Inventories................................ 970 1,095 (2,137) 438 (791)
Prepaid expenses and other current assets.. (12) 22 4 (10) --
Receivable from finance company............ 17 -- -- -- --
Other assets............................... -- -- (200) 8 9
Floor plan notes payable................... (994) (815) 1,846 (432) 993
Accounts payable and accrued expenses...... 24 (201) 190 100 (156)
Income taxes payable....................... -- (59) 49 (16) --
Other long term liabilities................ -- (5) (28) 9 --
----------- ----------- ----------- ----------- ------
Net cash provided by (used in) operating
activities................................. 70 1,157 1,030 775 184
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........... (6) (4) (304) (9) (107)
Proceeds from sale of property and
equipment.................................. -- -- -- -- --
----------- ----------- ----------- ----------- ------
Net cash provided by (used in) investing
activities................................. (6) (4) (304) (9) (107)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings...... 153 46 -- 42 280
Principal payments of long-term debt......... (67) (20) (48) (35) (61)
Other current bank borrowings, net of
repayments................................. -- -- -- -- --
Advance to/from officers and affiliates...... -- 474 -- -- --
Due from/to related parties.................. (78) 13 77 (46) (207)
Capital contributions and (disbursements).... -- -- 310 -- --
Dividends paid............................... -- -- 310 -- --
----------- ----------- ----------- ----------- ------
Net cash provided by (used in) financing
activities................................. 8 (1,317) (253) (572) (208)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS........................... 72 (164) 473 194 (131)
CASH AND CASH EQUVALENTS, beginning of
period....................................... 18 1,052 579 385 185
----------- ----------- ----------- ----------- ------
CASH AND CASH EQUVALENTS, end of period........ $ 90 $ 888 $ 1,052 $ 579 $ 54
----------- ----------- ----------- ----------- ------
----------- ----------- ----------- ----------- ------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for--Interest...................... $ 302 $ 323 $ 284 $ 210 $ 72
Cash paid for--Taxes......................... -- 111 17 61 --
</TABLE>
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and without any common ownership.
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-20
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
1. BUSINESS AND ORGANIZATION:
BUSINESS OF HOMETOWN AUTO RETAILERS, INC. ("HOMETOWN")
Hometown was founded on March 10, 1997 as Dealerco, Inc., a New York
Corporation, and was later merged into Hometown Auto Retailers, Inc., a Delaware
Corporation. Hometown's purpose is to consolidate and operate automobile
dealerships in the Northeast, primarily in New Jersey and New England. Hometown
was formed to combine three dealership groups (the Core Operating Companies)
located in New Jersey and Connecticut, acquire two other dealerships (the
Acquisitions) located in Vermont and Massachusetts, complete an initial public
offering (the Offering) of its Common Stock and, subsequent to the Offering,
continue to acquire, through merger or purchase, additional dealerships to
expand its regional operations.
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
BUSINESS OF CORE OPERATING COMPANIES AND ACQUISITIONS
Shaker, Westwood, Muller, Bay State and Brattleboro (the Companies) are
primarily engaged in the retail sale of new and used automobiles and the sale of
the related finance, insurance and service contracts. In addition, the Companies
sell automotive parts, provide vehicle servicing and sell wholesale used
vehicles. In addition, Westwood is engaged in the retail sale of livery cars to
livery fleet operators as well as the related finance, insurance and service
contracts. Finally, Shaker owns and operates a factory authorized free-standing
neighborhood automobile maintenance and light repair and parts center. The
following table lists the locations of the businesses:
<TABLE>
<S> <C>
Shaker's Lincoln Mercury, Inc. Watertown, Connecticut
Shaker's Jeep/Eagle, Inc. Waterbury, Connecticut
Shaker's Lincoln Mercury Autocare, Inc. Naugatuck, Connecticut
Family Ford, Inc. Waterbury, Connecticut
Family Rental, Inc. Waterbury, Connecticut
Westwood Lincoln Mercury Sales, Inc. Emerson, New Jersey
Muller Toyota, Inc. Clinton, New Jersey
Muller Chevrolet, Oldsmobile, Isuzu, Inc. Stewartsville, New Jersey
Muller Auto Body Phillipsburg, New Jersey
Bay State Lincoln Mercury, Inc. Framingham, Massachusetts
Brattleboro Chrysler Plymouth Dodge, Inc. North Brattleboro, Vermont
</TABLE>
ORGANIZATION OF THE CORE OPERATING COMPANIES
Shaker, Westwood and Muller have agreed to enter into a combination whereby
each company will exchange all of their common stock for an agreed upon number
of shares of Hometown Class B Common Stock. These transactions have been
accounted for using the purchase method of accounting with Shaker being deemed
the acquiror. Reference is made to footnote 18 for further information regarding
this transaction.
F-21
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
1. BUSINESS AND ORGANIZATION: (CONTINUED)
ORGANIZATION OF THE ACQUISITIONS
Hometown has also entered into agreements to acquire Bay State and
Brattleboro for cash. These acquisitions will be accounted for using the
purchase method of accounting. Reference is made to footnote 18 for further
information regarding these transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
MAJOR SUPPLIERS AND FRANCHISE AGREEMENTS
The Companies purchase substantially all of their new vehicles at the
prevailing prices charged by the applicable manufacturers to all franchised
dealers. The Companies' sales volume could be adversely impacted by the
manufacturers' inability to supply it with an adequate supply of popular models
or as a result of an unfavorable allocation of vehicles by the manufacturer.
Each dealer's franchise agreement contains provisions which may limit,
without the consent of the applicable manufacturer, changes in dealership
management and ownership, place certain restrictions on the dealership (such as
minimum working capital requirements) and provide for termination of the
franchise agreement by the manufacturer in certain instances. See footnote 3 for
a more detailed discussion of these risks.
REVENUE RECOGNITION
Revenue for vehicle and parts sales is recognized upon delivery to and
acceptance by the customer. Revenue for vehicle service is recognized when the
service has been completed.
FINANCE, INSURANCE AND SERVICE CONTRACT INCOME RECOGNITION
The Companies arrange financing for customers through various institutions
and receive financing fees equal to the difference between the loan rates
charged to customers and the predetermined financing rates set by the financing
institution. In addition, the Companies receive commissions from the sale of
credit life and disability insurance and extended service contracts to
customers.
The Companies may be charged back (chargebacks) for unearned financing fees,
insurance or service contract commissions in the event of early termination of
the contracts by the customers. The revenues from financing fees and commissions
are recorded at the time of the sale of the vehicles. The reserves for future
chargebacks are based on historical operating results and the termination
provisions of the applicable contracts. Finance, insurance and service contract
income, net of estimated chargebacks, are included in other dealership revenue
in the accompanying financial statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand, cash on deposit, cash
invested in applicable Manufacturers' cash management accounts, marketable
securities and liquid investments, such as money market accounts, that have an
original maturity of three months or less at the date of purchase.
F-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES
New, used and demonstrator vehicle values are stated at the lower of cost or
market, determined on a specific unit basis. Parts and accessories are stated at
the lower of cost (determined on a first-in, first-out basis) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated useful life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
that do not improve or extend the life of such assets are charged to operations
as incurred. Disposals are removed at cost less accumulated depreciation and any
resulting gain or loss is reflected in current operations.
OTHER ASSETS
Organizational costs associated with E.R.R. Enterprises, Inc. and its
subsidiaries are amortized over a 60 month period.
The costs of acquiring an Oldsmobile franchise by Muller Chevrolet and to
record the acquisition of another dealership location by Bay State were
capitalized and are being amortized over 15 years on a straight-line basis.
INCOME TAXES
The Companies follow the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets are realized or liabilities are settled. A valuation allowance
reduces deferred tax assets when it is more likely than not that some or all of
the deferred tax assets will not be realized.
Muller Chevrolet, Bay State and Brattleboro are S corporations as defined by
the Internal Revenue Code, whereby a company, electing such status, is not
subject to taxation for federal purposes. Under S corporation status, the
stockholders report their proportional shares of the company's taxable earnings
or losses in their personal tax returns.
Effective January 1, 1997, Muller Toyota had elected S corporation status.
INTEREST EXPENSE
Automobile manufacturers periodically provide floor plan interest
assistance, or subsidies, which reduce the dealer's cost of financing. The
accompanying financial statements reflect interest expense net of floor plan
assistance.
F-23
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Companies' financial instruments consist primarily of cash equivalents,
floor plan notes payable, current bank borrowings and long-term debt.
CASH EQUIVALENTS, FLOOR PLAN NOTES PAYABLE AND OTHER CURRENT BANK BORROWINGS
The carrying amount approximates fair value because of the short maturity of
those instruments.
LONG-TERM DEBT
The fair value of long-term debt is estimated based on the quoted market
prices for the same or similar issues or on the current rates offered for debt
of the same remaining maturities.
ADVERTISING AND PROMOTION
The Companies expense advertising and promotion as incurred.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Companies to a
concentration of credit risk consist principally of cash, cash equivalents,
contracts in transit and accounts receivable. The Companies maintain cash
balances at financial institutions that may, at times, be in excess of federally
insured levels. Also, the Companies grant credit to individual customers and
local companies in the automobile repair business such as automotive parts
stores, automotive mechanics, and automotive body repair shops. The Companies
perform ongoing credit evaluations of their customers and generally do not
require collateral. The Companies maintain an allowance for doubtful accounts at
a level which management believes is sufficient to cover potential credit
losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions in determining the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
STATEMENTS OF CASH FLOWS
For purposes of the statements of cash flows, cash and cash equivalents
include contracts in transit which are typically collected within one month.
Additionally, the net change in floor plan financing of inventory, which is a
customary financing technique in the industry, is reflected as an operating
activity in the accompanying statements of cash flows.
LONG LIVED ASSETS
The Companies review long lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an assets may not be fully recoverable.
F-24
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued the following
statements. The Companies are currently not affected by these statements,
however, when applicable, the Companies will adopt the provisions of each
statement.
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
SFAS No. 123 defines a fair value based method of accounting for stock based
compensation and encourages adoption of that method. SFAS No. 123, however, also
allows measurement of compensation cost using the intrinsic value based method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". If
the Companies elect to use the accounting in Opinion No. 25, they must make pro
forma disclosures of net income and earnings per share, as if the fair value
based method of accounting has been applied.
Statement No. 128 "Earnings Per Share" ("SFAS 128"). SFAS No. 128 requires
the presentation of basic earnings per share and diluted earnings per share.
"Basic earnings per share" represents net income divided by the weighted average
shares outstanding. "Diluted earnings per share" represents net income divided
by weighted average shares outstanding adjusted for the incremental dilution of
outstanding stock options.
A reconciliation of weighted average common shares outstanding to weighted
average common shares outstanding assuming dilution is required as disclosure.
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS No.
130, requires the presentation of comprehensive income in an entity's financial
statements. Comprehensive income represents all changes in equity of an entity
during the reporting period, including net income and charges directly to
equity, which are excluded from net income.
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS No. 131 requires that enterprises report certain
information about operating segments, information about products and services,
the geographic areas in which they operate and their major customers.
3. SUMMARY OF MATERIAL RISK FACTORS:
MANUFACTURERS' CONTROL OVER DEALERSHIPS
The dealerships operated by the Companies sell automobiles pursuant to
franchise agreements with automobile manufacturers or authorized distributors of
the manufacturers. Through the terms and conditions of these franchise
agreements, manufacturers exert considerable influence over the operations of
the company's dealerships. Each of the franchise agreements includes provisions
for the termination or non-renewal of the manufacturer-dealer relationship for a
variety of causes, including any unapproved change of ownership or management
and other material breaches of the franchise agreement. Prior approval of the
relevant manufacturer is required with respect to acquisition of additional
automobile dealerships and a manufacturer may deny a company's application to
make an acquisition or seek to impose further restrictions on a company as a
condition to granting approval of an acquisition. Certain state laws, however,
limit the ability of automobile manufacturers to reject proposed transfers of
dealerships, notwithstanding the terms of any dealer or franchise agreement. The
loss of one or more of the Companies' franchise agreements could have a material
adverse effect on the Companies' business, financial condition and results of
operations.
F-25
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
3. SUMMARY OF MATERIAL RISK FACTORS: (CONTINUED)
As a condition to granting their consent to the Exchange and the
Acquisitions, the Manufacturers have imposed restrictions on the Companies.
These restrictions include restrictions on (i) the acquisition of more than a
specified percentage of the Common Stock (20% in the case of GM and Toyota Motor
and 50% in the case of Ford Motor) by any one person who in the opinion of the
Manufacturer is unqualified to own a dealership or who has interests
incompatible with the Manufacturer; (ii) certain material changes in the
Companies or extraordinary corporate transactions such as a merger or sale of a
material amount of assets; (iii) the removal of a dealership general manager
without the consent of the manufacturer; (iv) the use of dealership facilities
to sell or service new vehicles of other manufacturers; (v) in the case of GM,
the advertising or marketing of non-GM operations with GM operations; (vi) in
the case of Ford Motor, mandatory binding arbitration of any dispute between the
Companies and Ford Motor concerning Ford Motor franchise agreements; (vii) in
the case of GM and Mitsubishi, any change in control of the Companies' Board of
Directors, and (viii) in the case of Ford Motor, any change in the Companies'
Board of Directors or management. If the Companies are unable to comply with
these restrictions, the Manufacturer may require the Companies to (i) sell the
assets of the dealerships to the Manufacturer or to a third party acceptable to
the Manufacturer and/or (ii) terminate the dealership agreements with the
Manufacturer.
Certain of the Manufacturers require their franchised dealerships to appoint
an employee (typically designated as the "Executive Manager") to act as the
primary contact between the dealership and the applicable Manufacturer. Such
individual typically is required to have operational control of all of the
applicable manufacturers' dealerships and to have full authority to resolve
issues raised by the applicable manufacturer in connection with the operation of
the dealership. The dealership is not allowed to change its Executive Manager
without the consent of the applicable Manufacturer. The agreements with the
Manufacturers also generally provide for periodic reporting and notice
provisions as a means of determining whether the Companies are in compliance
with the restrictions contained in those agreements. A manufacturer, upon its
determination of a violation of the restrictions, will notify the dealership of
the violation and the dealership will generally have a period to cure the
violation. If the dealership disputes the Manufacturer's claim of a violation or
is unwilling or unable to cure the violation, the manufacturer may enforce the
remedies specified in the agreement through judicial or regulatory proceedings
or in certain instances through arbitration.
DEPENDENCE ON AUTOMOBILE MANUFACTURERS
The Companies are significantly dependent upon their relationships with, and
the success of, certain manufacturers. For the year ended December 31, 1997,
Ford Motor, Toyota Motor and Chrysler, accounted for 63%, 17% and 11%,
respectively, of the new vehicle sales of Hometown, after giving effect to both
the Exchange and the Acquisitions. The Companies may become dependent on
additional manufacturers in the future as a result of its acquisition strategy
and changes in the Companies' sales mix.
F-26
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
ACCOUNTS RECEIVABLE CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
MULLER
SHAKER WESTWOOD TOYOTA
------------------------ ------------------------ -----------
<S> <C> <C> <C> <C> <C>
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- ----------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amounts due from manufacturers............................. $ 218 $ 211 $ 678 $ 406 $ 61
Parts and service receivables.............................. 440 350 211 115 361
Warranty receivables....................................... 25 19 79 68 47
Due from finance companies................................. 171 452 788 777 69
Other...................................................... 60 59 210 214 57
----- ----------- ----------- ----------- -----
Sub-total............................................ 914 1,091 1,966 1,580 595
Less: Allowance for doubtful accounts...................... -- -- (33) -- (100)
----- ----------- ----------- ----------- -----
Total receivables.................................... $ 914 $ 1,091 $ 1,933 $ 1,580 $ 495
----- ----------- ----------- ----------- -----
----- ----------- ----------- ----------- -----
<CAPTION>
<S> <C>
12/31/96
-----------
<S> <C>
Amounts due from manufacturers............................. $ 70
Parts and service receivables.............................. 119
Warranty receivables....................................... 14
Due from finance companies................................. 32
Other...................................................... 73
-----
Sub-total............................................ 308
Less: Allowance for doubtful accounts...................... (100)
-----
Total receivables.................................... $ 208
-----
-----
</TABLE>
<TABLE>
<CAPTION>
MULLER CHEVROLET BAY STATE BRATTLEBORO
------------------------ ------------------------ -------------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Amounts due from manufacturers.................................. $ 4 $ 23 $ 86 $ 110 $ 71
Parts and service receivables................................... 24 5 15 39 12
Warranty receivables............................................ 30 16 12 3 37
Due from finance companies...................................... 117 212 58 85 11
Other........................................................... 81 17 4 4 4
----- ----- ----- ----- -----
Sub-total................................................. 256 273 175 241 135
Less: Allowance for doubtful accounts........................... (100) (100) -- (9) --
----- ----- ----- ----- -----
Total receivables......................................... $ 156 $ 173 $ 175 $ 232 $ 135
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
INVENTORIES CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
MULLER
SHAKER WESTWOOD TOYOTA
------------------------ ---------------------- -----------
<S> <C> <C> <C> <C> <C>
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- --------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New Vehicles............................................. $ 4,623 $ 4,936 $ 9,037 $ 5,406 $ 2,346
Used Vehicles............................................ 2,420 3,044 1,115 709 1,139
Parts, accessories and other............................. 566 524 393 363 487
----------- ----------- --------- ----------- -----------
Total Inventories.................................. $ 7,609 $ 8,504 $ 10,545 $ 6,478 $ 3,972
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
<CAPTION>
<S> <C>
12/31/96
-----------
<S> <C>
New Vehicles............................................. $ 2,498
Used Vehicles............................................ 1,024
Parts, accessories and other............................. 221
-----------
Total Inventories.................................. $ 3,743
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
MULLER CHEVROLET BAY STATE BRATTLEBORO
------------------------ ------------------------ -----------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
New Vehicles.................................................... $ 4,592 $ 3,403 $ 1,821 $ 2,989 $ 2,190
Used Vehicles................................................... 429 492 855 770 1,108
Parts, accessories and other.................................... 148 166 129 141 108
----------- ----------- ----------- ----------- -----------
Total Inventories......................................... $ 5,169 $ 4,061 $ 2,805 $ 3,900 $ 3,406
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
F-27
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS: (CONTINUED)
OTHER ASSETS:
MULLER CHEVROLET
In May 1993, Muller Chevrolet purchased an Oldsmobile franchise for $300,000
which is being amortized over 15 years. The accumulated amortization as of
December 31, 1997 and December 31, 1996 was approximately $90,000 and $66,000,
respectively.
BAY STATE
Bay State changed locations in 1996 and purchased an existing automobile
dealership. The excess purchase price over the net assets acquired was $200,000.
This goodwill is included in Other Assets and is being amortized over 15 years
on a straight line basis. The accumulated amortization as of December 31, 1997
and December 31, 1996 was approximately $23,000 and $9,000, respectively.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
MULLER
SHAKER WESTWOOD TOYOTA
------------------------ ------------------------ -----------
<S> <C> <C> <C> <C> <C>
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- ----------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Accounts payable, trade.................................... $ 233 $ 173 $ 157 $ 134 $ 568
Accrued compensation costs................................. 44 76 311 73 49
Customer deposits.......................................... 39 35 129 41 --
Reserve for finance, insurance and service contracts
charge-backs............................................. 40 51 305 238 38
Other accrued expenses..................................... 107 116 305 209 458
----- ----- ----------- ----- -----------
Total................................................ $ 463 $ 451 $ 1,207 $ 695 $ 1,113
----- ----- ----------- ----- -----------
----- ----- ----------- ----- -----------
<CAPTION>
<S> <C>
12/31/96
-----------
<S> <C>
Accounts payable, trade.................................... $ 574
Accrued compensation costs................................. 39
Customer deposits.......................................... --
Reserve for finance, insurance and service contracts
charge-backs............................................. 73
Other accrued expenses..................................... 377
-----------
Total................................................ $ 1,063
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
MULLER CHEVROLET BAY STATE BRATTLEBORO
------------------------ ------------------------ -------------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Accounts payable, trade......................................... $ 147 $ 218 $ 28 $ 73 $ 22
Accrued compensation costs...................................... -- -- -- -- --
Customer deposits............................................... -- -- 45 100 --
Reserve for finance, insurance and service contracts
charge-backs.................................................. 103 88 36 36 100
Other accrued expenses.......................................... 36 87 78 179 36
----- ----- ----- ----- -----
Total..................................................... $ 286 $ 393 $ 187 $ 388 $ 158
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
F-28
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
5. PROPERTY AND EQUIPMENT:
PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL SHAKER WESTWOOD MULLER TOYOTA
LIVES IN -------------------- ------------------------ ------------------------
YEARS 12/31/97 12/31/96 12/31/97 12/31/96 12/31/97 12/31/96
----------- --------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Land and land improvements................. 15 to 20 $ 188 $ 193 $ -- $ -- $ 500 $ 500
Building and leasehold improvements........ 7 to 31.5 1,061 1,037 289 298 277 258
Machinery, equipment, furniture and
fixtures................................. 3 to 7 1,564 1,494 484 472 928 900
Vehicles................................... 5 142 146 22 34 --
--------- --------- ----- ----- ----------- -----------
Sub-total............................ 2,955 2,870 795 804 1,705 1,658
Less--Accumulated depreciation............. (1,609) (1,442) (557) (524) (897) (839)
--------- --------- ----- ----- ----------- -----------
Property and equipment, net.......... $ 1,346 $ 1,428 $ 238 $ 280 $ 808 $ 819
--------- --------- ----- ----- ----------- -----------
--------- --------- ----- ----- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
ESTIMATED
USEFUL MULLER CHEVROLET BAY STATE BRATTLEBORO
LIVES ------------------------ ------------------------ -------------
IN YEARS 12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Land and land improvements........................ 15 to 20 $ -- $ -- $ -- $ -- $ 148
Building and leasehold improvements............... 7 to 31.5 50 50 228
Machinery, equipment, furniture and fixtures...... 3 to 7 497 483 376 376 62
Vehicles.......................................... 5 73 137 77 58 --
----- ----- ----- ----- -----
Sub-total................................... 620 670 453 434 438
Less--Accumulated depreciation.................... (331) (236) (175) (77) (55)
----- ----- ----- ----- -----
Property and equipment, net................. $ 289 $ 434 $ 278 $ 357 $ 383
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
6. DUE FROM FINANCE COMPANIES:
Muller Toyota and Muller Chevrolet use specialty financing companies that
provide credit to customers with poor credit history. The dealerships are
advanced approximately 70% of the financed amount on a non-recourse basis and
are paid the balance from the finance company when the loans are satisfied.
Muller Chevrolet has a receivable balance of $294,000 and $231,000, net of
reserves for uncollectible amounts of $270,000 as of December 31, 1997 and 1996.
Muller Toyota has a receivable balance of $990,000 and $873,000, net of reserves
for uncollectible amounts of $955,000 and $955,000, as of December 31, 1997 and
1996, respectively. These receivables are classified as long-term due to the
fact that the remaining balances are paid to the dealerships when the loans are
satisfied.
F-29
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
7. FLOOR PLAN NOTES PAYABLE:
Floor plan notes payable reflects amounts payable for the purchase of
specific vehicle inventory and consists of the following:
<TABLE>
<CAPTION>
MULLER
SHAKER WESTWOOD TOYOTA
------------------------ ---------------------- -----------
<S> <C> <C> <C> <C> <C>
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- --------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New vehicles............................................. $ 4,895 $ 5,094 $ 9,098 $ 5,667 $ 2,989
Used vehicles............................................ 1,866 2,555 879 227 1,129
Rental and other vehicles................................ -- -- 202 109 374
----------- ----------- --------- ----------- -----------
Total.................................................... $ 6,761 $ 7,649 $ 10,179 $ 6,003 $ 4,492
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
Floor plan obligations related to sold vehicles not yet
remitted to financial institutions..................... $ -- $ -- $ 101 $ 277 $ 520
----------- ----------- --------- ----------- -----------
----------- ----------- --------- ----------- -----------
<CAPTION>
<S> <C>
12/31/96
-----------
<S> <C>
New vehicles............................................. $ 3,279
Used vehicles............................................ 800
Rental and other vehicles................................ 236
-----------
Total.................................................... $ 4,315
-----------
-----------
Floor plan obligations related to sold vehicles not yet
remitted to financial institutions..................... $ 572
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
MULLER CHEVROLET BAY STATE BRATTLEBORO
------------------------ ------------------------ -----------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
New vehicles.................................................... $ 4,947 $ 3,869 $ 1,989 $ 2,974 $ 2,368
Used vehicles................................................... 458 435 983 813 820
Rental and other vehicles....................................... -- 60 -- -- --
----------- ----------- ----------- ----------- -----------
Total........................................................... $ 5,405 $ 4,364 $ 2,972 $ 3,787 $ 3,188
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Floor plan obligations related to sold vehicles not yet remitted
to financial institutions..................................... $ 355 $ 466 $ 98 $ 31 $ --
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
The floor plan arrangements permit the Companies to finance their vehicle
purchases dependent upon new and used vehicle sales and inventory levels. The
resultant liability is secured by the related inventory and normally by personal
guarantees from the owners. Payments are due when the related vehicles are sold.
F-30
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
7. FLOOR PLAN NOTES PAYABLE: (CONTINUED)
Information about the floor plan accounts is as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FLOOR PLAN LIABILITY
INTEREST RATE FLOOR PLAN INTEREST -------------------------------------
-------------------- ----------------------------------- MAXIMUM CURRENT CURRENT
RANGING FROM EXPENSE CREDITS NET AVAILABILITY AVAILABILITY OUTSTANDING
-------------------- ----------- ----------- --------- ----------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shaker............................ 9.50% 10.50% $ 831 $ (423) $ 408 $ 7,975 $ 1,214 $ 6,761
Westwood.......................... 9.50% 9.50% 423 (223) 200 6,900 -- 10,179
Muller Toyota..................... 8.90% 9.50% 241 (166) 75 4,700 208 4,492
Muller Chevrolet.................. 8.90% 9.50% 389 (138) 251 5,850 445 5,405
Bay State......................... 9.50% 9.50% 390 (68) 322 2,900 -- 2,972
Brattleboro....................... 9.50% 10.25% 210 (171) 39 2,550 -- 3,188
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FLOOR PLAN LIABILITY
INTEREST RATE FLOOR PLAN INTEREST -------------------------------------
-------------------- ----------------------------------- MAXIMUM CURRENT CURRENT
RANGING FROM EXPENSE CREDITS NET AVAILABILITY AVAILABILITY OUTSTANDING
-------------------- ----------- ----------- --------- ----------- ----------- -----------
<CAPTION>
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shaker............................ 9.25% 10.00% $ 901 $ (335) $ 566 $ 7,850 $ 201 $ 7,649
Westwood.......................... 9.25% 9.25% 499 (202) 297 5,500 -- 6,003
Muller Toyota..................... 8.25% 9.75% 306 (162) 144 4,700 385 4,315
Muller Chevrolet.................. 8.90% 9.50% 349 (147) 202 5,850 1,486 4,364
Bay State......................... 9.50% 9.50% 378 (95) 283 3,300 -- 3,787
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FLOOR PLAN LIABILITY
INTEREST RATE FLOOR PLAN INTEREST -------------------------------------
-------------------- ----------------------------------- MAXIMUM CURRENT CURRENT
RANGING FROM EXPENSE CREDITS NET AVAILABILITY AVAILABILITY OUTSTANDING
-------------------- ----------- ----------- --------- ----------- ----------- -----------
<CAPTION>
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Shaker............................ 9.25% 10.00% $ 1,029 $ (314) $ 715 $ 9,075 $ 614 $ 8,461
Westwood.......................... 9.50% 9.50% 599 (493) 106 5,500 -- 6,508
Muller Toyota..................... 8.25% 9.75% 375 None 375 4,700 1,108 3,592
Muller Chevrolet.................. 8.90% 9.50% 425 (151) 274 5,850 1,487 4,363
Bay State......................... 9.50% 9.50% 244 (37) 207 4,000 2,059 1,941
</TABLE>
Management and the applicable financing companies are aware of and have
agreed to the financing in excess of the original lines of credit.
8. OTHER CURRENT BANK BORROWINGS:
SHAKER
One of the subsidiaries of E.R.R. Enterprises, Inc., Family Rental, Inc.,
leases vehicles through the Manufacturer for its rental fleet. The terms of the
leases are six to twelve months at various interest rates.
F-31
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
8. OTHER CURRENT BANK BORROWINGS: (CONTINUED)
WESTWOOD
Effective May 24, 1996, Westwood entered into an agreement with Midland Bank
for a $1,000,000 revolving line of credit. This line of credit bears interest at
the prime rate (8.5% and 8.25% at December 31, 1997 and 1996, respectively),
expires in April 1998, and is guaranteed by a majority stockholder of Westwood.
As of December 31, 1997 and 1996, borrowings under this line of credit amounted
to $1,000,000 and $500,000, respectively. Westwood(1)s management intents and
believes it has the ability to renew this line of credit under substantially the
same terms and conditions existing as of December 31, 1997.
MULLER TOYOTA
During 1997, Muller Toyota obtained a $200,000 revolving line of credit.
This line of credit bears interest at the prime rate plus 1.5% (10.0% at
December 31, 1997), expires in April 1998, and is collateralized by certain
assets of the Company. As of December 31, 1997, borrowings under this line of
credit amounted to $200,000. Subsequent to December 31, 1997, this line was
repaid and closed.
MULLER CHEVROLET
During 1997, Muller Chevrolet obtained a $200,000 revolving line of credit.
This line of credit bears interest at the prime rate (8.5% at December 31,
1997), expires in April 1998, and is guaranteed by a majority shareholder of
Muller Chevrolet. As of December 31, 1997, borrowings under this line of credit
amounted to $200,000. Muller Chevrolet(1)s management intents and believes it
has the ability to renew this line of credit under substantially the same terms
and conditions existing as of December 31, 1997.
F-32
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
9. LONG TERM DEBT:
SHAKER
<TABLE>
<CAPTION>
12/31/97 12/31/96
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Notes payable for computer equipment, due in monthly installments including interest at rates
ranging from 7.4% to 7.9%, maturing in March and April 2000................................. $ 158 $ 199
Mortgage note payable, due in monthly installments including interest at a variable rate (9.0%
in 1997 and 8.5% in 1996), maturing in September 1998....................................... 227 252
----- -----
385 451
Less: Current portion......................................................................... 278 65
----- -----
$ 107 $ 386
----- -----
----- -----
</TABLE>
Maturities of long-term debt for each of the next five years and thereafter
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AGGREGATE
DECEMBER 31, OBLIGATION
- ------------------------------------------------------------------------------- ---------------
<S> <C>
(IN THOUSANDS)
1998....................................................................... $ 278
1999....................................................................... 62
2000....................................................................... 45
2001....................................................................... --
2002....................................................................... --
thereafter................................................................. --
-----
$ 385
-----
-----
</TABLE>
WESTWOOD
<TABLE>
<CAPTION>
12/31/97 12/31/96
--------------- -------------
<S> <C> <C>
(IN THOUSANDS)
Note for computer equipment, due in monthly installments including interest, maturing in
May 1997............................................................................... $ -- $ 1
Note for computer equipment, due in monthly installments including interest, maturing in
June 1997.............................................................................. -- 1
Note for computer equipment, due in monthly installments including interest, maturing in
November 2001.......................................................................... 8 10
--
-----
8 12
Less: Current portion.................................................................... 2 3
--
-----
$ 6 $ 9
--
--
-----
-----
</TABLE>
F-33
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
9. LONG TERM DEBT: (CONTINUED)
Maturities of long-term debt for each of the next five years and thereafter
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AGGREGATE
DECEMBER 31, OBLIGATION
- ------------------------------------------------------------------------------- -------------------
<S> <C>
(IN THOUSANDS)
1998....................................................................... $ 2
1999....................................................................... 2
2000....................................................................... 2
2001....................................................................... 2
2002....................................................................... --
thereafter................................................................. --
--
$ 8
--
--
</TABLE>
MULLER TOYOTA
<TABLE>
<CAPTION>
12/31/97 12/31/96
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Notes payable, due in monthly installments including interest at 3% above the 3 month LIBOR
rate (8.9% and 8.5% as of December 31, 1997 and 1996, respectively), maturing in July 1999,
personally guaranteed by the majority stockholders and collateralized by substantially all
the assets of Muller Toyota................................................................. $ 139 $ 223
Notes payable, due in monthly installments including interest at 10.5%, maturing in October
2006........................................................................................ 529 591
Various equipment notes payable, due in monthly installments including interest ranging from
10.3% to 13.1%, maturing on various dates through 2003, collateralized by the related
equipment................................................................................... 96 105
----- -----
764 919
Less: Current portion......................................................................... 164 157
----- -----
$ 600 $ 762
----- -----
----- -----
</TABLE>
Maturities of long-term debt for each of the next five years and thereafter
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AGGREGATE
DECEMBER 31, OBLIGATION
- ------------------------------------------------------------------------------- ---------------
<S> <C>
(IN THOUSANDS)
1998........................................................................... $ 164
1999........................................................................... 145
2000........................................................................... 100
2001........................................................................... 105
2002........................................................................... 105
thereafter..................................................................... 145
-----
$ 764
-----
-----
</TABLE>
F-34
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
9. LONG TERM DEBT: (CONTINUED)
MULLER CHEVROLET
<TABLE>
<CAPTION>
12/31/97 12/31/96
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Note payable, due in monthly installments including interest at prime plus 2% (10.5% and
10.25% at December 31, 1997 and 1996, respectively), maturing in May 1998, collateralized by
a second mortgage on a shareholder's personal residence and the assignment of Muller
Chevrolet's open accounts with Chevrolet, personally guaranteed by the shareholders and
cross guaranteed by Muller Toyota, Inc. and a company affiliated through common ownership... $ 12 $ 42
Note payable, due in monthly installments including interest at prime plus 2% (10.5% and
10.25% at December 31, 1997 and 1996, respectively), maturing in September 2000,
collateralized by substantially all corporate assets of Muller Chevrolet and a company
affiliated through common ownership and guaranteed by the shareholders...................... 64 104
Note payable, due in monthly installments including interest at 9.5%, maturing in February
2016, collateralized by body shop equipment................................................. 145 148
Note payable, due in monthly installments including interest at prime plus 1.5% (10% and 9.75%
at December 31, 1997 and 1996,respectively), maturing in January 2001,collateralized by the
related equipment........................................................................... 62 82
Note payable, due in monthly installments including interest at 7.5%, maturing in February
2000........................................................................................ 90 214
Note payable to bank, due in monthly installments including interest at 7.5%; maturing in May
2001; collateralized by related equipment................................................... 28 35
----- -----
401 625
Less: Current portion......................................................................... 80 126
----- -----
$ 321 $ 499
----- -----
----- -----
</TABLE>
Maturities of long-term debt for each of the next five years and thereafter
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AGGREGATE
DECEMBER 31, OBLIGATION
- ------------------------------------------------------------------------------- ---------------
<S> <C>
(IN THOUSANDS)
1998........................................................................... $ 80
1999........................................................................... 68
2000........................................................................... 42
2001........................................................................... 12
2002........................................................................... 12
thereafter..................................................................... 187
-----
$ 401
-----
-----
</TABLE>
F-35
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
9. LONG TERM DEBT: (CONTINUED)
BAY STATE
<TABLE>
<CAPTION>
12/31/97 12/31/96
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Various notes payable for loaner vehicles, notes have 15 month terms with monthly payments of
1.5% to 2.0% of capitalized amounts plus interest at 9.5%. The balance is due at the end of
the term.................................................................................... $ 77 $ 50
Less: Current portion......................................................................... 26 17
--- ---
$ 51 $ 33
--- ---
--- ---
</TABLE>
Maturities of long-term debt for each of the next five years and thereafter
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AGGREGATE
DECEMBER 31, OBLIGATION
- ------------------------------------------------------------------------------- -----------------
<S> <C>
(IN THOUSANDS)
1998........................................................................... $ 26
1999........................................................................... 51
2000........................................................................... --
2001........................................................................... --
2002........................................................................... --
thereafter..................................................................... --
---
$ 77
---
---
</TABLE>
BRATTLEBORO
<TABLE>
<CAPTION>
12/31/97
---------------
<S> <C>
(IN THOUSANDS)
Note payable, due in monthly installments including interest at 9.25%, maturing in June 2002,
collateralized by the related buildings and improvements......................................... $ 218
Less: Current portion.............................................................................. 70
-----
$ 148
-----
-----
</TABLE>
F-36
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
9. LONG TERM DEBT: (CONTINUED)
Maturities of long-term debt for each of the next five years and thereafter
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AGGREGATE
DECEMBER 31, OBLIGATION
- -------------------------------------------------------------------------------- ---------------
<S> <C>
(IN THOUSANDS)
1998............................................................................ $ 70
1999............................................................................ 70
2000............................................................................ 70
2001............................................................................ 8
2002............................................................................
thereafter...................................................................... --
-----
$ 218
-----
-----
</TABLE>
10. STOCKHOLDERS' EQUITY:
Capital stock consists of the following:
<TABLE>
<CAPTION>
PAR OR
STATED
SHARES SHARES SHARES VALUE TREASURY
AUTHORIZED ISSUED OUTSTANDING PER SHARE STOCK
----------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
E.R.R. Enterprises, Inc............................... 10,000 7,218 7,218 $ 5.00 --
Class A...............................................
E.R.R. Enterprises, Inc............................... 18,045 18,045 18,045 --
Class B............................................... 1.84
Westwood.............................................. 100 60 60 1,000.00 --
Muller Toyota......................................... 100 100 75 400.00 $ 890,000
Muller Chevrolet...................................... 100 100 100 400.00 --
Bay State............................................. 15,000 100 100 250.00 --
Brattleboro........................................... 250 100 100 330.00 --
</TABLE>
11. RELATED PARTY TRANSACTIONS:
OPERATING LEASES WITH STOCKHOLDER
Some of the principal stockholders of the Companies lease to the dealerships
the premises under various operating leases. Additional information regarding
the terms of these leases is contained in Note 13, "Operating Leases."
STOCKHOLDER LOAN GUARANTEES
The Companies have provided guarantees and/or pledged assets as security for
certain outstanding loan obligations of various related parties. See Note 15
"Commitments and Contingencies," for discussion of guarantee and security
arrangements provided on behalf of related parties.
F-37
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
11. RELATED PARTY TRANSACTIONS: (CONTINUED)
SHAKER
<TABLE>
<CAPTION>
Due from related parties: 12/31/97 12/31/96
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Note receivable from Joseph Shaker Realty, a related party through common
ownership, non-interest bearing with payment on demand.................... $ 208 $ 167
Note receivable from Shaker Enterprises, a related party through common
ownership. Payable monthly including interest at 6.34% maturing in May
2013. (Repaid in 1997).................................................... -- 364
Note receivable from Corey Shaker, a stockholder. Interest payable monthly
at 6.83% maturing in December 1998........................................ 86 27
----- -----
$ 294 $ 558
----- -----
----- -----
Due to related parties:
Note payable to Ed Shaker, a stockholder. Non interest bearing with payment
on demand................................................................. $ 706 $ 667
Note payable to Edick Leasing, a related party through common ownership.
Interest payable monthly at 9.5% with payment on demand................... 100 100
Note payable to Joseph Shaker Realty, a related party through common
ownership. Interest payable monthly at 5.6% with payment on demand........ 82 78
----- -----
$ 888 $ 845
----- -----
----- -----
</TABLE>
Other:
Shaker purchases certain used vehicles from Edick Leasing, a related party
through common ownership. Vehicles purchased from the affiliate for the years
ended December 31, 1997 , 1996 and 1995 aggregated approximately $312,000,
$446,000 and $440,000, respectively.
F-38
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
11. RELATED PARTY TRANSACTIONS: (CONTINUED)
WESTWOOD
<TABLE>
<CAPTION>
Due from related parties: 12/31/97 12/31/96
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Note receivable from Salvatore Vergopia, a stockholder. Interest payable
annually at the prime rate, 8.5% and 8.25% at December 31, 1997 and 1996,
respectively, with payment on demand...................................... $ 940 $ 171
Note receivable from Worldwide Financing Co. Ltd., a related party through
common ownership. Non-interest bearing with payment on demand............. 90 100
Note receivable from Edward Vergopia, a stockholder. Non-interest bearing
with payment on demand.................................................... 66 59
----------- -----------
$ 1,096 $ 330
----------- -----------
----------- -----------
Due to related parties:
Note payable to Salvatore Vergopia, a stockholder. Interest payable annually
at the prime rate, 8.5% and 8.25% at December 31, 1997 and 1996,
respectively, with payment on demand...................................... $ 1,000 $ 1,000
----------- -----------
----------- -----------
</TABLE>
MULLER TOYOTA
<TABLE>
<CAPTION>
Due from related parties: 12/31/97 12/31/96
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Note receivable from Rellum Realty, a related party through common
ownership. Non-interest bearing with no repayment terms. Subsequent to
December 31, 1997 this note was repaid.................................... $ 430 $ 324
Note receivable from Muller Chevrolet. Non-interest bearing with payment on
demand.................................................................... 754 340
----------- -----
$ 1,184 $ 664
----------- -----
----------- -----
</TABLE>
MULLER CHEVROLET
<TABLE>
<CAPTION>
Due to related parties: 12/31/97 12/31/96
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Note payable to Muller Toyota. Non-interest bearing with payment on
demand...................................................................... $ 754 $ 340
----- -----
----- -----
</TABLE>
F-39
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED.)
11. RELATED PARTY TRANSACTIONS: (CONTINUED)
BAY STATE
<TABLE>
<CAPTION>
Due from related parties: 12/31/97 12/31/96
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Advances to James Langway, stockholder, non-interest bearing with payment on
demand.................................................................... $ 214 $ 227
----- -----
----- -----
Due to related parties:
Advances from James Langway, stockholder, non-interest bearing with payment
on demand................................................................. $ 474 $ --
----- -----
----- -----
</TABLE>
BRATTLEBORO
<TABLE>
<CAPTION>
Due to related parties: 12/31/97
---------------
<S> <C>
(IN THOUSANDS)
Note payable to Tom Cosenzi, stockholder, non-interest bearing with payment on
demand....................................................................... $ 252
-----
-----
</TABLE>
12. ADVERTISING:
Advertising expense (net of manufacturers' rebates and assistance) consist
of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER
31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Shaker.................................................................................... $ 793 $ 790 $ 736
Westwood.................................................................................. 17 66 65
Muller Toyota............................................................................. 523 464 422
Muller Chevrolet.......................................................................... 450 385 450
Bay State................................................................................. 103 100 51
Brattleboro............................................................................... 395 N/P N/P
</TABLE>
- ------------------------
N/P (NOT PRESENTED)
F-40
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
13. OPERATING LEASES:
The Companies lease various facilities and equipment under operating lease
agreements, including leases with related parties. These leases expire on
various dates. The lease agreements are subject to renewal under essentially the
same terms and conditions as the original leases. Equipment leases with third
parties are not material.
Total rent expense for operating leases and rental agreements with related
parties are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING DECEMBER
31,
-------------------------------
<S> <C> <C> <C>
1997 1996 1995
--------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Shaker................................................................ $ 480 $ 480 $ 480
Westwood.............................................................. 352 256 264
Muller Toyota......................................................... 488 478 457
Muller Chevrolet...................................................... 460 460 404
Bay State............................................................. 270 172 60
Brattleboro........................................................... 276 N/P N/P
</TABLE>
- ------------------------
N/P = Not presented
SHAKER
Shaker rents its operating facilities in Waterbury and Watertown on a year
to year basis. Shaker is obligated under the agreements to pay executory costs
such as insurance, repairs and maintenance, and other related expenses.
Shaker's Waterbury facilities are rented from a Connecticut partnership in
which the majority stockholders of Shaker are general partners.
Shaker's Watertown facility is rented from a second partnership in which
certain stockholders of Shaker are general partners.
WESTWOOD
Westwood currently leases its operating facilities from two majority
stockholders of Westwood, under a lease agreement dated February 1, 1997 for 10
years. Westwood is committed under such agreement for rental payments of
$360,000 per year through 2002 and an aggregate of $1,470,000 thereafter. Prior
to February 1, 1997, Westwood leased its operating facilities from the same
majority shareholders under a lease agreement dated February 1, 1992 for 10
years.
MULLER TOYOTA AND MULLER CHEVROLET
Muller Toyota and Muller Chevrolet rent their operating facilities, on a
month to month basis, from a partnership owned by the stockholders of Muller
Toyota and Muller Chevrolet.
BAY STATE
Bay State rents its operating facilities, on a month to month basis, from a
partnership owned by the stockholders of Bay State.
F-41
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
14. INCOME TAXES:
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
HOMETOWN SHAKER WESTWOOD
------------- ------------------------------------- ------------------------
12/31/97 12/31/97 12/31/95 12/31/95 12/31/97 12/31/96
------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Federal--
Current................................. $ -- $ 103 $ 220 $ (117) $ 73 $ 198
Deferred................................ -- 7 (7) 192 9 (74)
State--
Current................................. -- 49 103 20 21 55
Deferred................................ -- 7 5 23 3 (19)
----- ----- ----- ----- ----- -----
Total Taxes............................... $ -- $ 166 $ 321 $ 118 $ 106 $ 160
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
<CAPTION>
12/31/95
-----------
<S> <C>
Federal--
Current................................. $ 154
Deferred................................ (86)
State--
Current................................. 43
Deferred................................ (23)
-----
Total Taxes............................... $ 88
-----
-----
</TABLE>
<TABLE>
<CAPTION>
MULLER TOYOTA MULLER CHEVROLET
--------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95
------------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Federal--
Current........................................... $ -- $ 226 $ (40) $ -- $ -- $ --
Deferred.......................................... -- (58) (3) -- -- --
State--
Current........................................... 36 33 (11) -- -- --
Deferred.......................................... -- 15 (1) -- -- --
--- ----- --- --- --- ---
Total Taxes......................................... $ 36 $ 216 $ (55) $ -- $ -- $ --
--- ----- --- --- --- ---
--- ----- --- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
BAY STATE BRATTLEBORO
------------------------------------- ---------------
<S> <C> <C> <C> <C>
12/31/97 12/31/96 12/31/95 12/31/97
----------- ----------- ----------- ---------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal--
Current.............................................................. $ -- $ -- $ -- $ --
Deferred............................................................. -- -- -- --
State--
Current.............................................................. 52 67 44 --
Deferred............................................................. -- -- -- --
--
--- --- ---
Total Taxes............................................................ $ 52 $ 67 $ 44 $ --
--
--
--- --- ---
--- --- ---
</TABLE>
F-42
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
14. INCOME TAXES: (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34% to income before
income taxes as follows:
<TABLE>
<CAPTION>
HOMETOWN SHAKER WESTWOOD
--------------- --------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/97 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96
--------------- ----------- ------------- ----------- ------------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Provision at the statutory rate........... 0% 34% 34% 34% 34% 34%
Increase (decrease) resulting from--
Income of S Corporation................. 0% 0% 0% 0% 0% 0%
State income tax, net of benefit for
federal deduction..................... 0% 6% 6% 6% 6% 6%
Other................................... 0% -6% 5% -4% 2% 3%
- -- -- --
--- ---
Total Taxes............................... 0% 34% 45% 36% 42% 43%
- -- -- --
- -- -- --
--- ---
--- ---
<CAPTION>
<S> <C>
12/31/95
-------------
<S> <C>
Provision at the statutory rate........... 34%
Increase (decrease) resulting from--
Income of S Corporation................. 0%
State income tax, net of benefit for
federal deduction..................... 6%
Other................................... 4%
--
Total Taxes............................... 44%
--
--
</TABLE>
<TABLE>
<CAPTION>
MULLER TOYOTA MULLER CHEVROLET
----------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
12/31/97 12/31/96 12/31/95 12/31/97 12/31/96
----------- ------------- ------------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Provision at the statutory rate....................... 34% 34% 34% 34% 34%
Increase (decrease) resulting from--
Income of S Corporation............................. -34% 0% 0% -34% -34%
State income tax, net of benefit for federal
deduction......................................... 6% 6% 6% 6% 6%
Other............................................... -1% 0% 2% -6% -6%
-- -- -- -- --
Total Taxes........................................... 5% 40% 42% 0% 0%
-- -- -- -- --
-- -- -- -- --
<CAPTION>
<S> <C>
12/31/95
-----------
<S> <C>
Provision at the statutory rate....................... 34%
Increase (decrease) resulting from--
Income of S Corporation............................. -34%
State income tax, net of benefit for federal
deduction......................................... 6%
Other............................................... -6%
--
Total Taxes........................................... 0%
--
--
</TABLE>
<TABLE>
<CAPTION>
BAY STATE BRATTLEBORO
------------------------------------- ---------------
<S> <C> <C> <C> <C>
12/31/97 12/31/96 12/31/95 12/31/97
----------- ----------- ----------- ---------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Provision at the statutory rate........................................ 34% 34% 34% 34%
Increase (decrease) resulting from--
Income of S Corporation.............................................. -34% -34% -34% -34%
State income tax, net of benefit for federal deduction............... 5% 5% 6% 0%
Other................................................................ 0% 0% 0% 0%
-- -- -- --
Total Taxes............................................................ 5% 5% 6% 0%
-- -- -- --
-- -- -- --
</TABLE>
F-43
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
14. INCOME TAXES: (CONTINUED)
Deferred income taxes are provided for temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
<TABLE>
<CAPTION>
MULLER
HOMETOWN SHAKER WESTWOOD TOYOTA
------------- ------------------------ ------------------------ -----------
<S> <C> <C> <C> <C> <C> <C>
12/31/97 12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
------------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Deferred tax assets--
Reserves and accruals not deductible until
paid.................................... $ -- $ 5 $ 7 $ 192 $ 204 $ --
Depreciation............................ -- -- -- 5 3 --
Other................................... -- -- -- 8 10 --
--- ----- ----- ----- ----- ---
Total................................... -- 5 7 205 217 --
Deferred tax liabilities--
Depreciation............................ -- (72) (52) -- -- --
Other................................... -- (97) (105) -- -- --
--- ----- ----- ----- ----- ---
Total................................... -- (169) (157) -- -- --
--- ----- ----- ----- ----- ---
Net deferred tax asset (liability)........ $ -- $ (164) $ (150) $ 205 $ 217 $ --
--- ----- ----- ----- ----- ---
--- ----- ----- ----- ----- ---
<CAPTION>
<S> <C>
12/31/96
-----------
<S> <C>
Deferred tax assets--
Reserves and accruals not deductible until
paid.................................... $ 128
Depreciation............................ --
Other................................... --
-----
Total................................... 128
Deferred tax liabilities--
Depreciation............................ --
Other................................... --
-----
Total................................... --
-----
Net deferred tax asset (liability)........ $ 128
-----
-----
</TABLE>
<TABLE>
<CAPTION>
MULLER CHEVROLET BAY STATE BRATTLEBORO
-------------------------- ------------------------ ---------------
<S> <C> <C> <C> <C> <C>
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
------------- ----------- ----------- ----------- ---------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Deferred tax assets--
Reserves and accruals not deductible until paid.......... $ -- $ -- $ -- $ -- $ --
Depreciation............................................. -- -- -- -- --
Other.................................................... -- -- -- -- --
--- --- --- --- ---
Total.................................................... -- -- -- -- --
Deferred tax liabilities--
Depreciation............................................. -- -- -- -- --
Other.................................................... -- -- -- -- --
--- --- --- --- ---
Total.................................................... -- -- -- -- --
--- --- --- --- ---
Net deferred tax asset (liability)......................... $ -- $ -- $ -- $ -- $ --
--- --- --- --- ---
--- --- --- --- ---
</TABLE>
15. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Companies are defendants in several lawsuits arising from normal
business activities. Management has reviewed pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on the Companies' financial
position or results of operations.
F-44
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
15. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
INSURANCE
The Companies carry a standard range of insurance coverage, including
general and business auto liability, commercial property, workers' compensation
and excess liability coverage.
WESTWOOD
As of September 29, 1995, Westwood entered into an agreement with a
financial institution for an indirect auto financing credit line in the amount
of $1,000,000 for the sale of new and used third party limousines to customers.
Loans advanced under this credit line to customers are made with the full
recourse to Westwood. Under the agreement, Westwood must also maintain an
account with this financial institution amounting to a minimum of 25% of the
loans outstanding. As of December 31, 1997 and 1996, loans outstanding under
this credit line amounted to approximately $475,000 and $863,000, respectively,
and the restricted cash is included in prepaid expenses and other current
assets.
Westwood is a guarantor for a $2,000,000 credit line granted by a financial
institution to SEC Funding Corp., a company in which the majority stockholder of
Westwood is also a stockholder. This credit line is used for financing the sale
of new and used third party limousines. As of December 31, 1997 and 1996, loans
outstanding under this credit line amounted to approximately $935,000 and
$950,000, respectively.
Westwood is a guarantor of a portfolio of customers limousine vehicle loans
granted by Ford Motor Credit Co. As of December 31, 1997 and 1996, Westwood
fully guaranteed limousine vehicle loans aggregating approximately $6,768,000
and $1,879,000, respectively, and was a limited guarantor on loans aggregating
approximately $800,000 as of December 31, 1997. The limited guarantee is
effective for a twelve month period, commencing with the inception of the
respective loan, and expires thereafter.
Westwood is a guarantor of a portfolio of vehicle loans, granted by Ford
Motor Credit Co., to various customers of Westwood with below average credit. As
of December 31, 1997 and 1996, Westwood fully guaranteed vehicle loans
associated with these customers, aggregating approximately $754,000 and
$2,545,000 respectively.
16. RETIREMENT PLANS:
SHAKER
Shaker has a contributory qualified profit-sharing 401(k) plan covering
substantially all full-time employees. Profit sharing contributions, if any, are
determined annually by the Board of Directors. No profit sharing contributions
were made in 1997, 1996 and 1995. For the years ended December 31, 1997, 1996
and 1995, matching contributions made by Shaker were approximately $24,000,
$16,000 and $14,000, respectively.
WESTWOOD
During 1997, Westwood established a contributory qualified 401(k) plan
covering substantially all full-time employees. Employee elective deferrals are
matched by Westwood at 25% of the first 5% of the deferrals. For the year ended
December 31, 1997, matching contributions made by Westwood were approximately
$30,000.
F-45
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
16. RETIREMENT PLANS: (CONTINUED)
MULLER TOYOTA AND MULLER CHEVROLET
Muller Toyota and Muller Chevrolet have a profit-sharing plan with a 401(k)
deferral feature. Employees may defer up to 20% of wages as a plan contribution
subject to limitations imposed by tax regulations. Profit-sharing contributions
are at the discretion of the Board of Directors. No contributions were made for
the years ended December 31, 1997, 1996 and 1995.
BAY STATE
Bay State has a contributory qualified 401(k) plan covering substantially
all full time employees. Baystate does not make any matching contributions to
the plan.
17. STOCK OPTION PLAN:
In February 1998, in order to attract and retain persons necessary for the
success of the Company, Hometown adopted its 1998 Stock Option Plan (the "Stock
Option Plan") covering up to 480,000 shares of Class A Common Stock. Pursuant to
the Stock Option Plan officers, directors and key employees of the Company and
consultants to the Company are eligible to receive incentive and/or
non-incentive stock options. The Stock Option Plan, which expires in January
2008, will be administered by the Board of Directors or a committee designated
by the Board of Directors. The selection of participants, allotment of shares,
determination of price and other conditions relating to the purchase of options
will be determined by the Board of Directors, or a committee thereof, in its
sole discretion. Stock options granted under the Stock Option Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Common Stock on the
date of the grant, except that the term of an incentive stock option granted
under the Stock Option Plan to a stockholder owning more than 10% of the
outstanding Common Stock may not exceed five years and its exercise price may
not be less than 110% of the fair market value of the Common Stock on the date
of the grant.
18. PROPOSED ACQUISITION BY SHAKER:
The stockholders of the Core Operating Companies have entered into
definitive purchase agreements with Hometown providing for the purchase of the
Companies by Shaker under the following terms and conditions:
ACQUISITION OF CORE OPERATING COMPANIES
The stockholders of Shaker, Westwood and Muller (the Core Operating
Companies) entered into the Exchange agreement pursuant to which they have
agreed to exchange all of the outstanding shares of four corporations, operating
six franchised dealerships, one collision repair center and one factory
authorized freestanding auto service center, for 3,760,000 shares of Hometown
Class B Common Stock as follows: 1,880,000 shares to the stockholders of Shaker;
940,000 shares to the shareholders of Westwood; and 940,000 shares to the
stockholders of Muller Toyota, Inc. and Muller Chevrolet, Inc.
The Exchange agreement provides that the combination is subject to certain
conditions including, among others: (i) the continuing accuracy on the closing
date of the representations and warranties of the applicable Core Operating
Companies and Hometown; (ii) the performance of each of the covenants by the
applicable Core Operating Companies; and (iii) the receipt of all permits,
approvals and consents
F-46
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(NOTES APPLY TO ALL DEALERSHIPS EXCEPT AS NOTED)
18. PROPOSED ACQUISITION BY SHAKER: (CONTINUED)
required for transfer of ownership of the Core Operating Companies and their
assets including the consent of the manufacturers.
ACQUISITIONS
Hometown entered into two agreements (the "Acquisitions") to acquire certain
assets and liabilities of two dealerships in Massachusetts and Vermont for an
aggregate consideration of $5.7 million, subject to adjustment based on the book
value of certain acquired assets. Each of the Acquisitions is subject to
satisfaction of various conditions precedent, including the achieving by each of
the sellers of certain levels of income, the receipt of factory consents from
all automobile manufacturers whose franchises are held by each of the sellers.
F-47
<PAGE>
INDEX TO UNAUDITED CONDENSED FINANCIAL PAGES
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
<TABLE>
<S> <C>
Balance Sheets, Hometown, Shaker, Westwood, Muller Toyota, Muller Chevrolet, Bay
State, Brattleboro and Pride as of March 31, 1998 and 1997......................... F-49
Statements of Operations, Hometown, Shaker, Westwood, Muller Toyota, Muller
Chevrolet, Bay State, Brattleboro and Pride for the three months ended March 31,
1998 and 1997...................................................................... F-50
Statements of Stockholders' Equity, Hometown, Shaker, Westwood, Muller Toyota, Muller
Chevrolet, Bay State, Brattleboro and Pride for the three months ended March 31,
1998
and 1997........................................................................... F-51
Statements of Cash Flows, Hometown, Shaker, Westwood, Muller Toyota, Muller
Chevrolet, Bay State, Brattleboro and Pride for the three months ended March 31,
1998 and 1997...................................................................... F-52
Notes to the Unaudited Condensed Financial Statements................................ F-53
</TABLE>
F-48
<PAGE>
UNAUDITED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MULLER
HOMETOWN SHAKER WESTWOOD MULLER TOYOTA CHEVROLET
------------- -------------------- ---------------------- ------------------------ -----------
3/31/98 3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97 3/31/98
------------- --------- --------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash
equivalents.......... $ 52 $ 3,608 $ 3,386 $ 284 $ 695 $ 314 $ 671 $ 200
Accounts receivable,
net.................. -- 1,249 1,122 1,844 1,278 1,020 641 164
Inventories............ -- 8,321 9,193 7,889 5,879 3,626 2,974 3,751
Prepaid expenses and
other current
assets............... 273 462 266 256 318 30 18 105
Deferred income
taxes................ -- 167 -- 213 54 -- -- --
----- --------- --------- --------- ----------- ----------- ----------- -----------
Total current
assets............. 325 13,807 13,967 10,486 8,224 4,990 4,304 4,220
Property and equipment,
net.................... -- 1,277 1,439 227 279 800 811 289
Receivable from finance
companies.............. -- -- -- -- -- 1,002 891 290
Due from related
parties................ -- 278 552 193 472 932 726 --
Deferred income taxes.... -- 683 -- -- -- -- 113 --
Other assets............. -- 7 78 203 29 -- -- 208
----- --------- --------- --------- ----------- ----------- ----------- -----------
Total Assets......... $ 325 $ 16,052 $ 16,036 $ 11,109 $ 9,004 $ 7,724 $ 6,845 $ 5,007
----- --------- --------- --------- ----------- ----------- ----------- -----------
----- --------- --------- --------- ----------- ----------- ----------- -----------
Current Liabilities
Floor plan notes
payable.............. $ -- $ 7,417 $ 8,310 $ 7,493 $ 5,880 $ 4,268 $ 3,575 $ 4,148
Accounts payable and
accrued expenses..... -- 3,070 700 1,005 726 1,098 1,382 341
Current maturities of
long-term debt....... -- 253 65 2 4 69 62 140
Other current bank
borrowings........... -- 100 123 1,000 300 -- -- 200
Advances from officers
and affilities....... 325 -- -- -- -- -- -- --
Income taxes payable... -- 146 229 132 -- 208 289 --
----- --------- --------- --------- ----------- ----------- ----------- -----------
Total current
liabilities........ 325 10,986 9,427 9,632 6,910 5,643 5,308 4,829
Long-term debt........... -- 107 364 6 7 563 716 226
Long-term deferred income
taxes.................. -- 164 338 -- -- -- -- --
Due to related parties... -- 920 851 -- 1,000 5 73 875
Other long-term
liabilities............ -- 52 30 -- -- 206 25 --
Stockholders' Equity
Common stock........... -- 69 69 60 60 30 30 345
Additional paid-in
capital.............. -- -- -- 76 76 96 96 811
Treasury stock, at
cost................. -- -- -- -- -- (890) (890) --
Retained earnings
(deficit)............ -- 3,754 4,957 1,335 951 2,071 1,487 (2,079)
----- --------- --------- --------- ----------- ----------- ----------- -----------
Total stockholders'
equity (deficit)... -- 3,823 5,026 1,471 1,087 1,307 723 (923)
----- --------- --------- --------- ----------- ----------- ----------- -----------
Total liabilities and
stockholders'
equity............. $ 325 $ 16,052 $ 16,036 $ 11,109 $ 9,004 $ 7,724 $ 6,845 $ 5,007
----- --------- --------- --------- ----------- ----------- ----------- -----------
----- --------- --------- --------- ----------- ----------- ----------- -----------
<CAPTION>
BAY STATE BRATTLEBORO PRIDE
------------------------ ------------------------ ----------------------
3/31/97 3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
----------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash
equivalents.......... $ 108 $ 1,091 $ 1,580 $ 446 $ 294 $ 83 $ 114
Accounts receivable,
net.................. 34 221 206 151 101 189 86
Inventories............ 3,842 1,886 4,318 2,534 1,725 2,388 2,528
Prepaid expenses and
other current
assets............... 7 13 8 2 2 60 51
Deferred income
taxes................ -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ---------
Total current
assets............. 3,991 3,211 6,112 3,133 2,122 2,720 2,779
Property and equipment,
net.................... 421 252 265 381 334 49 48
Receivable from finance
companies.............. 308 -- -- -- -- -- --
Due from related
parties................ 4 214 219 -- -- -- --
Deferred income taxes.... -- -- -- -- -- -- --
Other assets............. 228 173 186 13 22 6 --
----------- ----------- ----------- ----------- ----------- ----------- ---------
Total Assets......... $ 4,952 $ 3,850 $ 6,782 $ 3,527 $ 2,478 $ 2,775 $ 2,827
----------- ----------- ----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ----------- ----------- ---------
Current Liabilities
Floor plan notes
payable.............. $ 4,309 $ 2,008 $ 4,451 $ 2,429 $ 1,185 $ 2,178 $ 2,106
Accounts payable and
accrued expenses..... 273 234 198 261 322 113 177
Current maturities of
long-term debt....... 126 26 17 70 73 -- 20
Other current bank
borrowings........... -- -- -- 57 -- -- --
Advances from officers
and affilities....... -- 511 -- -- -- -- --
Income taxes payable... -- 8 -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ---------
Total current
liabilities........ 4,708 2,787 4,666 2,817 1,580 2,291 2,303
Long-term debt........... 513 40 5 134 191 -- --
Long-term deferred income
taxes.................. -- -- -- -- -- -- --
Due to related parties... 341 -- -- 252 128 50 50
Other long-term
liabilities............ -- 12 16 -- -- -- --
Stockholders' Equity
Common stock........... 345 25 25 33 33 2 2
Additional paid-in
capital.............. 811 310 310 -- -- 529 563
Treasury stock, at
cost................. -- -- -- -- -- -- --
Retained earnings
(deficit)............ (1,766) 676 1,760 291 546 (97) (91)
----------- ----------- ----------- ----------- ----------- ----------- ---------
Total stockholders'
equity (deficit)... (610) 1,011 2,095 324 579 434 474
----------- ----------- ----------- ----------- ----------- ----------- ---------
Total liabilities and
stockholders'
equity............. $ 4,952 $ 3,850 $ 6,782 $ 3,527 $ 2,478 $ 2,775 $ 2,827
----------- ----------- ----------- ----------- ----------- ----------- ---------
----------- ----------- ----------- ----------- ----------- ----------- ---------
</TABLE>
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to unaudited Condensed Financial Statements are an
integral part of these Balance Sheets.
F-49
<PAGE>
UNAUDITED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
MULLER
HOMETOWN SHAKER WESTWOOD MULLER TOYOTA CHEVROLET
--------------- ---------------------- ---------------------- ------------------------ -----------
3/31/98 3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97 3/31/98
--------------- --------- ----------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
New vehicle
sales.......... $ -- $ 5,967 $ 6,945 $ 12,599 $ 9,716 $ 4,598 $ 5,087 $ 2,535
Used vehicle
sales.......... -- 5,723 5,105 4,273 1,694 3,265 3,651 1,205
Parts and service
sales.......... -- 1,613 1,674 1,121 1,005 848 735 463
Other dealership
revenues,
net............ -- 441 379 397 145 354 378 119
--- --------- ----------- --------- ----------- ----------- ----------- -----------
Total
revenues..... -- 13,744 14,103 18,390 12,560 9,065 9,851 4,322
Cost of sales
New vehicle
sales.......... -- 5,590 6,532 11,970 9,209 4,343 4,682 2,386
Used vehicle
sales.......... -- 5,137 4,417 3,980 1,589 3,001 3,383 1,056
Parts and service
sales.......... -- 885 908 552 517 419 378 268
--- --------- ----------- --------- ----------- ----------- ----------- -----------
Cost of sales...... -- 11,612 11,857 16,502 11,315 7,763 8,443 3,710
--- --------- ----------- --------- ----------- ----------- ----------- -----------
Gross profit... -- 2,132 2,246 1,888 1,245 1,302 1,408 612
Selling, general
and
administrative
expenses......... -- 4,194 1,770 1,432 1,268 1,097 1,103 629
--- --------- ----------- --------- ----------- ----------- ----------- -----------
Income (loss)
from
operations... -- (2,062) 476 456 (23) 205 305 (17)
Other income
(expense)
Interest income
(expense), net
............... 1 (57) (76) (132) (64) (68) (58) (113)
Other income
(expense),
net............ -- (6) 6 (9) (9) (7) 4 (24)
--- --------- ----------- --------- ----------- ----------- ----------- -----------
Income (loss)
before
taxes........ 1 (2,125) 406 315 (96) 130 251 (154)
Provision (benefit)
for income
taxes............ -- (850) 162 132 (40) 8 15 --
--- --------- ----------- --------- ----------- ----------- ----------- -----------
Net income
(loss)....... $ 1 $ (1,275) $ 244 $ 183 $ (56) $ 122 $ 236 $ (154)
--- --------- ----------- --------- ----------- ----------- ----------- -----------
--- --------- ----------- --------- ----------- ----------- ----------- -----------
S-Corporation pro
forma provision
(benefit) for
income taxes..... -- -- -- -- -- 44 84 (52)
----------- ----------- -----------
Pro forma net
income (loss).... $ 78 $ 152 $ (102)
----------- ----------- -----------
----------- ----------- -----------
<CAPTION>
BAY STATE BRATTLEBORO PRIDE
------------------------ ------------------------ ------------------------
3/31/97 3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues
New vehicle
sales.......... $ 2,896 $ 1,980 $ 2,172 $ 2,400 $ 1,813 $ 1,351 $ 1,495
Used vehicle
sales.......... 1,458 2,356 3,124 2,598 3,851 441 694
Parts and service
sales.......... 323 555 522 362 530 300 291
Other dealership
revenues,
net............ 203 80 91 65 187 44 76
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total
revenues..... 4,880 4,971 5,909 5,425 6,381 2,136 2,556
Cost of sales
New vehicle
sales.......... 2,721 1,837 2,030 2,227 1,675 1,270 1,410
Used vehicle
sales.......... 1,321 2,005 2,684 2,307 3,254 382 611
Parts and service
sales.......... 156 291 260 201 304 168 164
----------- ----------- ----------- ----------- ----------- ----------- -----------
Cost of sales...... 4,198 4,133 4,974 4,735 5,233 1,820 2,185
----------- ----------- ----------- ----------- ----------- ----------- -----------
Gross profit... 682 838 935 690 1,148 316 371
Selling, general
and
administrative
expenses......... 654 481 444 511 765 332 356
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss)
from
operations... 28 357 491 179 383 (16) 15
Other income
(expense)
Interest income
(expense), net
............... (79) (54) (75) (42) (20) (12) (12)
Other income
(expense),
net............ 1 9 4 26 7 -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income (loss)
before
taxes........ (50) 312 420 163 370 (28) 3
Provision (benefit)
for income
taxes............ -- 18 19 -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income
(loss)....... $ (50) $ 294 $ 401 $ 163 $ 370 $ (28) $ 3
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
S-Corporation pro
forma provision
(benefit) for
income taxes..... (16) 105 142 59 131 (8) 3
----------- ----------- ----------- ----------- ----------- ----------- -----------
Pro forma net
income (loss).... $ (34) $ 189 $ 259 $ 104 $ 239 $ (20) $ --
----------- ----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Unaudited Condensed Financial Statements
are an integral part of these Statements.
F-50
<PAGE>
UNAUDITED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
MULLER CHEVROLET
HOMETOWN SHAKER WESTWOOD MULLER TOYOTA
----------- ------------------------ ------------------------ ------------------------ --------------------
3/31/98 3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common Stock:
Balance......... $ -- $ 69 $ 69 $ 60 $ 60 $ 30 $ 30 $ 345 $ 345
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
Additional Paid-in
Capital
Balance,
Beginning of
period........ $ -- $ -- $ -- $ 76 $ 76 $ 96 $ 96 $ 811 $ 811
Capital
contribution
(disbursement).. -- -- -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
Balance, End of
period........ $ -- $ -- $ -- $ 76 $ 76 $ 96 $ 96 $ 811 $ 811
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
Treasury Stock, at
cost
Balance......... $ -- $ -- $ -- $ -- $ -- $ (890) $ (890) $ -- $ --
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
Retained Earnings
(Deficit)
Balance, Beginning
of period....... $ (1) $ 5,029 $ 4,713 $ 1,152 $ 1,007 $ 1,949 $ 1,251 $ (1,925) $ (1,716)
Net Income
(Loss)........ 1 (1,275) 244 183 (56) 122 236 (154) (50)
Dividends....... -- -- -- -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
Balance, End of
period........ $ -- $ 3,754 $ 4,957 $ 1,335 $ 951 $ 2,071 $ 1,487 $ (2,079) $ (1,766)
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
Total
Stockholders'
Equity
(Deficit)....... $ -- $ 3,823 $ 5,026 $ 1,471 $ 1,087 $ 1,307 $ 723 $ (923) $ (610)
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------- ---------
<CAPTION>
BAY STATE BRATTLEBORO PRIDE
------------------------ ------------------------ ------------------------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Common Stock:
Balance......... $ 25 $ 25 $ 33 $ 33 $ 2 $ 2
----------- ----------- ----- ----- ----- -----------
Additional Paid-in
Capital
Balance,
Beginning of
period........ $ 310 $ 310 $ -- $ -- $ 539 $ 587
Capital
contribution
(disbursement).. -- -- -- -- (10) (24)
----------- ----------- ----- ----- ----- -----------
Balance, End of
period........ $ 310 $ 310 $ -- $ -- $ 529 $ 563
----------- ----------- ----- ----- ----- -----------
Treasury Stock, at
cost
Balance......... $ -- $ -- $ -- $ -- $ -- $ --
----------- ----------- ----- ----- ----- -----------
Retained Earnings
(Deficit)
Balance, Beginning
of period....... $ 494 $ 1,359 $ 143 $ 192 $ (95) $ (94)
Net Income
(Loss)........ 294 401 163 370 (28) 3
Dividends....... (112) -- (15) (16) 26 --
----------- ----------- ----- ----- ----- -----------
Balance, End of
period........ $ 676 $ 1,760 $ 291 $ 546 $ (97) $ (91)
----------- ----------- ----- ----- ----- -----------
Total
Stockholders'
Equity
(Deficit)....... $ 1,011 $ 2,095 $ 324 $ 579 $ 434 $ 474
----------- ----------- ----- ----- ----- -----------
----------- ----------- ----- ----- ----- -----------
</TABLE>
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Unaudited Condensed Financial Statements
are an integral part of these Statements.
F-51
<PAGE>
UNAUDITED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
HOMETOWN SHAKER WESTWOOD
------------- ---------------------- ------------------------
3/31/98 3/31/98 3/31/97 3/31/98 3/31/97
------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 1 $ (1,275) $ 244 $ 183 $ (56)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities--
Depreciation and amortization.................................. -- 46 46 40 18
Deferred income taxes.......................................... -- (850) 188 (8) 163
Changes in assets and liabilities:
Accounts receivable, net..................................... -- (335) (31) 89 302
Inventories.................................................. -- (712) (689) 2,656 599
Prepaid expenses and other current assets.................... (170) (228) (198) (5) (32)
Receivable from finance company.............................. -- -- -- -- --
Other assets................................................. -- 99 (10) (101) (3)
Floor plan notes payable..................................... -- 656 661 (2,686) (123)
Accounts payable and accrued expenses........................ (1) 2,607 249 (202) 31
Income taxes payable......................................... -- -- (111) 132 (104)
Other long term liabilities.................................. -- -- 1 -- --
----- --------- ----------- ----------- -----
Net cash provided by (used in) operating activities............ (170) 8 350 98 795
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................. -- (3) (57) (29) (26)
Proceeds from sale of property and equipment................... -- 26 -- -- 9
----- --------- ----------- ----------- -----
Net cash provided by (used in) investing activities............ -- 23 (57) (29) (17)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings........................ -- -- -- -- --
Principal payments of long-term debt........................... -- (25) (22) -- (1)
Other current bank borrowings, net of repayments............... -- 15 22 -- (200)
Advance to/from officers and affiliates........................ 175 -- -- -- --
Due from/to related parties.................................... -- 48 12 (97) (142)
Dividends paid................................................. -- -- -- -- --
----- --------- ----------- ----------- -----
Net cash provided by (used in) financing activities............ 175 38 12 (97) (343)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. 5 69 305 (28) 435
CASH AND CASH EQUVALENTS, beginning of period.................... 47 3,539 3,081 312 260
----- --------- ----------- ----------- -----
CASH AND CASH EQUVALENTS, end of period.......................... $ 52 $ 3,608 $ 3,386 $ 284 $ 695
----- --------- ----------- ----------- -----
----- --------- ----------- ----------- -----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest....................................................... $ -- $ 57 $ 76 $ 134 $ 66
Taxes.......................................................... -- -- 85 8 --
<CAPTION>
MULLER CHEVROLET
MULLER TOYOTA BAY STATE
------------------------ ------------------------ -----------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 122 $ 236 $ (154) $ (50) $ 294
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities--
Depreciation and amortization.................................. 41 44 10 14 26
Deferred income taxes.......................................... -- 15 -- -- --
Changes in assets and liabilities:
Accounts receivable, net..................................... (525) (433) (8) 139 (46)
Inventories.................................................. 346 769 1,418 219 919
Prepaid expenses and other current assets.................... (14) (13) (94) (7) 5
Receivable from finance company.............................. (12) (18) 4 (77) --
Other assets................................................. -- 5 2 6 4
Floor plan notes payable..................................... (224) (740) (1,257) (55) (964)
Accounts payable and accrued expenses........................ (15) 319 55 (120) 47
Income taxes payable......................................... 171 135 -- -- 5
Other long term liabilities.................................. (82) (61) -- -- (1)
----- ----- ----------- --- -----------
Net cash provided by (used in) operating activities............ (192) 258 (24) 69 289
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................. (33) (36) (10) (1) --
Proceeds from sale of property and equipment................... -- -- -- -- --
----- ----- ----------- --- -----------
Net cash provided by (used in) investing activities............ (33) (36) (10) (1) --
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings........................ -- -- -- 50 --
Principal payments of long-term debt........................... (132) (141) (35) (36) (11)
Other current bank borrowings, net of repayments............... (200) -- -- -- --
Advance to/from officers and affiliates........................ -- -- -- -- 37
Due from/to related parties.................................... 257 11 121 (3) --
Dividends paid................................................. -- -- -- -- (112)
----- ----- ----------- --- -----------
Net cash provided by (used in) financing activities............ (75) (130) 86 11 (86)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. (300) 92 52 79 203
CASH AND CASH EQUVALENTS, beginning of period.................... 614 579 148 29 888
----- ----- ----------- --- -----------
CASH AND CASH EQUVALENTS, end of period.......................... $ 314 $ 671 $ 200 $ 108 $ 1,091
----- ----- ----------- --- -----------
----- ----- ----------- --- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest....................................................... $ 68 $ 58 $ 113 $ 79 $ 62
Taxes.......................................................... -- -- -- -- 13
<CAPTION>
BRATTLEBORO PRIDE
------------------------ ------------------------
3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 401 $ 163 $ 370 $ (28) $ 3
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities--
Depreciation and amortization.................................. 73 7 5 3 4
Deferred income taxes.......................................... -- -- -- -- --
Changes in assets and liabilities:
Accounts receivable, net..................................... 26 (16) (18) (83) 38
Inventories.................................................. (418) 872 890 (705) (574)
Prepaid expenses and other current assets.................... 32 (2) (2) 23 15
Receivable from finance company.............................. -- -- -- -- --
Other assets................................................. 5 1 -- 2 --
Floor plan notes payable..................................... 664 (759) (1,010) 700 419
Accounts payable and accrued expenses........................ (190) 103 9 19 71
Income taxes payable......................................... (62) -- -- -- --
Other long term liabilities.................................. (2) -- -- -- --
----------- ----- ----------- --- -----------
Net cash provided by (used in) operating activities............ 529 369 244 (69) (24)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............................. -- (5) (53) (8) (2)
Proceeds from sale of property and equipment................... 19 -- -- -- --
----------- ----- ----------- --- -----------
Net cash provided by (used in) investing activities............ 19 (5) (53) (8) (2)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings........................ -- -- 280 -- --
Principal payments of long-term debt........................... (28) (14) (16) (7) (3)
Other current bank borrowings, net of repayments............... -- 57 -- -- --
Advance to/from officers and affiliates........................ -- -- -- -- --
Due from/to related parties.................................... 8 -- (330) -- --
Dividends paid................................................. -- (15) (16) (10) (24)
----------- ----- ----------- --- -----------
Net cash provided by (used in) financing activities............ (20) 28 (82) (17) (27)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............. 528 392 109 (94) (53)
CASH AND CASH EQUVALENTS, beginning of period.................... 1,052 54 185 177 167
----------- ----- ----------- --- -----------
CASH AND CASH EQUVALENTS, end of period.......................... $ 1,580 $ 446 $ 294 $ 83 $ 114
----------- ----- ----------- --- -----------
----------- ----- ----------- --- -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for--
Interest....................................................... $ 90 $ 42 $ 20 $ 12 $ 12
Taxes.......................................................... 81 -- -- -- --
</TABLE>
Hometown and each of the Core Operating Companies and Acquisitions are
autonomous and independent without any common ownership.
The accompanying Notes to Unaudited Condensed Financial Statements are an
integral part of these Statements.
F-52
<PAGE>
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial information included herein for the three month ended March
31, 1998 and 1997 is unaudited; however, such information reflects all
adjustments consisting only of normal recurring adjustments which are, in the
opinion of management, necessary for a fair presentation of the financial
position, results of operations and cash flows for the interim periods. These
interim financial statements should be read in conjunction with the Audited
Financial Statements and related notes thereto.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
2. INVENTORIES
New, used and demonstrator vehicles are stated at the lower of cost or
market, determined on a specific unit basis. Parts and accessories are stated at
the lower of cost (determined on a first-in, first-out basis) or market.
INVENTORIES CONSIST OF THE FOLLOWING:
<TABLE>
<CAPTION>
MULLER
SHAKER WESTWOOD MULLER TOYOTA CHEVROLET
-------------------- -------------------- -------------------- ---------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97 3/31/98
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
New Vehicles................................... $ 5,623 $ 5,618 $ 6,886 $ 5,158 $ 2,135 $ 1,623 $ 2,997
Used Vehicles.................................. 2,151 3,029 540 386 996 1,017 558
Parts, accessories and other................... 547 546 463 335 495 334 196
--------- --------- --------- --------- --------- --------- ---------
Total Inventories............................ $ 8,321 $ 9,193 $ 7,889 $ 5,879 $ 3,626 $ 2,974 $ 3,751
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
<CAPTION>
3/31/97
---------
<S> <C>
New Vehicles................................... $ 3,145
Used Vehicles.................................. 528
Parts, accessories and other................... 169
---------
Total Inventories............................ $ 3,842
---------
---------
</TABLE>
<TABLE>
<CAPTION>
BAY STATE BRATTLEBORO PRIDE
-------------------- -------------------- --------------------
3/31/98 3/31/97 3/31/98 3/31/97 3/31/98 3/31/97
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
New Vehicles.................................................... $ 936 $ 2,449 $ 1,721 $ 889 $ 1,974 $ 1,972
Used Vehicles................................................... 816 1,723 709 756 306 425
Parts, accessories and other.................................... 134 146 104 80 108 131
--------- --------- --------- --------- --------- ---------
Total Inventories............................................. $ 1,886 $ 4,318 $ 2,534 $ 1,725 $ 2,388 $ 2,528
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
3. INCOME TAXES
The Companies follow the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets are realized or liabilities are settled. A valuation allowance
reduces deferred tax assets when it is more likely than not that some or all of
the deferred tax assets will not be realized.
F-53
<PAGE>
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
Deferred income taxes are provided for temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
<TABLE>
<CAPTION>
SHAKER WESTWOOD
3/31/98 3/31/98
----------- -----------
<S> <C> <C>
Deferred tax assets--
Reserves and accruals not deductible until paid............................................. $ 5 $ 200
Net operating loss carry forward............................................................ 845 --
Depreciation................................................................................ -- 5
Other....................................................................................... -- 8
----- -----
Total....................................................................................... 850 213
Deferred tax liabilities--
Depreciation................................................................................ (72) --
Other....................................................................................... (92) --
----- -----
Total....................................................................................... (164) --
----- -----
Net deferred tax asset (liability).......................................................... $ 686 $ 213
----- -----
----- -----
</TABLE>
4. SUBSEQUENT EVENTS:
LEASES
Hometown has executed leases for the premises occupied by certain of the
companies. Each of these governing leases will become effective as of the
closing of the Offering, have a term expiring in 2013, be on a triple net basis
and provide for a consumer price index ("CPI") increase to the base rent for the
five-year periods commencing January 1, 2002 and 2007.
SHAKER
Hometown will lease, for an initial annual base rental of $552,000, the
premises occupied by the Shaker dealerships from Shaker Enterprises, a related
party through common ownership.
The following table represents the estimated minimum annual rental payments
under such lease:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
1998............................................................................................... $ 184
1999............................................................................................... 552
2000............................................................................................... 552
2001............................................................................................... 552
2002............................................................................................... 552
Thereafter......................................................................................... 6,072
</TABLE>
MULLER
Hometown will lease, for an initial annual base rental of $864,000 the
premises occupied by Muller Toyota and Muller Chevrolet from Rellum Realty
Company, a related party through common ownership.
F-54
<PAGE>
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. SUBSEQUENT EVENTS: (CONTINUED)
The following table represents the estimated minimum annual rental payments
under such lease:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
1998............................................................................................... $ 288
1999............................................................................................... 864
2000............................................................................................... 864
2001............................................................................................... 816
2002............................................................................................... 816
Thereafter......................................................................................... 8,976
</TABLE>
WESTWOOD
Hometown will lease, for an initial annual base rental of $360,000 the
premises occupied by Westwood from Salvatore A. Vergopia, a stockholder of
Westwood.
The following table represents the estimated minimum annual rental payments
under such lease:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
1998............................................................................................... $ 120
1999............................................................................................... 360
2000............................................................................................... 360
2001............................................................................................... 360
2002............................................................................................... 360
Thereafter......................................................................................... 3,960
</TABLE>
BAY STATE
Hometown will lease, for an initial annual base rental of $360,000 the
premises occupied by Baystate from the shareholders of Bay State.
The following table represents the estimated minimum annual rental payments
under such lease:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
1998............................................................................................... $ 120
1999............................................................................................... 360
2000............................................................................................... 360
2001............................................................................................... 360
2002............................................................................................... 360
Thereafter......................................................................................... 4,860
</TABLE>
BRATTLEBORO
Hometown will lease, for an initial annual base rental of $360,000 the
premises occupied by Brattleboro from the shareholders of Brattleboro.
F-55
<PAGE>
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
4. SUBSEQUENT EVENTS: (CONTINUED)
The following table represents the estimated minimum annual rental payments
under such lease:
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------
<S> <C>
1998............................................................................................... $ 80
1999............................................................................................... 240
2000............................................................................................... 240
2001............................................................................................... 240
2002............................................................................................... 240
Thereafter......................................................................................... 160
</TABLE>
EMPLOYMENT CONTRACTS
In April 1998, Hometown entered into five-year employment agreements,
effective as of the closing of the acquisitions, for the following key
positions: Chairman and Chief Executive Officer, President and Chief Operating
Officer, Vice President -- New Jersey Operations, Vice President -- Connecticut
Operations, Vice President -- Fleet Operations, General Manager -- Muller
Toyota, Vice President -- Parts and Service, and Vice President -- Mergers and
Acquisitions. Each agreement provides for an annual base salary of $200,000,
except that the agreement for the General Manager provides for an annual base
salary of $150,000 plus an annual bonus equal to five percent of the pre-tax
profits of Muller Toyota, the agreement for Vice President -- Parts and Service
provides for an annual base salary of $100,000 and the agreement for Vice
President -- Mergers and Acquisitions provides for an annual base salary of
$150,000. Each agreement also provides for participation by the employee in all
executive benefit plans and, if employment is terminated without cause (as
defined in the agreement), payment of an amount equal to the salary which would
have been payable over the unexpired term of his employment agreement.
ACQUISITION
On May 28, 1998, the Company entered into an agreement to purchase the
business and certain assets of Pride Auto Center, Inc. ("Pride"), a Jeep/Eagle
dealer, for an estimated purchase price of approximately $925,000, including a
$55,000 deposit previously paid and $200,000 to be paid through the issuance of
an 8% promissory note payable in installments over a 36-month period and the
assumption of Pride's floor plan and certain other liabilities. As soon as
practicable following the closing, Hometown intends to close the Pride facility
and to consolidate its operations with those of another Hometown Jeep/Eagle
dealership located less than two miles away.
F-56
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR BY ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE
SHARES OF COMMON STOCK OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
OFFER OR SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE
HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 11
Use of Proceeds................................. 19
Dividend Policy................................. 19
Dilution........................................ 20
Capitalization.................................. 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 27
Business........................................ 40
Management...................................... 54
Certain Transactions............................ 59
Principal Stockholders.......................... 61
Description of Capital Stock.................... 62
Shares Eligible for Future Sale................. 64
Underwriting.................................... 65
Legal Matters................................... 66
Experts......................................... 66
Available Information........................... 67
Index to Unaudited Pro Forma Financial
Statements.................................... F-1
Index to Financial Statements................... F-14
</TABLE>
UNTIL , 1998 [25] DAYS AFTER THE COMMENCEMENT OF THE OFFERING], ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,000,000 SHARES
[LOGO]
CLASS A COMMON STOCK
---------------------
PROSPECTUS
---------------------
PAULSON INVESTMENT COMPANY, INC.
DATED JULY , 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses in connection with the issuance and distribution of the securities
being registered hereunder other than underwriting commissions and expenses, are
estimated below.
<TABLE>
<S> <C>
SEC registration fee........................................................... $ 2,654.30
NASD registration fee.......................................................... 3,294.00
NASDAQ listing fee............................................................. 17,700.00
Printing expenses.............................................................. 100,000.00
Accounting fees and expenses................................................... 350,000.00
Legal fees and expenses........................................................ 400,000.00
State securities law fees and expenses including fees of counsel............... 10,000.00
Transfer Agent and Registrar Fees.............................................. 5,000.00
Stock Certificate Expenses..................................................... 1,000.00
Miscellaneous expenses......................................................... 10,351.70
----------
Total.......................................................................... $900,000.00
----------
----------
</TABLE>
- ------------------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Sections 145 of the Delaware General Corporation Law grants to the Company
the power to indemnify the officers and directors of the Company, under certain
circumstances and subject to certain conditions and limitations as stated
therein, against all expenses and liabilities incurred by or imposed upon them
as a result of suits brought against them as such officers and directors if they
act in good faith and in a manner they reasonably believe to be in or not
opposed to the best interests of the Company and, with respect to any criminal
action or proceeding, have no reasonable cause to believe their conduct was
unlawful.
The Company's certificate of incorporation provides as follows:
"NINTH: A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit.
TENTH: (A) RIGHT TO INDEMNIFICATION. Each person who was or is made a party
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer,
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment),
II-1
<PAGE>
against all expense, liability and loss (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators: provided, however, that, except
as provided in paragraph (b) hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the board of directors of the Corporation. The right to
indemnification conferred in this Section shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition: provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer (in his or her capacity as a
director or officer and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Section or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
(B) RIGHT OF CLAIMANT TO BRING SUIT. If a claim under paragraph (a) of this
Section is not paid in full by the Corporation within thirty days after a
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant shall be entitled
to be paid also the expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the Delaware General Corporation Law for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard or conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
(C) NON-EXCLUSIVITY OF RIGHTS. The right to indemnification and the payment
of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, by-law, agreement, vote of stockholders or
disinterested directors or otherwise.
(D) INSURANCE. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under the Delaware General Corporation Law."
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years the Company has issued the following
unregistered securities:
II-2
<PAGE>
(a) In March 1997 the Company issued an aggregate of 240,000 shares of Class A
Common Stock1 to its four organizers as follows: 60,000 shares to Matthew J.
Visconti Jr.;60,000 shares to Morse, Zelnick, Rose & Lander, LLP; 60,000
shares to Joseph Lauria, Esq.; and 60,000 AutoInfo, Inc. Mr. Visconti will
become Vice President of the Company upon the closing of the Offering.
(b) At the closing of the Offering the Company will issue an aggregate of
3,760,000 shares of Class B Common Stock to the stockholders of the Founding
Dealers as follows: an aggregate of 1,880,000 shares to the 12 stockholders
of the parent company of the Shaker Group including 206,612 shares to Joseph
Shaker, President and Chief Operating Officer and a Director of the Company,
249,100 shares to Corey Shaker, Vice President -- Connecticut Operations and
a Director of the Company, 206,424 shares, 218,268 shares, and 277,668
shares, respectively, to Steven Shaker, Paul Shaker and Janet Shaker, all of
whom are holders of more than 5% of the voting securities of the Company
prior to the Offering; an aggregate 940,000 shares to the stockholders of
the Muller Group including 470,034 shares to William C. Muller Jr., Vice
President -- New Jersey Operations, 93,248 shares to James Christ, General
Manager -- Muller Toyota and a Director of the Company and 376,718 shares to
William C. Muller Sr. a holder of more than 5% of the voting securities of
the Company prior to and after giving effect to the Offering; and 940,000
shares to the stockholders of Westwood, consisting of 479,400 shares to
Salvatore A. Vergopia, Chairman of the Board and Chief Executive Officer of
the Company, 225,600 shares to Janet Vergopia, the wife of Salvatore A.
Vergopia and 235,000 shares to Edward A. Vergopia, Vice President -- Fleet
Operations and a Director of the Company and the son of Salvatore and Janet
Vergopia.
The shares issued or to be issued in each of the above transactions have
been or will be issued for investment and without a view to distribution and
each share certificate bears or will bear an appropriate restricted security
legend. Each of the transactions did not involve a public offering of the
Company's securities and were exempt from the registration requirements of the
Securities Act pursuant to Section 4(2), thereof.
II-3
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Dealer-Co., Inc. (NY-3/10/97)*
3.2 Certificate of Incorporation of Hometown Auto Retailers, Inc. (Del-6/5/97)*
3.3 Certificate of Ownership and Merger of Dealer-Co., Inc. into Hometown Auto Retailers, Inc.
(Del-6/27/97)*
3.4 Certificate of Merger of Dealer-Co., Inc. and Hometown Auto Retailers, Inc. into Hometown Auto
Retailers, Inc. (the "Company") (NY-9/11/97)*
3.5 Certificate of Amendment of the Certificate of Incorporation filed February 19, 1998*
3.6 Certificate of Amendment of the Certificate of Incorporation filed June 8, 1998
3.7 By-Laws of the Company*
4.1 Form of Class A Common Stock Certificate
4.3 Form of Warrant Agreement between the Company and Paulson Investment Company and related Warrant
4.4 Stock Option Plan of the Company*
5.1 Opinion of Morse, Zelnick, Rose & Lander, LLP as to legality of the securities being registered.
10.1 Exchange Agreement, dated as of the 1st day of July, 1997, among the Registrant and the members of
the Shaker Group, the Muller Group and the Westwood Group*
10.2 Agreement, dated July 2, 1997, between the Registrant and Brattleboro Chrysler Plymouth Dodge, Inc.*
and Amendments dated November 11, 1997*, April 14, 1998* and July 8, 1998
10.3 Agreement, dated August 14, 1997, between the Registrant and Leominster Lincoln Mercury, Inc., dba
Bay State Lincoln Mercury* and Amendments dated October 31, 1997* and April 14, 1998*, respectively
10.4 Stockholders Agreement, dated as of the 16th day of February 1998, among the Shaker Stockholders, the
Muller Stockholders and the Westwood Stockholders*
10.5 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and Salvatore
A. Vergopia*
10.6 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and Joseph
Shaker*
10.7 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and William C.
Muller Jr.*
10.8 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and Corey
Shaker*
10.9 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and Edward A.
Vergopia*
10.10 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and James
Christ*
10.11 Proposed employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and
Matthew J. Visconti Jr.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.12 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and Steven
Shaker*
10.13 Lease, dated as of April 20, 1998, between Shaker Enterprises, as landlord, and Hometown
(Lincoln/Mercury dealership in Watertown, CT.)*
10.14 Lease, dated as of April 20, 1998, between Joseph Shaker Realty Company, as landlord, and Hometown
(Ford dealership in Waterbury, CT.)*
10.15 Lease, dated as of April 20, 1998, between Joseph Shaker Realty Company, as landlord, and Hometown
(Jeep/Eagle dealership Waterbury, CT.)*
10.16 Lease, dated as of April 20, 1998, between Rellum Realty Company, as landlord, and Hometown (Toyota
dealership in Clinton, NJ)*
10.17 Lease, dated as of April 20, 1998, between Rellum Realty Company, as landlord, and Hometown
(Chevrolet/Oldsmobile/Isuzu dealership In Stewartville, NJ)*
10.18 Lease, dated as of April 20, 1998, between Salvatore A. Vergopia and Janet Vergopia, as landlord, and
Hometown (Lincoln Mercury dealership in Emerson, NJ)*
10.19 Inventory Loan and Security Agreement between Toyota Motor Credit Corporation and Muller Toyota,
Inc.; Commercial Promissory Notes; Dealer Floor Plan Agreement*
10.20 Ford Motor Company Automotive Wholesale Installment Sale and Security Agreement with Shakers, Inc.;
Power of Attorney for Wholesale Installment Sale Contract; and Automotive Installment Sale Contract*
10.21 Ford Motor Company Automotive Wholesale Installment Sale and Security Agreement with Family Ford,
Inc. and Power of Attorney for Wholesale*
10.22 Chrysler Financial Security Agreement and Master Credit Agreement with Shaker's Inc.*
10.23 Lease, dated as of April 20, 1998, between Thomas E. Cosenzi optionees as landlord, and Hometown
(Chrysler Plymouth dealerships in N. Brattleboro, VT.)
10.24 Form of Stock Option Agreement with schedule of optionees
10.25 Agreement dated May 28, 1998, between the Registrant and Pride Auto Center, Inc. (an Acquisition)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1)
23.3 Consent of Domenic Colasacco*
23.4 Consent of Steven Hirsh*
23.5 Consent of Louis I. Margolis*
23.6 Consent of Crain's Automotive
25.1 Power of Attorney of certain of Hometown's Officers and directors (included on signature page)
</TABLE>
- ------------------------
* Included in the initial filing of the Registration Statement
II-5
<PAGE>
ITEM 17. UNDERTAKINGS
A. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
B. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City, County and
State of New York on July 8, 1998.
HOMETOWN AUTO RETAILERS, INC.
By: /s/ JOSEPH SHAKER
-----------------------------------------
Joseph Shaker, PRESIDENT AND CHIEF
OPERATING OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below on July 8, 1998 by the following
persons in the capacities indicated and each of the undersigned persons, in any
capacity, hereby severally constitutes Joseph Shaker and Stephen A. Zelnick, and
each of them singularly, his true and lawful attorney with full power to them
and each of them to sign for him and in his name and in the capacity indicated
below, this Registration Statement and any and all amendments thereto.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------------ ------------------------------------------------------
<C> <S>
/s/ JOSEPH SHAKER*
------------------------------------------- President and Chief Operating Officer
Joseph Shaker
/s/ JOHN RUDY*
------------------------------------------- Chief Financial and Accounting Officer
John Rudy
/s/ SALVATORE A. VERGOPIA*
------------------------------------------- Director (Chairman)
Salvatore A. Vergopia
/s/ WILLIAM C. MULLER JR.*
------------------------------------------- Director
William C. Muller Jr.
/s/ COREY SHAKER*
------------------------------------------- Director
Corey Shaker
/s/ EDWARD A. VERGOPIA*
------------------------------------------- Director
Edward A. Vergopia
/s/ JAMES CHRIST*
------------------------------------------- Director
James Christ
*by
Stephen A. Zelnick
Attorney-in-fact
</TABLE>
II-7
<PAGE>
We have audited in accordance with generally accepted auditing standards, the
financial statements of Hometown Auto Retailers, Inc., E.R.R. Enterprises, Inc.,
Westwood Lincoln Mercury Sales, Inc., Muller Toyota, Inc., Muller Chevrolet,
Oldsmobile, Isuzu, Inc., Leominster Lincoln Mercury, Inc., and Brattleboro
Chrysler Plymouth Dodge, Inc. as identified in the index to financial pages
included in this registration statement and have issued our report thereon dated
March 6, 1998. Our audit was made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedules are the
responsibility of the company's management and are presented for purposes of
complying with the Securities and Exchange Commissions rules and are not part of
the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
/s/ ARTHUR ANDERSEN LLP
New York, New York
July 13, 1998
S-1
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO DEDUCTION
BEGINNING COSTS AND NET OF OTHER BALANCE AT
ACCOUNT DESCRIPTION OF YEAR EXPENSES WRITE-OFFS ADJUSTMENTS END OF YEAR
- -------------------------------------------------- ---------- ----------- ---------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
SHAKER
RESERVE FOR FINANCE, INSURANCE AND AND SERVICE
CONTRACTS CHARGE-BACKS
Year ended December 31, 1997.................. $ 51,000 $ -- $ (11,000) $ -- $ 40,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1996.................. $ 51,000 $ -- $ -- $ -- $ 51,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1995.................. $ 51,000 $ -- $ -- $ -- $ 51,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
WESTWOOD
ALLOWANCE FOR DOUBFUL ACCOUNTS
Year ended December 31, 1997.................. $ -- $ 33,000 $ -- $ -- $ 33,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1996.................. $ -- $ -- $ -- $ -- $ --
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1995.................. $ -- $ -- $ -- $ -- $ --
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
RESERVE FOR FINANCE, INSURANCE AND AND SERVICE
CONTRACTS CHARGE-BACKS
Year ended December 31, 1997.................. $ 238,000 $ 67,000 $ -- $ -- $ 305,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1996.................. $ 121,000 $ 117,000 $ -- $ -- $ 238,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1995.................. $ 89,000 $ 32,000 $ -- $ -- $ 121,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
MULLER TOYOTA
ALLOWANCE FOR DOUBFUL ACCOUNTS
Year ended December 31, 1997.................. $ 100,000 $ -- $ -- $ -- $ 100,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1996.................. $ 100,000 $ -- $ -- $ -- $ 100,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1995.................. $ 100,000 $ -- $ -- $ -- $ 100,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
RESERVE FOR FINANCE, INSURANCE AND SERVICE
CONTRACTS CHARGE-BACKS
Year ended December 31, 1997.................. $ 73,000 $ -- $ (35,000) $ -- $ 38,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1996.................. $ 73,000 $ -- $ -- $ -- $ 73,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1995.................. $ 73,000 $ -- $ -- $ -- $ 73,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
RESERVE FOR UNCOLLECTIBLE LONG-TERM FINANCE
CONTRACTS
Year ended December 31, 1997.................. $ 955,000 $ -- $ -- $ -- $ 955,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1996.................. $ 780,000 $ 175,000 $ -- $ -- $ 955,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1995.................. $ -- $ 780,000 $ -- $ -- $ 780,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
</TABLE>
S-2
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<S> <C> <C> <C> <C> <C>
MULLER CHEVROLET
ALLOWANCE FOR DOUBFUL ACCOUNTS
Year ended December 31, 1997.................. $ 100,000 $ -- $ -- $ -- $ 100,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1996.................. $ 100,000 $ -- $ -- $ -- $ 100,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1995.................. $ 100,000 $ -- $ -- $ -- $ 100,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
RESERVE FOR FINANCE, INSURANCE AND AND SERVICE
CONTRACTS CHARGE-BACKS
Year ended December 31, 1997.................. $ 88,000 $ 15,000 $ -- $ -- $ 103,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1996.................. $ 88,000 $ -- $ -- $ -- $ 88,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1995.................. $ 88,000 $ -- $ -- $ -- $ 88,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
RESERVE FOR UNCOLLECTIBLE LONG-TERM FINANCE
CONTRACTS
Year ended December 31, 1997.................. $ 270,000 $ -- $ -- $ -- $ 270,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1996.................. $ 145,000 $ 125,000 $ -- $ -- $ 270,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1995.................. $ -- $ 145,000 $ -- $ -- $ 145,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
BAY STATE
ALLOWANCE FOR DOUBFUL ACCOUNTS
Year ended December 31, 1997.................. $ 9,000 $ -- $ (9,000) $ -- $ --
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1996.................. $ -- $ 9,000 $ -- $ -- $ 9,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1995.................. $ -- $ -- $ -- $ -- $ --
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
RESERVE FOR FINANCE, INSURANCE AND SERVICE
CONTRACTS CHARGE-BACKS
Year ended December 31, 1997.................. $ 36,000 $ -- $ -- $ -- $ 36,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1996.................. $ 36,000 $ -- $ -- $ -- $ 36,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
Year ended December 31, 1995.................. $ 36,000 $ -- $ -- $ -- $ 36,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
BRATTLEBORO
RESERVE FOR FINANCE, INSURANCE AND AND SERVICE
CONTRACTS CHARGE-BACKS
Year ended December 31, 1997.................. $ 100,000 $ -- $ -- $ -- $ 100,000
---------- ----------- ---------- ------------- -----------
---------- ----------- ---------- ------------- -----------
</TABLE>
S-3
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ----------- ---------
<C> <S> <C>
1.1 Form of Underwriting Agreement
3.1 Certificate of Incorporation of Dealer-Co., Inc. (NY-3/10/97)*
3.2 Certificate of Incorporation of Hometown Auto Retailers, Inc. (Del-6/5/97)*
3.3 Certificate of Ownership and Merger of Dealer-Co., Inc. into Hometown Auto Retailers, Inc.
(Del-6/27/97)*
3.4 Certificate of Merger of Dealer-Co., Inc. and Hometown Auto Retailers, Inc. into Hometown Auto
Retailers, Inc. (the "Company") (NY-9/11/97)*
3.5 Certificate of Amendment of the Certificate of Incorporation filed February 19, 1998*
3.6 Certificate of Amendment of the Certificate of Incorporation filed June 8, 1998
3.7 By-Laws of the Company*
4.1 Form of Class A Common Stock Certificate
4.3 Form of Warrant Agreement between the Company and Paulson Investment Company and related Warrant
4.4 Stock Option Plan of the Company*
5.1 Opinion of Morse, Zelnick, Rose & Lander, LLP as to legality of the securities being registered.
10.1 Exchange Agreement, dated as of the 1st day of July, 1997, among the Registrant and the members
of the Shaker Group, the Muller Group and the Westwood Group*
10.2 Agreement, dated July 2, 1997, between the Registrant and Brattleboro Chrysler Plymouth Dodge,
Inc.* and Amendments dated November 11, 1997*, April 14, 1998* and July 8, 1998
10.3 Agreement, dated August 14, 1997, between the Registrant and Leominster Lincoln Mercury, Inc.,
dba Bay State Lincoln Mercury* and Amendments dated October 31, 1997* and April 14, 1998*,
respectively
10.4 Stockholders Agreement, dated as of the 16th day of February 1998, among the Shaker
Stockholders, the Muller Stockholders and the Westwood Stockholders*
10.5 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and
Salvatore A. Vergopia*
10.6 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and Joseph
Shaker*
10.7 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and
William C. Muller Jr.*
10.8 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and Corey
Shaker*
10.9 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and Edward
A. Vergopia*
10.10 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and James
Christ*
10.11 Proposed employment Agreement, dated as of the 20th day of April, 1998, between the Registrant
and Matthew J. Visconti Jr.
10.12 Employment Agreement, dated as of the 20th day of April, 1998, between the Registrant and Steven
Shaker*
10.13 Lease, dated as of April 20, 1998, between Shaker Enterprises, as landlord, and Hometown
(Lincoln/Mercury dealership in Watertown, CT.)*
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS PAGE
- ----------- ---------
<C> <S> <C>
10.14 Lease, dated as of April 20, 1998, between Joseph Shaker Realty Company, as landlord, and
Hometown (Ford dealership in Waterbury, CT.)*
10.15 Lease, dated as of April 20, 1998, between Joseph Shaker Realty Company, as landlord, and
Hometown (Jeep/Eagle dealership Waterbury, CT.)*
10.16 Lease, dated as of April 20, 1998, between Rellum Realty Company, as landlord, and Hometown
(Toyota dealership in Clinton, NJ)*
10.17 Lease, dated as of April 20, 1998, between Rellum Realty Company, as landlord, and Hometown
(Chevrolet/Oldsmobile/Isuzu dealership In Stewartville, NJ)*
10.18 Lease, dated as of April 20, 1998, between Salvatore A. Vergopia and Janet Vergopia, as
landlord, and Hometown (Lincoln Mercury dealership in Emerson, NJ)*
10.19 Inventory Loan and Security Agreement between Toyota Motor Credit Corporation and Muller Toyota,
Inc.; Commercial Promissory Notes; Dealer Floor Plan Agreement*
10.20 Ford Motor Company Automotive Wholesale Installment Sale and Security Agreement with Shakers,
Inc.; Power of Attorney for Wholesale Installment Sale Contract; and Automotive Installment
Sale Contract*
10.21 Ford Motor Company Automotive Wholesale Installment Sale and Security Agreement with Family
Ford, Inc. and Power of Attorney for Wholesale*
10.22 Chrysler Financial Security Agreement and Master Credit Agreement with Shaker's Inc.*
10.23 Lease, dated as of April 20, 1998, between Thomas E. Cosenzi optionees as landlord, and Hometown
(Chrysler Plymouth dealerships in N. Brattleboro, VT.)
10.24 Form of Stock Option Agreement with schedule of optionees
10.25 Agreement dated May 28, 1998, between the Registrant and Pride Auto Center, Inc. (an
Acquisition)
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in Exhibit 5.1)
23.3 Consent of Domenic Colasacco*
23.4 Consent of Steven Hirsh*
23.5 Consent of Louis I. Margolis*
23.6 Consent of Crain's Automotive
25.1 Power of Attorney of certain of Hometown's Officers and directors (included on signature page)
</TABLE>
- ------------------------
* Included in the initial filing of the Registration Statement
<PAGE>
EXHIBIT 1.1
HOMETOWN AUTO RETAILERS, INC.
AND
PAULSON INVESTMENT COMPANY, INC.
___________________
UNDERWRITING AGREEMENT
Dated July _______, 1998
================================================================================
<PAGE>
2,000,000 Shares of Class A Common Stock
HOMETOWN AUTO RETAILERS, INC.
UNDERWRITING AGREEMENT
----------------------
New York, New York
July ______, 1998
Paulson Investment Company, Inc.
As Representative of the
Several Underwriters
c/o Paulson Investment Company, Inc.
811 S.W. Front Avenue
Suite 200
Portland, Oregon 97204
Gentlemen:
Hometown Auto Retailers, Inc., a Delaware corporation (the "Company"),
proposes to sell to Paulson Investment Company, Inc. and the several
underwriters (the "Underwriters") named in Schedule A hereto for whom you are
acting as the Representative ("you" or the "Representative") an aggregate of Two
Million (2,000,000) shares of Class A Common Stock, par value $0.001 per share,
of the Company (the "Common Stock"). The shares to be so purchased from the
Company by the Underwriters (the "Firm Shares") are set forth opposite their
names in Schedule A hereto. The Company also proposes to grant to the
Representative an option to purchase up to Three Hundred Thousand 300,000
additional shares of its Class A Common Stock (the "Option Shares") as set forth
below.
As the Representative, you have advised the Company that: (a) you are
authorized to enter into this Agreement for yourself as Representative and on
behalf of the several Underwriters; and (b) the several Underwriters are
willing, acting severally and not jointly, to purchase the numbers of Firm
Shares set forth opposite their respective names in Schedule A. The Firm Shares
and the Option Shares (to the extent that the aforementioned option is
exercised) are herein collectively called the "Shares".
In consideration of the mutual agreements contained herein and of the
interests of
<PAGE>
the parties in the transactions contemplated hereby, the parties hereto agree as
follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
(a) The Company represents and warrants to, and agrees with, each of the
Underwriters as of the date hereof, and as of the Closing Date (as hereinafter
defined) and the Option Closing Date (as hereinafter defined), if any, as
follows:
(i) A registration statement on Form S-1 (File No. 333-52763) with
respect to the Class A Common Stock has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Company to you. The Company
will not file any other amendment to the registration statement unless a
draft of the proposed filing shall have first been furnished to the
Representative, and shall not thereafter file any such amendment until the
Representative shall have approved such filing. Such registration
statement, as amended, on file with the Commission at the time the
registration statement becomes effective, which shall be deemed to include
all information omitted therefrom in reliance upon Rule 430A and contained
in the Prospectus referred to below, is hereinafter referred to as the
"Registration Statement" and the "Prospectus" shall hereinafter mean (a)
the form of prospectus first filed with the Commission pursuant to Rule
424(b), or (b) the last preliminary prospectus included in the Registration
Statement filed prior to the time it becomes effective or filed pursuant to
Rule 424(a) under the Act that is delivered by the Company to the
Underwriters for delivery to purchasers of the Shares, together with the
term sheet or abbreviated term sheet filed with the Commission pursuant to
Rule 424(b)(7) under the Act. Each preliminary prospectus included in the
Registration Statement prior to the time it becomes effective is herein
referred to as a "Preliminary Prospectus."
(ii) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Delaware.
Except as described in the Prospectus, the Company does not own any
interest in any corporation or other business entity that has any material
assets, liabilities or operations. The Company or its applicable
subsidiary, as the case may be, is duly qualified to transact business in
all jurisdictions in which the conduct of its business requires such
qualification. The Company or its applicable subsidiary, as
2
<PAGE>
the case may be, is duly qualified and licensed and in good standing as a
foreign corporation in each jurisdiction in which its ownership or leasing
of any properties or the character of its operations require such
qualification or licensing. The Company or its applicable subsidiary, as
the case may be, has all requisite power and authority (corporate and
other), and has obtained any and all necessary authorizations, approvals,
orders, licenses, certificates, franchises and permits of and from all
governmental or regulatory officials and bodies (including, without
limitation, state and/or other regulatory authorities and those having
jurisdiction over environmental or similar matters), to own or lease its
properties and conduct its business as described in the Prospectus; the
Company or its applicable subsidiary, as the case may be, is and has been
doing business in compliance with all such authorizations, approvals,
orders, licenses, certificates, franchises and permits and all federal,
state, local and foreign laws, rules and regulations; and neither the
Company nor any subsidiary has received any notice of proceedings relating
to the revocation or modification of any such authorization, approval,
order, license, certificate, franchise, or permit which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would adversely affect the condition, financial or otherwise, or the
earnings, position, prospects, value, operation, properties, business or
results of operations of the Company or any subsidiary. The disclosures in
the Registration Statement concerning the effects of federal, state, local,
and foreign laws, rules and regulations on each of the Company's and any
subsidiary's businesses as currently conducted and as contemplated are
correct in all respects and do not omit to state a material fact necessary
to make the statements contained therein not misleading in light of the
circumstances in which they were made.
(iii) The outstanding shares of Class A and Class B Common Stock of
the Company have been duly authorized and validly issued and are fully paid
and non-assessable and have been issued and sold by the Company in
compliance in all material respects with applicable Federal and state
securities laws; the shares issuable upon exercise of the Representative's
Warrants (as defined in Paragraph (f) of Section 2 hereof) and the Option
Shares that may be sold by the Company have been duly authorized and when
issued and paid for as contemplated herein will be validly issued, fully
paid and non-assessable; and no preemptive rights of stockholders exist
with respect to any of the Shares or the issue and sale thereof. Neither
the filing of the Registration Statement, nor the offering or sale of the
Shares as contemplated by this Agreement gives rise to any rights, other
than those which have been waived or satisfied, for or relating to the
registration of any other shares of Common Stock under the Act.
(iv) The information set forth under the caption "Capitalization"
in the Prospectus is true, correct and complete as to the matters
customarily covered under such a caption. All of the Shares conform to the
description thereof
3
<PAGE>
contained in the Registration Statement. The form of certificates for the
Shares conforms to the corporate law of the State of Delaware. Except as
disclosed in the Prospectus, there are no outstanding rights, options or
warrants for the purchase of any securities of the Company, and the Company
is not a party to any agreement pursuant to which any person has the right
to purchase any securities of the Company. Effective immediately following
the Closing Date (hereinafter defined) there will be no person holding any
anti-dilution rights with respect to the securities of the Company other
than the holder(s) of the Representative's Warrants and the holders of
options issued pursuant to the Company's Stock Option Plan.
(v) Except as disclosed in the Registration Statement, the Company
has not (i) issued any capital stock or any options, warrants, convertible
securities or other rights to purchase its capital stock, (ii) increased
its long-term or short-term debt, or (iii) declared or paid any dividends
on its capital stock.
(vi) Neither the Commission nor, to the best of the Company's
knowledge, any state regulatory authority, has issued any order preventing
or suspending the use of any Preliminary Prospectus, Registration Statement
or Prospectus or any part thereof relating to the proposed offering of the
Shares nor have any proceedings been instituted for that purpose. No
proceedings for a stop order suspending the effectiveness of the
Registration Statement or any of the Company's securities have been
instituted or are pending or threatened. Each of the Preliminary
Prospectus, the Registration Statement and Prospectus at the time of filing
thereof contains all statements which are required to be stated therein and
which conform to the requirements of the Act and the Rules and Regulations.
None of the Preliminary Prospectus, the Registration Statement and
Prospectus, nor any amendments thereto, contain or will contain, any untrue
statement of a material fact, nor omit or will omit, to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading; provided, however, that the Company makes no
representations or warranties as to information contained in or omitted
from the Preliminary Prospectus, the Registration Statement or Prospectus,
or any such amendment or supplement, in reliance upon, and in conformity
with, written information furnished to the Company by or on behalf of any
Underwriter through the Representative, specifically for use in the
preparation thereof.
(vii) The financial statements of the Company, together with related
notes and schedules as set forth in the Registration Statement and the
Prospectus, comply in all material respects with the requirements of the
Act and, fairly present the financial position and the results of
operations and cash flows of the Company as of the indicated dates and for
the indicated periods. Such financial statements and related schedules
have been prepared in accordance with the Rules and
4
<PAGE>
Regulations and with generally accepted accounting principles, consistently
applied through the periods involved, except as disclosed therein, and all
adjustments necessary for a fair presentation of results for such periods
have been made. The summary financial and statistical data of the Company
included in the Registration Statement present fairly the information shown
therein and such data has been compiled on a basis consistent with the
financial statements presented therein and the books and records of the
Company. Such financial statements have been examined by Arthur Andersen
LLP, who are independent certified public accountants within the meaning of
the Act and the Rules and Regulations. The pro forma financial statements
and other pro forma financial information (including the notes thereto)
included in the Registration Statement and the Prospectus, (i) present
fairly, in all material respects, the information shown therein, (ii) have
been prepared, in all material respects, in accordance with the applicable
requirements of Rule 11.02 of Regulation S-X promulgated under the Exchange
Act, (iii) have been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, and (iv) have
been properly compiled on the bases described therein, and the assumptions
used in the preparation of the pro forma financial statements and other pro
forma financial information and included in the Registration Statement and
the Prospectus are reasonable and the adjustments used therein are
appropriate to give effect to the transactions or circumstances referred to
therein. There has been no adverse change or development involving a
prospective change in the condition, financial or otherwise, or in the
earnings, position, prospects, value, operation, properties, business, or
results of operation of the Company whether or not arising in the ordinary
course of business, since the date of the financial statements included in
the Registration Statement and the Prospectus and the outstanding debt, the
property, both tangible and intangible, and the businesses of the Company
conform in all respects to the descriptions thereof contained in the
Registration Statement and the Prospectus. Financial information
(including, without limitation, any pro forma financial information) set
forth in the Prospectus under the headings "Prospectus Summary -- Summary
Pro Forma Financial Data," "Selected Financial Data," "Capitalization," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" fairly present, on the basis stated in the Prospectus, the
information set forth therein, and have been derived from or compiled on a
basis consistent with that of the audited financial statements included in
the Prospectus; and, in the case of pro forma financial information, if
any, the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein. The amounts shown as accrued for
current and deferred income and other taxes in such financial statements
are sufficient for the payment of all accrued and unpaid federal, state,
local and foreign income taxes, interest, penalties, assessments or
deficiencies applicable to the Company, whether disputed or not, for the
applicable period then ended and periods prior thereto; adequate allowance
for doubtful accounts has been provided for unindemnified losses due to the
operations of the Company; and the statements of
5
<PAGE>
income do not contain any items of special or nonrecurring income not
earned in the ordinary course of business, except as specified in the notes
thereto.
(viii) Arthur Andersen LLP, who have certified certain of the
financial statements filed with the Commission as part of the Registration
Statement, are independent public accountants as required by the Act and
the Rules and Regulations.
(ix) There is no action, suit, claim or proceeding pending or, to
the knowledge of the Company, threatened against the Company before any
court or administrative agency or otherwise which if determined adversely
to the Company might result in any material adverse change in the earnings,
business, management, properties assets, rights, operations, condition
(financial or otherwise) or prospects of the Company or to prevent the
consummation of the transactions contemplated hereby.
(x) The Company or applicable subsidiary, as the case may be, has
good and marketable title to all of the properties and assets reflected in
the financial statements (or as described in the Registration Statement as
owned by it), subject to no lien, mortgage, pledge, charge or encumbrance
of any kind except those reflected in such financial statements (or as
described in the Registration Statement) or which are not material in
amount. The Company or an applicable subsidiary, as the case may be,
occupies its leased properties under valid and binding leases conforming in
all material respects to the description thereof set forth in the
Registration Statement.
(xi) The Company has filed all federal, state, local and foreign
income tax returns which have been required to be filed and has paid all
taxes indicated by said returns to be due and all assessments received by
it to the extent that such taxes have become due and are not being
contested in good faith. All tax liabilities have been adequately provided
for in the financial statements of the Company.
(xii) Since the respective dates as of which information is given in
the Registration Statement, as it may be amended or supplemented, there has
not been any material adverse change or any development involving a
prospective material adverse change in or affecting the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company, whether or not occurring in the
ordinary course of business, and there has not been any material
transaction entered into or any material transaction that is probable of
being entered into by the Company, other than transactions in the
6
<PAGE>
ordinary course of business and changes and transactions described in the
Registration Statement, as it may be amended or supplemented. The Company
has no material contingent obligations which are not disclosed in the
Company's financial statements included in the Registration Statement or
elsewhere in the Prospectus which are included in the Registration
Statement.
(xiii) The Company is not, nor, with the giving of notice or lapse of
time or both, will not be, in violation of or in default under its
Certificate of Incorporation, as amended (the "Certificate of
Incorporation"), or by-laws or under any agreement, lease, contract,
indenture or other instrument or obligation to which it is a party or by
which it, or any of its properties, is bound and which default is material
in respect of the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise) or prospects of the
Company. The execution and delivery of this Agreement and the consummation
of the transactions contemplated herein will not conflict with or result in
a breach of any of the terms or provisions of, or constitute a default
under, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company is a party, or of the Certificate of
Incorporation or by-laws of the Company or any order, rule or regulation
applicable to the Company of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(xiv) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission, the National Association of Securities Dealers, Inc. (the
"NASD") or such additional steps as may be necessary to qualify the Shares
for public offering by the Underwriters under state securities or Blue Sky
laws) has been obtained or made and is in full force and effect.
(xv) The Company or any applicable subsidiary, as the case may be,
holds or has licensed all material patents, patent rights, trademarks,
trade names, copyrights, trade secrets and licenses of any of the foregoing
(collectively, the "Intellectual Property Rights"), that are necessary for
the conduct of its business as conducted and as proposed to be conducted in
accordance with the description contained in the Prospectus; there is no
claim pending or, to the knowledge of the Company, threatened against it
alleging any infringement of Intellectual Property Rights, nor does the
Company know of any basis for any such claim. The Company knows of no
material infringement by others of Intellectual Property Rights owned by or
licensed to the Company.
7
<PAGE>
(xvi) The Company or an applicable subsidiary, as the case may be,
holds all material licenses, certificates, permits, orders or other similar
authorizations granted or issued by any governmental agency (collectively
the "Government Permits") required to conduct its business. No proceeding
to revoke, limit or otherwise materially change any Government Permit has
been commenced or, to the Company's knowledge, is threatened against the
Company.
(xvii) The Company, to its knowledge, is in compliance with all laws,
rules, regulations, orders of any court or administrative agency, operating
licenses or other requirements imposed by any governmental body applicable
to it, except as in the aggregate do not have and will not in the future
have a material adverse effect upon the operations, business, properties or
assets of the Company, including, to its knowledge and without limitation,
all applicable laws, rules, regulations, licenses or other governmental
standards relating to the sale of new and used cars and light trucks and
replacement parts and provision of maintenance, repair services and related
financing, insurance and service contracts by the Company; and the conduct
of the business of the Company, as described in the Prospectus, will not
cause the Company to be in violation of any such requirements.
(xviii) All executed agreements, contracts or other documents or
copies of executed agreements, contracts or other documents filed as
exhibits to the Registration Statement to which the Company is a party or
by which it may be bound or to which any of its assets, properties or
businesses may be subject, have been duly and validly authorized, executed
and delivered by the Company and constitute the legal, valid and binding
agreements of the Company enforceable against the Company, in accordance
with their respective terms. The descriptions in the Registration
Statement of agreements, contracts and other documents are accurate and
fairly present the information required to be shown with respect thereto by
Form S-1, and there are no contracts or other documents which are required
by the Act or the Rules and Regulations to be described in the Registration
Statement or filed as exhibits to the Registration Statement which are not
described or filed as required, and the exhibits which have been filed are
complete and correct copies of the documents of which they purport to be
copies.
(xix) Neither the Company, nor any of its affiliates, has taken or
intends to take, directly or indirectly, any action designed to cause or
result in, or which has constituted or which might reasonably be expected
to constitute, the stabilization or manipulation of the price of the shares
of Common Stock to facilitate the sale or resale of the Shares.
(xx) The Company is not an "investment company" within the meaning
8
<PAGE>
of such term under the Investment Company Act of 1940, as amended (the
"1940 Act"), and the rules and regulations of the Commission thereunder.
(xxi) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that: (A) transactions are
executed in accordance with management's general or specific authorization;
(B) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (C) access to assets
is permitted only in accordance with management's general or specific
authorization; and (D) the recorded accountability for assets is compared
with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(xxii) The Company or an applicable subsidiary, as the case may be,
carries, or is covered by, insurance in such amounts and covering such
risks as is adequate for the conduct of its business and the value of its
properties and as is customary for companies engaged in similar industries.
(xxiii) The Company has generally enjoyed a satisfactory employer-
employee relationship with its employees and, to its knowledge, is in
compliance with all federal, state, local, and foreign laws and regulations
respecting employment and employment practices, terms and conditions of
employment and wages and hours. There are no pending, or to the knowledge
of the Company, threatened investigations involving the Company by the U.S.
Department of Labor, or any other foreign or domestic governmental agency
responsible for the enforcement of such federal, state, local, or foreign
laws and regulations. There are no pending, or to the knowledge of the
Company, threatened unfair labor practice charges or complaints against the
Company before the National Labor Relations Board. There are no pending,
or to the knowledge of the Company, threatened strikes, picketing,
boycotts, disputes, slowdowns or stoppages against or involving the
Company, or any predecessor entity, and none has ever occurred. No
representation question exists respecting the employees of the Company, and
no collective bargaining agreement or modification thereof is currently
being negotiated by the Company. No grievance or arbitration proceeding is
pending under any expired or existing collective bargaining agreements of
the Company. No labor dispute with the employees of the Company exists,
or, to its knowledge, is imminent.
(xxiv) The Company is in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income Security
Act of 1974, as amended, including the regulations and published
interpretations thereunder ("ERISA"); no "reportable event" (as defined in
ERISA) has occurred
9
<PAGE>
with respect to any "pension plan" (as defined in ERISA) for which the
Company would have any liability; the Company has not incurred and does not
expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412
or 4971 of the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder (the "Code"); and each
"pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so qualified
in all material respects and nothing has occurred, whether by action or by
failure to act, which would cause the loss of such qualification.
(xxv) The Representative's Warrants have been duly authorized for
issuance to the Representative and will, when issued, possess rights,
privileges and characteristics as represented in the most recent form of
Representative's Warrants filed as an exhibit to the Registration
Statement; the securities to be issued upon exercise of the
Representative's Warrants, when issued and delivered against payment
therefor in accordance with the terms of the Representative's Warrants,
will be duly and validly issued, fully paid, non-assessable and free of
preemptive rights, and all corporate action required to be taken for the
authorization and issuance of the Representative's Warrants, and the
securities to be issued upon their exercise, have been validly and
sufficiently taken.
(xxvi) The Company has caused each officer and director and each
person who owns, beneficially or of record, 5% or more of the Common Stock
outstanding immediately prior to this offering to furnish to the
Representative, on or prior to the date of this Agreement, a letter or
letters, in form and substance satisfactory to the Underwriters ("Lockup
Agreements"), pursuant to which each such person shall agree: (A) not to
offer to sell, sell, contract to sell, sell short or otherwise dispose of,
any shares of Common Stock or other capital stock of the Company, or any
other securities convertible, exchangeable or exercisable for shares or
derivatives of Common Stock owned by such person, or request the
registration for the offer or sale of any of the foregoing (or as to which
such person has the right to direct the disposition of) for a period of
three hundred and sixty five days after the effective date of the
Registration Statement, directly or indirectly, except with the prior
written consent of the Representative; and (B) if such consent is provided,
to give prior written notice to the Representative of any offers to sell,
sales, contracts to sell, short sales or other dispositions by any such
person of Common Stock pursuant to Rule 144 under the Act or any similar
provisions enacted subsequent to the date of this Agreement, for a period
of ninety (90) days after the effective date of the Registration Statement.
(xxvii) The Company has not at any time during the last five years:
(A) made any unlawful contribution to any candidate for foreign office, or
failed to
10
<PAGE>
disclose fully any contribution in violation of law, or (B) made any
payment to any federal or state governmental officer or official, or other
person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States or any
jurisdiction thereof.
(xxviii) Except as disclosed in the Prospectus, neither the Company
nor any of its officers, directors or affiliates have caused any person,
other than the Underwriters, to be entitled to reimbursement or
compensation of any kind, including, without limitation, any compensation
that would be includable as underwriter compensation under the NASD's
Conduct Rules with respect to the offering of the Shares, as a result of
the consummation of such offering based on any activity of such person as a
finder, agent, broker, investment adviser or other financial service
provider.
(xxix) The Common Stock has been approved for inclusion, subject to
official notice of issuance in the NASDAQ National Market
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Company agrees to
sell 2,000,000 Firm Shares to the Underwriters and each Underwriter agrees,
severally and not jointly, to purchase, at a price of $_________ per share, the
number of Firm Shares set forth opposite the name of each underwriter in
Schedule A hereof, subject to adjustment in certain circumstances in accordance
with Section 9 hereof.
(b) The Company agrees to have the Firm Shares available for inspection,
checking and packaging by the Representative in New York, New York, not later
than 1:00 PM on the business day prior to the Closing Date.
(c) Payment for the Firm Shares to be sold hereunder is to be made in New York
Clearing House funds and, at the option of the Representative by certified or
bank cashier's checks drawn to the order of the Company in accordance with its
interests or bank wire to an account specified by the Company against either
uncertificated or certificated delivery of the Firm Shares (which delivery, if
certificated, shall take place in such location in New York City as may be
specified by the Representative) to the Representative for the several accounts
of the Underwriters. Such payment is to be made at the offices of Greenberg
Traurig Hoffman Lipoff Rosen & Quentel, at 7:00 a.m., Portland, Oregon time, on
the third business day after the date of this Agreement or at such other time
and date not later than five business days thereafter as the Representative and
the Company shall agree, such time and date being herein referred to as the
"Closing
11
<PAGE>
Date." (As used herein, "business day" means a day on which both the New York
Stock Exchange is open for trading and on which banks in New York are open for
business and not permitted by law or executive order to be closed.) Except to
the extent uncertificated Firm Shares are delivered at closing, the certificates
for the Firm Shares will be delivered in such denominations and in such
registrations as the Representative shall request in writing not later than the
second full business day prior to the Closing Date, and will be made available
for inspection by the Representative at least one business day prior to the
Closing Date.
(d) On the basis of the representations and warranties herein contained
and subject to the terms and conditions herein set forth, the Company hereby
grants an option to the Representative to purchase from the Company all or any
part of the Option Shares at a price of $ per share. The option
granted hereby may be exercised in whole or in part by giving written notice:
(i) at any time before the Closing Date and (ii) only once thereafter within
thirty (30) days after the date of this Agreement, by the Representative to the
Company setting forth the number of Option Shares as to which the Representative
is exercising the option, the names and denominations in which the Option Shares
are to be registered and the time and date at which certificates representing
the Option Shares are to be delivered. The time and date at which certificates
for Option Shares are to be delivered shall be determined by the Representative
but shall not be earlier than three nor later than ten business days after the
exercise of such option nor in any event prior to the Closing Date (such time
and date being herein referred to as the "Option Closing Date"). If the date of
exercise of the option is three or more days before the Closing Date, the notice
of exercise shall set the Closing Date as the Option Closing Date. The option
with respect to the Option Shares granted hereunder may be exercised only to
cover over-allotments in the sale of the Firm Shares by the Underwriters. The
Representative may cancel such option at any time prior to its expiration by
giving written notice of such cancellation to the Company. To the extent, if
any, that the option is exercised, payment for the Option Shares shall be made
on the Option Closing Date in New York Clearing House funds and, at the option
of the Representative, by certified or bank cashier's check drawn to the order
of the Company or by bank wire to an account specified by the Company against
delivery of certificates therefor at such location in New York, New York as may
be specified by the Representative.
(e) In addition to the sums payable to the Representative as provided
elsewhere herein, the Representative shall be entitled to receive at the
closing, for itself alone and not as representative of the Underwriters, as
additional compensation for its services, purchase warrants (the
"Representative's Warrants") for the purchase of up to 200,000 shares of Class A
Common Stock of the Company at a price of $______ per share, upon the terms and
subject to adjustment as described in the form of Representative's Warrant filed
as an exhibit to the Registration Statement.
12
<PAGE>
3. OFFERING BY THE UNDERWRITERS.
The several Underwriters agree to make a public offering of the Firm Shares
as soon as the Representative deems it advisable to do so. The Firm Shares are
to be initially offered to the public at the initial public offering price set
forth on the cover of the Prospectus. The Representative may from time to time
thereafter change the public offering price and other selling terms. To the
extent, if at all, that any Option Shares are purchased pursuant to Section 2
hereof, the Representative will offer them to the public on the foregoing terms.
The Representative may enter into one or more agreements as the Representative,
in its sole discretion, deems advisable with one or more broker-dealers who
shall act as dealers in connection with such public offering.
It is further understood that the Representative will act as representative
of the Underwriters in the offering and sale of the Firm Shares in accordance
with an Agreement Among Underwriters and Selected Dealer's Agreement entered
into by the Representative and the several other Underwriters.
4. COVENANTS OF THE COMPANY.
(a) The Company covenants and agrees with the several Underwriters that:
(i) The Company shall: (A) use its best efforts to cause the
Registration Statement to become effective as promptly as practicable, or,
if the procedure in Rule 430A of the Rules and Regulations is followed, to
prepare and timely file with the Commission under Rule 424(b) of the Rules
and Regulations a Prospectus in a form approved by the Representative
containing information previously omitted at the time of effectiveness of
the Registration Statement in reliance on Rule 430A of the Rules and
Regulations, and (B) not file any amendment to the Registration Statement
or supplement to the Prospectus of which the Representative shall not
previously have been advised and furnished with a copy or to which the
Representative shall have reasonably objected in writing or which is not in
compliance with the Rules and Regulations.
(ii) The Company shall advise the Representative promptly and
confirm the notice in writing: (A) when the Registration Statement or any
post-effective amendment thereto shall have become effective, (B) of
receipt of any comments from the Commission, (C) of any request of the
Commission for amendment of the Registration Statement or for supplement to
the Prospectus or for any additional information, and (D) of the issuance
by the Commission of any stop order suspending the effectiveness of the
Registration Statement or the use of the Prospectus or of the institution
of any proceedings for that purpose. The
13
<PAGE>
Company will use its best efforts to prevent the issuance of any such stop
order preventing or suspending the use of the Prospectus and to obtain as
soon as possible the lifting thereof, if any is issued.
(iii) The Company shall cooperate with the Representative in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representative may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
that the Company shall not be required to qualify as a foreign corporation
or to file a general consent to service of process in any jurisdiction
where it is not now so qualified or required to file such a consent. The
Company will, from time to time, prepare and file such statements, reports,
and other documents as are or may be required to continue such
qualifications in effect for so long a period as the Representatives may
reasonably request for distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representative, from time to time, as many copies of any Preliminary
Prospectus as the Representative may reasonably request. The Company will
deliver to, or upon the order of, the Representative during the period when
delivery of a Prospectus is required under the Act, as many copies of the
Prospectus in final form, or as thereafter amended or supplemented, as the
Representative may reasonably request. The Company will deliver to the
Representative at or before the Closing Date, three signed copies of the
Registration Statement and all amendments thereto including one set of all
exhibits filed therewith, and will deliver to the Representative such
number of copies of the Registration Statement (including such number of
copies of the exhibits filed therewith that may reasonably be requested),
and of all amendments thereto, as the Representative may reasonably
request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations of the Commission
thereunder, so as to permit the completion of the distribution of the
Shares as contemplated in this Agreement and the Prospectus. If during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, any event shall occur as a result of which, in the
judgment of the Company or in the reasonable opinion of the Underwriters,
it becomes necessary to amend or supplement the Prospectus in order to make
the statements therein, in light of the circumstances existing at the time
the Prospectus is delivered to a purchaser, not misleading, or if it is
necessary at any time to amend or supplement the Prospectus to comply with
any law, the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to the
14
<PAGE>
Prospectus so that the Prospectus as so amended or supplemented will not,
in light of the circumstances when it is so delivered, be misleading, or so
that the Prospectus will comply with the law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not later
than 15 months after the effective date of the Registration Statement, an
earnings statement (which need not be audited) in reasonable detail,
covering a period of at least 12 consecutive months beginning after the
effective date of the Registration Statement, which earnings statement
shall satisfy the requirements of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so
made available.
(vii) The Company shall: (A) deliver to its stockholders annual
reports containing financial statements audited by its independent
accountants and, for a reasonable period, not less than five years,
quarterly reports concerning unaudited financial information for each of
the first three quarters of each fiscal year, and (B) for a period of five
years from the Closing Date, deliver to the Representative copies of such
annual reports and copies of all other documents, reports and information
furnished by the Company to its stockholders or filed with any securities
exchange or the NASD pursuant to the requirements of such exchange or with
the Commission pursuant to the Act or the Exchange Act. The Company will
deliver to the Representative similar reports with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations, which
are not consolidated in the Company's financial statements.
(viii) Except with the prior written consent of the Representative,
no offering, sale, short sale or other disposition of any shares of Common
Stock of the Company or other securities convertible into or exchangeable
or exercisable for shares of Class A Common Stock or derivative of Common
Stock will be made for a period of ninety (90) days after the effective
date of this Registration Statement directly or indirectly, by the Company
other than the sales of Class A Common Stock covered by this Agreement and
sales upon exercise of options outstanding, on the effective date, under
its Stock Option Plan.
(ix) The Company shall use its best efforts to list subject to
notice of issuance the Shares on the NASDAQ Stock Market and thereafter to
maintain such listing.
(x) The Company shall apply the net proceeds of its sale of the
Shares as set forth in the Prospectus and shall file such reports with the
Commission with
15
<PAGE>
respect to the sale of the Shares and the application of the proceeds
therefrom as may be required in accordance with Rule 463 under the Act.
(xi) The Company shall not invest, or otherwise use the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company or any of its subsidiaries to register as an
investment company under the 1940 Act.
(xii) The Company shall maintain the currency of the prospectus
forming a part of an effective registration statement, which may be the
Registration Statement filed with respect to the Class A Common Stock
issuable upon exercise of the Representative's Warrants at all times during
which any Warrant remains outstanding.
(xiii) The Company shall, if it commences to engage in any business
with the government of Cuba or with any person or affiliate located in Cuba
after the date the Registration Statement becomes or has become effective
with the Commission or with the Florida Department of Banking and Finance
(the "Department"), whichever date is later, or if the information reported
or incorporated by reference in the Prospectus, if any, concerning the
Company's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, provide the Department with notice of
such business or change, as appropriate, in a form acceptable to the
Department.
(xiv) The Company shall maintain a transfer agent and, if necessary
under the jurisdiction of incorporation of the Company, a registrar for the
Common Stock, each of which shall be reasonably satisfactory to the
Representative.
(xv) The Company shall not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
(xvi) The Company shall timely file all such reports, forms or other
documents as may be required (including, but not limited to, a report as
may be required pursuant to Rule 463 of the Regulations) from time to time,
under the Act, the Exchange Act, and the Rules and Regulations, and all
such reports, forms and documents filed will comply as to form and
substance with the applicable requirements under the Act, the Exchange Act,
and the Rules and Regulations.
16
<PAGE>
(xvii) For a period of five (5) years from the Closing Date, the
Company shall furnish to the Underwriters at the Company's sole expense:
(i) daily consolidated transfer sheets relating to the Common Stock, (ii)
the list of holders of all of the Company's securities and (iii) a Blue Sky
"Trading Survey" for secondary sales of the Company's securities prepared
by counsel to the Company.
5. COSTS AND EXPENSES.
(a) The Representative shall be entitled to receive from the Company, for
itself alone and not as Representative of the Underwriters, a nonaccountable
expense allowance equal to 1.5% of the aggregate public offering price of Shares
sold to the Underwriters in connection with the offering. The Representative
shall be entitled to withhold this allowance on the Closing Date with respect to
all Shares delivered on the Closing Date (less $25,000 heretofore advanced
against such amount that has heretofore been paid by the Company). In addition,
the Representative shall be entitled to receive from the Company reimbursement
for its accountable expenses to the extent that such expenses exceed the $25,000
heretofore advanced by the Company. If the public offering of the Shares is
consummated, all amounts paid pursuant to the immediately preceding sentence
shall be credited against the Representative's non-accountable expenses as
provided in the first sentence of this paragraph (a) of Section 5; provided,
however, that the sums so paid shall be limited to an amount that would not
increase the amount of non-accountable reimbursement otherwise payable under the
aforesaid first sentence of this paragraph. If said public offering is not
consummated due to adverse market conditions or because the proposed price is
below the range stated in the cover page of the Prospectus or due to default by
the Underwriters, the Company shall not be obligated to reimburse the
Representative for any further accountable expenses incurred in connection with
the proposed offering above $25,000. However, if said public offering is not
consummated due to any misrepresentation by the Company or the Company chooses
not to proceed, even if the Representative offers to complete the offering
within the range stated in the cover page of the Prospectus, then the Company
shall reimburse the Representative for any further accountable expenses incurred
in connection with the proposed offering in excess of $25,000. For purposes of
this paragraph, the Representative shall be deemed to have incurred expenses
when they are billed regardless of whether such expenses have been paid.
(b) In addition to the payment described in paragraph (a) of this Section
5, the Company shall pay all costs, expenses and fees incident to the
performance of the obligations of the Company under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of counsel for the Company; the cost
of printing and delivering to, or as requested by, the Underwriters of copies of
the Registration Statement, Preliminary Prospectuses, the Prospectus, this
Agreement, the Underwriters' Selling Memorandum, the Underwriters' Invitation
Letter, the NASDAQ Listing Application, the Blue Sky
17
<PAGE>
Survey and any supplements or amendments thereto; the filing fees of the
Commission; the filing fees and expenses (including legal fees and
disbursements) incident to securing any required review by the NASD of the terms
of the sale of the Shares; the Listing Fee of the NASDAQ Stock Market; and the
expenses, including the fees and disbursements of counsel for the Underwriters,
incurred in connection with the qualification of the Shares under state
securities or Blue Sky laws. Any transfer taxes imposed on the sale of the Firm
Shares to the several Underwriters shall be paid by the Company. If this
Agreement shall not be consummated because the conditions in Section 6 hereof
are not satisfied, or because this Agreement is terminated by the Representative
pursuant to Section 11 hereof, or by reason of any failure, refusal or inability
on the part of the Company to perform any undertaking or satisfy any condition
of this Agreement or to comply with any of the terms hereof on their part to be
performed, unless such failure to satisfy said condition or to comply with said
terms be due to the default or omission of any Underwriter, then, subject to the
expense limitations set forth in paragraph (a) of this Section 5, the Company
shall reimburse the several Underwriters for reasonable out-of-pocket expenses,
including fees and disbursements of counsel, reasonably incurred in connection
with investigating, marketing and proposing to market the Shares or in
contemplation of performing their obligations hereunder; but the Company shall
not in any event be liable to any of the several Underwriters for damages on
account of loss of anticipated profits from the sale by them of the Shares.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm Shares on
the Closing Date and the Option Shares, if any, on the Option Closing Date, as
the case may be, are subject to the continuing accuracy, as of the Closing Date
or the Option Closing Date, as the case may be, of the representations and
warranties of the Company contained herein, and to the performance by the
Company of its covenants and obligations hereunder and to the following
additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective and any and all fillings required by Rule 424 and
Rule 430A of the Rules and Regulations shall have been made, and any request of
the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representative and
complied with to its reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing Date
which would prevent the issuance of the Shares.
18
<PAGE>
(b) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Morse, Zelnick, Rose &
Lander, LLP, counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters (and stating
that it may be relied upon by counsel to the Underwriters) to the effect that:
(i) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State Delaware and as
a foreign corporation in each jurisdictions in which its ownership or
leasing of any properties or the character of its operations requires such
qualification, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement. All outstanding shares of capital stock of every subsidiary of
the Company have been duly authorized and validly issued and are fully paid
and non-assessable.
(ii) The Company has duly authorized, issued and outstanding
capital stock as set forth under the caption "Capitalization" in the
Prospectus; the authorized shares of the Common Stock have been duly
authorized; the outstanding shares of the Company's Common Stock have been
duly authorized and validly issued and are fully paid and non-assessable
and were issued and sold by the Company in compliance in all material
respects with applicable securities laws; all of the securities of the
Company conform to the description thereof contained in the Prospectus; the
certificates for the Common Stock and Warrants of the Company, assuming
they are in the form filed with the Commission, are in due and proper form;
the shares of Common Stock to be sold by the Company pursuant to this
Agreement, including shares of Common Stock issuable upon exercise of the
Warrants, have been duly authorized and are, or in the case of the Shares
to be sold by the Company, will be validly issued, fully paid and
non-assessable when issued and paid for as contemplated by this Agreement
and the Registration Statement; no preemptive rights of stockholders exist
with respect to any of the Common Stock of the Company or the issue or sale
thereof pursuant to any applicable statute or the provisions of the
Company's Certificate of Incorporation or, to such counsel's knowledge,
pursuant to any contractual obligation; and, to such counsel's knowledge,
the Company is not a party to or bound by any instrument, agreement or
other arrangement providing for it to issue any capital stock, rights,
warrants, options or other securities, except for this Agreement and the
Representative's Warrant Agreement.
(iii) The Representative's Warrants have been authorized for
issuance to the Representative and will, when issued, possess rights,
privileges, and characteristics as represented in the most recent form of
Representative's Warrant filed as an exhibit to the Registration Statement;
the securities to be issued upon exercise of the Representative's Warrants,
when issued and delivered against
19
<PAGE>
payment therefor in accordance with the terms of the Representative's
Warrants, will be duly and validly issued, fully paid, non-assessable and
free of preemptive rights, and all corporate action required to be taken
for the authorization and issuance of the Representative's Warrants, and
the securities to be issued upon their exercise, has been validly and
sufficiently taken.
(iv) Except as described in the Prospectus, to the knowledge of
such counsel, there are no outstanding securities of the Company
convertible or exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and there are no
outstanding or authorized options, warrants or rights of any character
obligating the Company to issue any shares of its capital stock or any
securities convertible or exchangeable into or evidencing the right to
purchase or subscribe for any shares of such stock; and except as described
in the Prospectus, to the knowledge of such counsel, no holder of any
securities of the Company or any other person has the right, contractual or
otherwise, which has not been satisfied or effectively waived, to cause the
Company to sell or otherwise issue to him or it, or to permit him or it to
underwrite the sale of, any Common Stock or the right to have any shares of
the Common Stock or other securities of the Company included in the
Registration Statement or the right, as a result of the filing of the
Registration Statement, to require registration under the Act of any shares
of Common Stock or other securities of the Company.
(v) The Registration Statement has become effective under the Act
and, to the best knowledge of such counsel, no stop order proceedings with
respect thereto have been instituted or are pending or threatened under the
Act.
(vi) The Registration Statement, the Prospectus and each amendment
or supplement thereto comply as to form in all material respects with the
requirements of the Act and the Rules and Regulations (except that such
counsel need not express an opinion as to the financial statements,
schedules and statistical information therein).
(vii) The statements under the captions "Shares Eligible for Future
Sale" and "Description of Capital Stock" in the Prospectus and in Items 14
and 15 of the Registration Statement, insofar as such statements constitute
a summary of documents referred to therein or matters of law, accurately
summarize in all material respects the information called for with respect
to such documents and matters.
(viii) Such counsel does not know of any contracts or documents
20
<PAGE>
required to be filed as exhibits to the Registration Statement or described
in the Registration Statement or the Prospectus which are not so filed or
described as required, and such contracts and documents as are summarized
in the Registration Statement or the Prospectus are fairly summarized in
all material respects.
(ix) Such counsel knows of no legal or governmental proceedings
pending or threatened against the Company except as set forth in the
Prospectus.
(x) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will not
conflict with or result in a breach of any of the terms or provisions of,
or constitute a default under, the Certificate of Incorporation or bylaws
of the Company, or any agreement or instrument known to such counsel to
which the Company is a party or by which, to the knowledge of such counsel,
the Company may be bound.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company and, when executed by the Representative, will be
a valid and binding agreement of the Company enforceable in accordance with
its terms except as rights to indemnity or contribution hereunder may be
limited by federal or state securities laws or public policy and except as
such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting the rights of creditors generally
and subject to general principles of equity.
(xii) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body is necessary in connection with the execution and
delivery of this Agreement and the consummation of the transactions
contemplated herein (other than as may be required by the NASD or as
required by state securities and Blue Sky laws as to which such counsel
need not express an opinion) except such as have been obtained or made,
specifying the same.
(xiii) The Company is not, and will not become, as a result of the
transactions contemplated by this Agreement and application of the net
proceeds therefrom as described in the Prospectus, required to register as
an investment company under the 1940 Act.
In rendering such opinion, such counsel may rely as to matters governed by
the laws of states other than Delaware or Federal laws on local counsel in such
jurisdictions, and as to matters concerning automobile franchise laws, on the
opinion of Messrs. Bressler Amery & Ross, provided that in each case such
counsel shall state that they believe that they and the Underwriters are
justified in relying on such other counsel. In
21
<PAGE>
addition to the matters set forth above, the opinion of Morse, Zelnick, Rose &
Lander, LLP shall also include a statement to the effect that nothing has come
to the attention of such counsel which leads them to believe that (i) the
Registration Statement, at the time it became effective under the Act (but after
giving effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, and (ii) the Prospectus, or any supplement
thereto, on the date it was filed pursuant to the Rules and Regulations and as
of the Closing Date or the Option Closing Date, as the case may be, contained an
untrue statement of a material fact or omitted to state a material fact
necessary in order to make the statements, in the light of the circumstances
under which they are made, not misleading (except that such counsel need express
no view as to financial statements, schedules and statistical information
therein). With respect to such statements, Morse, Zelnick, Rose & Lander, LLP
may state that their belief is based upon the procedures set forth therein
(which procedures shall be reasonably acceptable to the Representative and
counsel for the Underwriters) but is otherwise without independent check and
verification.
(c) The Representative shall have received from Morse, Zelnick, Rose &
Lander, LLP its opinion that: (i) the Company has been duly organized and is
validly existing as a corporation under the laws of the State Delaware, and the
Company or its applicable subsidiary, as the case may be, has corporate power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement; the Company or its applicable
subsidiary, as the case may be, is duly qualified to transact business in all
jurisdictions in which the conduct of its business requires such qualification
or in which the failure to qualify would have a materially adverse effect upon
the business of the Company, all outstanding shares of capital stock of every
subsidiary of the Company have been duly authorized and validly issued and are
fully paid and non-assessable; and (ii) the Company has authorized and
outstanding capital stock as set forth under the caption "Capitalization" in the
Prospectus; the authorized shares of the Common Stock have been duly authorized;
the outstanding shares of the Company's Common Stock have been duly authorized
and validly issued and are fully paid and non-assessable and were issued and
sold by the Company in compliance in all material respects with applicable
securities laws; all of the securities of the Company conform to the description
thereof contained in the Prospectus; the certificates for the Common Stock and
Warrants of the Company, assuming they are in the form filed with the
Commission, are in due and proper form; the shares of Common Stock to be sold by
the Company pursuant to this Agreement, including shares of Common Stock
issuable upon exercise of the Warrants, have been duly authorized and are, or in
the case of the Shares to be sold by the Company, will be validly issued, fully
paid and non-assessable when issued and paid for as contemplated by this
Agreement and the Registration Statement; and no preemptive rights of
stockholders exist with respect to any of the Common Stock of the Company or the
issue or sale thereof pursuant to any applicable statute or the provisions of
the Company's Certificate of Incorporation or, to such
22
<PAGE>
counsel's knowledge, pursuant to any contractual obligation. Such opinion shall
expressly state that it can be relied upon by Greenberg Traurig Hoffman Lipoff
Rosen & Quentel and by the Underwriters.
(d) The Representative shall have received from Greenberg Traurig Hoffman
Lipoff Rosen & Quentel, counsel for the Underwriters, an opinion dated the
Closing Date or the Option Closing Date, as the case may be, substantially to
the effect specified in subparagraphs (i), (v) and (vi) of paragraph (b) of
this Section 6. In addition to the matters set forth above, such opinion shall
also include a statement to the effect that nothing has come to the attention of
such counsel that has caused them to believe that: (i) the Registration
Statement, at the time it became effective under the Act (but after giving
effect to any modifications incorporated therein pursuant to Rule 430A under the
Act) and as of the Closing Date or the Option Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and (ii) the Prospectus, or any supplement thereto, on the date
it was filed pursuant to the Rules and Regulations and as of the Closing Date or
the Option Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of circumstances under which they were made, not
misleading (except that such counsel need not express any view as to financial
statements, schedules and statistical information therein). With respect to
such statement, such counsel may state that their belief is based upon the
procedures set forth therein, but is without independent check and verification.
(e) The Representative shall have received at or prior to the Closing Date
from Greenberg Traurig Hoffman Lipoff Rosen & Quentel a memorandum or summary,
in form and substance satisfactory to the Representative, with respect to the
qualification for offering and sale by Underwriters of the Shares under the
state securities or Blue Sky laws of such jurisdictions as the Representative
may reasonably have designated to the Company.
(f) The Representative, on behalf of the several Underwriters, shall have
received, on the Closing Date and on the Option Closing Date, as the case may
be, a letter dated the Closing Date or the Option Closing Date, as the case may
be, in form and substance satisfactory to the Representative, of Arthur Andersen
LLP confirming that they are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations thereunder and
stating that in their opinion the financial statements and schedules examined by
them and included in the Registration Statement comply in form and in all
material respects with the applicable accounting requirements of the Act and the
related published Rules and Regulations, and containing such other statements
and information as are ordinarily included in such accountants' "comfort
letters" to Underwriters with respect to the financial statements and certain
financial and statistical information contained in the Registration Statement
and Prospectus.
23
<PAGE>
(g) The Representative shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of the
Chief Executive Officer or Chief Operating Officer of the Company to the effect
that, as of the Closing Date or the Option Closing Date, as the case may be,
such officer represents as follows:
(i) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have been
taken or are, to the best of his knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or the Option
Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules 424
or 430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and the
Prospectus and, in his opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration
Statement were true and correct, and such Registration Statement and
Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, and since the effective date of the Registration Statement no
event has occurred which should have been set forth in a supplement to or
an amendment of the Prospectus which has not been set forth in such
supplement or amendment; and
(v) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been any material
adverse change or any development involving a prospective material adverse
change in or affecting the condition, financial or otherwise, of the
Company or the earnings, business, management, properties, assets, rights,
operations, condition (financial or otherwise) or prospects of the Company
whether or not arising in the ordinary course of business.
(h) The Company shall have furnished to the Representative such further
documents confirming the representations and warranties, covenants and
conditions contained herein and related matters as the Representative may
reasonably have requested.
24
<PAGE>
(i) The Firm Shares and the Option Shares shall have been approved for
designation upon notice of issuance on the NASDAQ National Market.
(j) The Lockup Agreements described in Section 1(a)(xxvi) shall have been
executed and delivered and shall be in full force and effect.
The opinions and certificates mentioned in this Agreement shall be deemed
to be in compliance with the provisions hereof only if they are in all material
respects reasonably satisfactory to the Representative and to Greenberg Traurig
Hoffman Lipoff Rosen & Quentel, counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6 shall
not have been fulfilled, the obligations of the Underwriters hereunder may be
terminated by the Representative by notifying the Company of such termination in
writing or by telegram at or prior to the Closing Date or the Option Closing
Date, as the case may be. In such event, the Company and the Underwriters shall
not be under any obligation to each other (except to the extent provided in
Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
The obligations of the Company to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and be in effect or proceedings
therefor initiated or threatened.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities to which such Underwriter or
any such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading in light of the circumstances under which
they were made; and will reimburse each Underwriter and each such controlling
person who is a party to such action or proceeding in accordance with Section
8(c) for any legal or other expenses
25
<PAGE>
reasonably incurred by such Underwriter or such controlling person in
investigating or defending any such loss, claim, damage or liability, action or
proceeding or in responding to a subpoena or governmental inquiry related to the
offering of the Shares; provided, however, that the Company will not be liable
in any such case to the extent that: (A) any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged untrue
statement, or omission or alleged omission made in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in
reliance upon and in substantial conformity with written information furnished
to the Company by or through the Representative specifically for use in the
preparation thereof, or (B) with respect to the Preliminary Prospectus, any such
loss, claim damage or liability of such Underwriter relates to the failure of
such Underwriter to deliver a copy of the Prospectus at, or prior to, the
confirmation of the sale of the Shares to the person alleging such loss, claim,
damage or liability, where the alleged untrue statement or omission of a
material fact contained in such Preliminary Prospectus was corrected in the
Prospectus. This indemnity agreement will be in addition to any liability which
the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of the Act, against any losses, claims, damages or
liabilities to which the Company or any such director, officer or controlling
person may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof)
arise out of or are based upon: (i) any untrue statement or alleged untrue
statement of any material fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus or any amendment or supplement thereto,
or (ii) the omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading in light of the circumstances under which they were made; and will
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer or controlling person in connection with investigating or
defending any such loss, claim, damage, liability, action or proceeding;
provided, however, that each Underwriter will be liable in each case to the
extent, and only to the extent, that (i) such untrue statement or alleged untrue
statement or omission or alleged omission has been made in the Registration
Statement, any Preliminary Prospectus, the Prospectus or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representative specifically for use
in the preparation thereof or, (ii) with respect to the Preliminary Prospectus,
any such loss, claim, damage or liability relates to the failure of such
Underwriter to deliver a copy of the Prospectus at, or prior to, the
confirmation of the sale of the Shares to the person alleging such loss, claim,
damage or liability, where the alleged untrue statement or omission of a
material fact contained in such Preliminary Prospectus was corrected in the
Prospectus. This indemnity agreement will be in addition to any liability which
such Underwriter may otherwise have.
26
<PAGE>
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
materially prejudiced by the failure to give such notice, but the failure to
give such notice shall not relieve the indemnifying party or parties from any
liability which it or they may have to the indemnified party for contribution or
otherwise than on account of the provisions of Section 8(a) or (b). In case any
such proceeding shall be brought against any indemnified party and such
indemnified party shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel satisfactory to
such indemnified party and shall pay as incurred the fees and disbursements of
such counsel related to such proceeding. In any such proceeding, any
indemnified party shall have the right to retain its own counsel at its own
expense. Notwithstanding the foregoing, the indemnifying party shall pay as
incurred (or within 30 days of presentation) the fees and expenses of the
counsel retained by the indemnified party in the event: (i) the indemnifying
party and the indemnified party shall have mutually agreed to the retention of
such counsel, (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified party
and representation of both parties by the same counsel would be inappropriate
due to actual or potential differing interests between them or (iii) the
indemnifying party shall have failed to assume the defense and employ counsel
acceptable to the indemnified party within a reasonable period of time after
notice of commencement of the action. It is understood that the indemnifying
party shall not, in connection with any proceeding or related proceedings in the
same jurisdiction, be liable for the fees and expenses of more than one separate
firm for all such indemnified parties. Such firm shall be designated in writing
by the Representative in the case of parties indemnified pursuant to Section
8(a) and by the Company in the case of parties indemnified pursuant to Section
8(b). The indemnifying party shall not be liable for any settlement of any
proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding in which
indemnification may be sought hereunder unless such settlement, compromise or
consent includes an unconditional release of each indemnified party from all
liability arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under Section 8(a) or
(b) above in
27
<PAGE>
respect of any losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other from the offering of the Shares. If, however, the allocation provided by
the immediately preceding sentence is not permitted by applicable law, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bears to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) referred
to above in this Section 8(d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this paragraph (d): (i) no Underwriter shall be required to
contribute any amount in excess of the underwriting discounts and commissions
applicable to the Shares purchased by such Underwriter and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of
fraudulent misrepresentation. The Underwriters' obligations in this Section
8(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against
28
<PAGE>
whom contribution may be sought under this Section 8 hereby consents to the
jurisdiction of any court having jurisdiction over any other contributing party,
agrees that process issuing from such court may be served upon him or it by any
other contributing party and consents to the service of such process and agrees
that any other contributing party may join him or it as an additional defendant
in any such proceeding in which such other contributing party is a party.
(f) Any losses, claims, damages or liabilities for which an indemnified
party is entitled to indemnification or contribution under this Section 8 shall
be paid by the indemnifying party to the indemnified party as such losses,
claims, damages, or expenses are incurred. The indemnity and contribution
agreements contained in this Section 8 and the representations and warranties of
the Company set forth in this Agreement shall remain operative and in full force
and effect, regardless of: (i) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, the Company, its
directors or officers or any persons controlling the Company within the meaning
of the Act, (ii) acceptance of any Shares and payment therefor hereunder, or
(iii) any termination of this Agreement. A successor to any Underwriter, or to
the Company, its directors or officers, or any person controlling the Company,
shall be bound by and entitled to the benefits of the indemnity, contribution
and reimbursement agreements contained in this Section 8.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for the portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company), the Representative shall
use its reasonable efforts to procure within 36 hours thereafter one or more of
the other Underwriters, or any others, to purchase from the Company upon the
terms set forth herein such amounts as may be agreed upon and upon the terms set
forth herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours the Representative shall not have procured such other Underwriters, or any
others, to purchase the Firm Shares or Option Shares, as the case may be, agreed
to be purchased by the defaulting Underwriter or Underwriters, then: (a) if the
aggregate number of Shares with respect to which such default shall occur does
not exceed 10% of the Firm Shares or Options Shares, as the case may be, covered
hereby, the other Underwriters shall be obligated, severally, in proportion to
the respective numbers of Firm Shares or Option Shares, as the case may be,
which they are obligated to purchase hereunder, to purchase the Firm Shares or
Option Shares, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase, or (b) if the aggregate number of Firm Shares
or Option Shares, as the case may be, with respect to which such default shall
occur equals or exceeds 10% of the Firm Shares or Option Shares, as the case may
be, covered hereby, the Company or the Representative shall
29
<PAGE>
have the right, by written notice given as to the Firm Shares if the default
relates to the Firm Shares, or as to the Option Shares if the default relates to
the Option Shares, within the next 36-hour period to the parties to this
Agreement, to terminate this Agreement without liability on the part of the
non-defaulting Underwriters or of the Company, except for expenses to be paid by
the Company under Section 5 hereof and except to the extent provided in Section
8 hereof. In the event of a default by any Underwriter or Underwriters, as set
forth in this Section 9, the Closing Date or Option Closing Date, as the case
may be, may be postponed for such period, not exceeding seven days, as the
Representative may reasonably determine in order that the required changes in
the Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as otherwise
provided herein, shall be mailed, delivered, telecopied or telegraphed and
confirmed as follows:
if to the Representative or the Underwriters:
Paulson Investment Company, Inc.
811 S.W. Front Avenue
Suite 200
Portland, Oregon 97204
Attention: Chester L. F. Paulson
with a copy to:
Greenberg Traurig Hoffman Lipoff Rosen & Quentel
200 Park Avenue
New York, New York 10166
Attention: Stephen A. Weiss, Esq.
Andrew J. Cosentino, Esq.
if to the Company:
Hometown Auto Retailers, Inc.
831 Straits Turnpike
Watertown, Connecticut 06795
Attention: Joseph Shaker, President
30
<PAGE>
with a copy to: Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, New York 10022
Attention: Stephen A. Zelnick, Esq.
11. TERMINATION.
This Agreement may be terminated by the Representative by notice to the
Company as follows:
(a) at any time prior to the earlier of: (i) the time the Shares are
released by the Representative for sale by notice to the Underwriters, or (ii)
11:30 a.m. on the first business day following the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company or the earnings, business,
management, properties, assets, rights, operations, condition (financial or
otherwise) or prospects of the Company, whether or not arising in the ordinary
course of business, (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or international
calamity or crisis or change in economic or political conditions if the effect
of such outbreak, escalation, declaration, emergency, calamity, crisis or change
on the financial markets of the United States would, in the Representative's
reasonable judgment, make it impracticable to market the Shares or to enforce
contracts for the sale of the Shares, (iii) the Dow Jones Industrial Average
shall have fallen by 15 percent or more from its closing price on the day
immediately preceding the date that the Registration Statement is declared
effective by the Commission, (iv) suspension of trading in securities generally
on the New York Stock Exchange or limitation on prices (other than limitations
on hours or numbers of days of trading) for securities on such Exchange, (v) the
enactment, publication, decree or other promulgation of any statute, regulation,
rule or order of any court or other governmental authority which in the
Representative's reasonable opinion materially and adversely affects the
business or operations of the Company, (vi) declaration of a banking moratorium
by United States or New York State authorities; (vii) the suspension of trading
of the Common Stock by the Commission or the NASD on the Nasdaq National Market,
or (viii) the taking of any action by any governmental body or agency in respect
of its monetary or fiscal affairs which in the Representative's reasonable
opinion has a material adverse effect on the securities markets in the United
States; or
(c) as provided in Sections 6 and 9 of this Agreement.
31
<PAGE>
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and their respective successors, executors,
administrators, heirs and assigns, and the officers, directors and controlling
persons referred to herein, and no other person shall have any right or
obligation hereunder. No purchaser of any of the Shares from any Underwriter
shall be deemed a successor or assign or third party beneficiary merely because
of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
information set forth in the last paragraph on the front cover page (insofar as
such information relates to the Underwriters), the legends required by Item
502(d) of Regulation S-K under the Act and the information under the caption
"Underwriting" in the Prospectus.
14. MISCELLANEOUS.
The reimbursement, indemnification and contribution agreements contained in
this Agreement and the representations, warranties and covenants in this
Agreement shall remain in full force and effect regardless of: (a) any
termination of this Agreement; (b) any investigation made by or on behalf of any
Underwriter or controlling person thereof or by or on behalf of the Company or
its directors or officers; and (c) delivery of and payment for the Shares under
this Agreement.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Oregon. All disputes relating to this Agreement shall be
adjudicated before a court located in Multnomah County, Oregon to the exclusion
of all other courts that might have jurisdiction.
[Remainder of page intentionally left blank]
32
<PAGE>
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
Hometown Auto Retailers, Inc.
By:
---------------------------
Joseph Shaker
President and Chief Operating
Officer
The foregoing Underwriting Agreement is
hereby confirmed and accepted as of the
date first above written.
PAULSON INVESTMENT COMPANY, INC.
As Representative of the several
Underwriters listed on Schedule A
By:
--------------------------------
Authorized Officer
33
<PAGE>
SCHEDULE A
SCHEDULE OF UNDERWRITERS
Number of Shares
Underwriter to be Purchased(1)
----------- ------------------
Paulson Investment Company, Inc.
- --------------------------------
Total 2,000,000
- --------------------
(1) Subject to pro rata increase in the event that the Option Shares are
purchased as provided in Section 2(d)
<PAGE>
Exhibit 3.6
CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION
OF
HOMETOWN AUTO RETAILERS, INC.
Hometown Auto Retailers, Inc. (the "Corporation"), a corporation organized
and existing under and by virtue of the General Corporation Law of the State of
Delaware does hereby certify:
1. The name of the Corporation is Hometown Auto Retailers, Inc.
2. The Certificate of Incorporation of the Corporation is hereby amended
to: (a) decrease and change the authorized capitalization from 32,000,000 shares
consisting of 24,000,000 shares of Class A Common Stock, par value $.001 per
share; 6,000,000 shares of Class B Common Stock, par value $.001 per share; and
2,000,000 shares of Preferred Stock, par value $.001 per share; into 29,760,000
shares consisting of 24,000,000 shares of Class A Common Stock, par value $.001
per share; 3,760,000 shares of Class B Common Stock, par value $.001 per share;
and 2,000,000 shares of Preferred Stock, par value $.001 per share and (b)
effectuate a reverse split and change each of the outstanding 400,000 shares of
Class A Common Stock into .6 shares of Class A Common Stock (for an aggregate of
240,000 shares of Class A Common Stock).
3. In order to effect the changes described in Paragraph 2 hereof, the
Certificate of Incorporation of the Corporation is hereby amended by striking
out Article FOURTH and by substituting the following new Article:
(a) GENERAL. The total number of shares of stock which the Corporation
shall have authority to issue is Twenty-Nine Million Seven Hundred Sixty
Thousand (29,760,000), of which: (i) Twenty-four Million (24,000,000) shall
be shares of Class A Common Stock, having a par value of $.001 per share,
(ii) Three Million Seven Hundred Sixty Thousand (3,760,000) shall be shares
of Class B Common Stock, having a par value of $.001 per share, and (iii)
Two Million (2,000,000) shall be shares of Preferred Stock, par value $.001
per share.
Upon the filing of this Certificate of Amendment, each of the Four
Hundred Thousand shares of Class A Common Stock of the Corporation
outstanding on such date shall automatically undergo a reverse split and be
changed into six-tenths (0.6) of a share of Class A Common Stock, resulting
in an aggregate of Two Hundred Forty Thousand (240,000) outstanding shares
of Class A Common Stock.
<PAGE>
No holder of any of the shares of stock of the Corporation, whether
now or hereafter authorized and issued, shall be entitled as of right to
purchase or subscribe for (1) any unissued stock of any class, or (2) any
additional shares of any class to be issued by reason of any increase of
the authorized capital stock of the Corporation of any class, or (3) bonds,
certificates of indebtedness, debentures or other securities convertible
into stock of the corporation, or carrying any right to purchase stock of
any class, but any such unissued stock or such additional authorized issue
of any stock or of other securities convertible into stock, or carrying any
right to purchase stock, may be issued and disposed of pursuant to
resolution of the Board of Directors to such persons, firms, corporations
or associations and upon such terms as may be deemed advisable by the Board
of Directors in the exercise of its discretion.
(b) CLASS A COMMON STOCK AND CLASS B COMMON STOCK.
(i) The Class A Common Stock and the Class B Common Stock shall be of
equal rank and shall entitle the holders thereof to the same rights and
privileges, except as hereinafter expressly provided with respect to voting
rights.
(ii) Both Class A Common Stock and Class B Common Stock shall vote
together as one class on all matters to be voted on by stockholders of the
Corporation, including the election of directors, except as otherwise
expressly provided by law. The holders of Class B Common Stock shall be
entitled to ten (10) votes per share and the holders of Class A Common
Stock shall be entitled to one vote per share.
(iii) The holders of the Class A Common Stock and the Class B Common
Stock shall be entitled to dividends when, as and if declared by the Board
of Directors in equal amounts per share and without preference or priority
of either class of stock over the other.
(iv) In the event of any liquidation, dissolution or winding up of the
affairs of the Corporation, whether voluntary or involuntary, all assets
and funds of the Corporation available for distribution shall be
distributed and paid over to the holders of the Class A Common Stock and
Class B Common Stock in equal amounts per share and without preference or
priority of either class of stock over the other.
2
<PAGE>
(v) Each share of Class B Common Stock shall be convertible at
any time at the option of the holder thereof into one share of Class A
Common Stock. In addition, upon any sale of Class B Common Stock in
either a private transaction or in the public market, each share of
Class B Common Stock so sold shall be automatically converted into one
share of Class A Common Stock, it being understood that such automatic
conversion shall not occur as a result of transfers because of INTER
VIVOS gift, or bequests or other gifts under a last will and
testament, deed or other document of trust or as a result of intestate
succession.
(c) PREFERRED STOCK. The Preferred Stock may be issued, from time to
time, in one or more series with such designations, preferences and
relative participating optional or other special rights and qualifications,
limitations or restrictions thereof, as shall be stated in the resolutions
adopted by the Board of Directors providing for the issuance of such
Preferred Stock or series thereof; and the Board of Directors is hereby
expressly vested with authority to fix such designations, preferences and
relative participating optional or other special rights or qualifications,
limitations or restrictions for each series, including, but not by way of
limitation, the power to affix the redemption and liquidation preferences,
the rate of dividends payable and the time for and the priority of payment
thereof and to determine whether such dividends shall be cumulative or not
and to provide for and affix the terms of conversion of such Preferred
Stock or any series thereof into Common Stock of the Corporation and fix
the voting power, if any, of Preferred Stock or any series thereof.
4. The Amendments of the Certificate of Incorporation herein certified
have been duly adopted in accordance with the provisions of Sections 228 and 242
of the General Corporation Law of the State of Delaware by the Unanimous Written
Consent of the Directors followed by the Unanimous Written Consent of the
Stockholders.
Executed on this ___ day of June, 1998.
HOMETOWN AUTO RETAILERS, INC.
By:/s/ Joseph Shaker
Joseph Shaker
President
3
<PAGE>
Exhibit 4.1
HAR
HOMETOWN AUTO RETAILERS, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
CUSIP 437858 10 3
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS CERTIFIES THAT
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF CLASS A COMMON STOCK OF THE PAR VALUE OF
$.001 PER SHARE OF
HOMETOWN AUTO RETAILERS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney, upon surrender of this Certificate properly
endorsed.
This Certificate is not valid until countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
John C. Rudy SECRETARY
Joseph Shaker PRESIDENT
COUNTERSIGNED AND REGISTERED:
CONTINENTAL STOCK TRANSFER & TRUST COMPANY
(JERSEY CITY, NJ) TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED OFFICER
HOMETOWN AUTO RETAILERS, INC.
The Corporation will furnish without charge to each stockholder who so
requests a statement of the designations, powers, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof of the Corporation and the qualifications, limitations or restrictions
of such preferences and/or rights. Such request may be made to the Corporation
or the Transfer Agent.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were
written out in full according to applicable laws or regulations:
TEN COM
TEN ENT
JT TEN
as tenants in common
as tenants by the entireties
as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT Custodian
(Cust)
(Minor)
under Uniform Gifts to Minors
Act
(State)
Additional abbreviations may also be used though not in the above list.
<PAGE>
For value received, the undersigned hereby sells, assigns and transfers unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
NOTICE:
THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed:
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE>
Exhibit 4.3
--------------------------------------------------------
HOMETOWN AUTO RETAILERS, INC.
AND
PAULSON INVESTMENT COMPANY, INC.
___________
REPRESENTATIVE'S
WARRANT AGREEMENT
Warrants for Purchase of 200,000 Shares of Class A Common Stock
of Hometown Auto Retailers, Inc.
Dated as of July __, 1998
Warrants Void After
July _____, 2003
--------------------------------------------------------
<PAGE>
REPRESENTATIVE'S WARRANT AGREEMENT, dated as of July __, 1998, between
HOMETOWN AUTO RETAILERS, INC., a Delaware corporation (the "Company"), and
PAULSON INVESTMENT COMPANY, INC. (the "Representative").
W I T N E S S E T H:
WHEREAS, the Representative has agreed pursuant to the Underwriting
Agreement (the "Underwriting Agreement") dated as of the date hereof between the
Company and the several Underwriters listed therein to act as the Representative
in connection with the Company's proposed public offering of up to 2,000,000
shares of Class A common stock, par value $.001 per share (the "Common Stock"),
plus 300,000 shares covered by an over-allotment option (the "Over-Allotment
Option") at a public offering price between $9.00 and $11.00 per share of Common
Stock (the "Public Offering"); and
WHEREAS, pursuant to the Underwriting Agreement, the Company proposes to
issue to the Representative warrants (the "Warrants") entitling the holders
thereof to purchase up to an aggregate of 200,000 shares of Common Stock, at a
price of $____ per Warrant; and
WHEREAS, the Warrants to be issued pursuant to this Agreement will be
issued on the Closing Date (as such term is defined in the Underwriting
Agreement) by the Company to the Representative in consideration for, and as
part of the Representative's compensation in connection with, the Representative
acting as the Representative pursuant to the Underwriting Agreement;
NOW, THEREFORE, in consideration of the premises, the payment by the
Representative to the Company of an aggregate of $10.00, and other good and
valuable consideration, the receipt and sufficiency which is hereby
acknowledged, the parties hereto agree as follows:
THE REPRESENTATIVE (OR ITS DESIGNEES) IS HEREBY GRANTED THE RIGHT TO
PURCHASE, AT ANY TIME FROM JULY ____, 1999, UNTIL 5:00 P.M., PACIFIC TIME, ON
JULY _____, 2003, UP TO AN AGGREGATE OF 200,000 SHARES OF COMMON STOCK AT AN
INITIAL EXERCISE PRICE (SUBJECT TO ADJUSTMENT AS PROVIDED IN SECTION 3 HEREOF)
OF $________ PER SHARE OF COMMON STOCK [120% OF THE PUBLIC OFFERING PRICE]
SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT.
The Warrants issued pursuant hereto are subject to the following terms and
conditions:
1. DEFINITIONS OF CERTAIN TERMS. Except as may be otherwise clearly
required by the context, the following terms have the following meanings:
(a) "Act" means the Securities Act of 1933, as amended.
(b) "Closing Date" means the date on which the Offering is closed.
<PAGE>
(c)"Commission" means the Securities and Exchange Commission.
(d) "Common Stock" means the common stock, par value $0.001 per share, of
the Company.
(e) "Company" means Hometown Auto Retailers, Inc., a Delaware corporation.
(f) "Company's Expenses" means any and all expenses payable by the Company
or the Warrantholder in connection with the offering described in the
Registration Statement, as defined below, except the Warrantholder's Expenses.
(g) "Effective Date" means the date on which the Registration Statement is
declared effective by the Commission.
(h) "Exercise Price" means the price at which the Warrantholder may
purchase one Share (or other Securities obtainable in lieu of one Share) upon
exercise of a Warrant as determined from time to time pursuant to the provisions
hereof. The initial Exercise Price is $__ per Share.
(i) "Offering" means the public offering of Shares made pursuant to the
Registration Statement.
(j) "Participating Underwriter" means any underwriter participating in the
sale of the Shares pursuant to the Registration Statement, as defined below.
(k) "Registration Statement" means the Company's registration statement
(File No. 333-52763), as amended as of the Closing Date.
(l) "Rules and Regulations" means the rules and regulations of the
Commission adopted under the Act.
(m) "Securities" means the securities obtained or obtainable upon exercise
of the Warrant(s) or securities obtained or obtainable upon exercise, exchange,
or conversion of such securities.
(n) "Share" means, as appropriate, either (i) a share of Common Stock
which is one of the shares of Common Stock offered to the public through the
prospectus included in the Registration Statement or (ii) an identical share of
Common Stock for which a Warrant is initially exercisable.
(o) "Warrant Certificate" means the certificate evidencing the Warrant(s),
a form of which is annexed hereto as Exhibit A.
(p) "Warrantholder" means the record holder of the Warrant(s) or
Securities. The initial Warrantholder is the Representative.
2
<PAGE>
(q) "Warrantholder's Expenses" means the sum of: (i) the aggregate amount
of cash payments (other than for expense allowances) made to an underwriter,
underwriting syndicate, or agent in connection with a public offering described
in Section 9 hereof multiplied by a fraction the numerator of which is the
aggregate sales price of the Securities sold by such underwriter, underwriting
syndicate, or agent in such offering and the denominator of which is the
aggregate sales price of all of the Securities sold by such underwriter,
underwriting syndicate, or agent in such offering and (ii) all out-of-pocket
expenses of the Warrantholder, except for the fees and disbursements of one firm
retained as legal counsel for the Warrantholder that will be paid by the
Company.
(r) "Warrant(s)" means the warrant(s) evidenced by the Warrant
Certificate, any similar certificate issued in connection with the Offering, or
any certificate obtained upon transfer or partial exercise of the Warrant(s)
evidenced by any such certificate.
2. EXERCISE OF WARRANT(S).
(a) All or any part of the Warrant may be exercised during a four-year
period commencing on the first anniversary of the Effective Date and ending at 5
p.m. Pacific Time on the fifth anniversary of the Effective Date (the "Exercise
Period") by surrendering the Warrant Certificate, together with appropriate
instructions, duly executed by the Warrantholder or by its duly authorized
attorney, at the office of the Company at 831 Straits Turnpike, Watertown,
Connecticut 06795, or at such other office or agency as the Company may
designate. Upon receipt of notice of exercise, the Company shall immediately
instruct its transfer agent to prepare certificates for the Securities to be
received by the Warrantholder upon completion of the Warrant exercise. When
such certificates are prepared, the Company shall notify the Warrantholder and
deliver such certificates to the Warrantholder (or as otherwise designated by
the Warrantholder's written instructions) immediately upon payment in full by
the Warrantholder, in lawful money of the United States, of the Exercise Price
payable with respect to the Securities being purchased. If the Warrantholder
shall represent and warrant that all applicable registration and prospectus
delivery requirements for their sale have been complied with upon sale of the
Securities received upon exercise of the Warrant(s), such certificates shall not
bear a legend with respect to the Act.
If fewer than all the Securities purchasable under the Warrant(s) are
purchased, the Company will, upon such partial exercise, execute and deliver to
the Warrantholder a new Warrant Certificate (dated the date hereof), in form and
tenor similar to the Warrant Certificate, evidencing that portion of the Warrant
not exercised. The Securities to be obtained on exercise of the Warrant(s) will
be deemed to have been issued, and any person exercising the Warrants will be
deemed to have become a holder of record of those Securities as of the date of
the payment of the Exercise Price.
(b) In addition to the method of payment set forth in paragraph (a) of
this Section 2 and in lieu of any cash payment required thereunder, the
Warrantholder shall have the right at any time and from time to time to exercise
the Warrant(s) in full or in part by surrendering the
3
<PAGE>
Warrant Certificate in the manner specified herein in exchange for the number of
shares of Common Stock equal to the quotient derived from DIVIDING the NUMERATOR
(which shall be an amount equal to the DIFFERENCE BETWEEN: (I) the number of
shares of Common Stock or other Securities as to which the Warrant is being
exercised MULTIPLIED by the per share Market Price, AND (II) the number of
shares of Common Stock or other Securities as to which the Warrant is being
exercised MULTIPLIED by the Exercise Price) BY the DENOMINATOR which shall be
the per share Market Price of the Common Stock. Solely for the purposes of this
paragraph, Market Price shall be calculated either: (i) on the date on which the
form of election attached hereto is deemed to have been sent to the Company
pursuant to Section 10 hereof (the "Notice Date") or (ii) as the average of the
Market Prices for each of the five trading days preceding the Notice Date,
whichever of (i) or (ii) is greater.
As used herein, the term "Market Price" at any date shall be deemed to be,
when referring to the Common Stock, the last reported sale price, or, in case no
such reported sale takes place on such day, the average of the last reported
sale prices for the last three (3) trading days, in either case as officially
reported by the principal securities exchange on which the Common Stock is
listed or admitted to trading or by the NASDAQ National Market ("NNM"), or, if
the Common Stock is not listed or admitted to trading on any national securities
exchange or quoted by the National Association of Securities Dealers Automated
Quotation System ("NASDAQ"), the average closing bid price as furnished by the
National Association of Securities Dealers, Inc. ("NASD") through NASDAQ or
similar organization if NASDAQ is no longer reporting such information, or if
the Common Stock is not quoted on NASDAQ, as determined in good faith (using
customary valuation methods) by resolution of the members of the Board of
Directors of the Company, based on the best information available to it.
3. ADJUSTMENTS IN CERTAIN EVENTS. The number, class, and price of
Securities for which the Warrant Certificate may be exercised are subject to
adjustment from time to time upon the happening of certain events as follows:
(a) If the outstanding shares of the Company's Common Stock are divided
into a greater number of shares or a dividend in stock is paid on the Common
Stock, the number of shares of Common Stock for which the Warrant(s) is (are)
then exercisable will be proportionately increased and the Exercise Price will
be proportionately reduced; and, conversely, if the outstanding shares of Common
Stock are combined into a smaller number of shares of Common Stock, the number
of shares of Common Stock for which the Warrant(s) is (are) then exercisable
will be proportionately reduced and the Exercise Price will be proportionately
increased. The increases and reductions provided for in this paragraph (a) of
Section 3 will be made with the intent and, as nearly as practicable, the effect
that neither the percentage of the total equity of the Company obtainable on
exercise of the Warrant(s) nor the price payable for such percentage upon such
exercise will be affected by any event described in this paragraph (a) of
Section 3.
(b) In case of any change in the Common Stock through merger,
consolidation, reclassification, reorganization, partial or complete
liquidation, purchase of substantially all the assets of the Company, or other
change in the capital structure of the Company, then, as a
4
<PAGE>
condition of such change, lawful and adequate provision will be made so that the
holder of the Warrant Certificate will have the right thereafter to receive upon
the exercise of the Warrant(s) the kind and amount of shares of stock or other
securities or property which it would have been entitled if, immediately prior
to such event, it had held the number of shares of Common Stock obtainable upon
the exercise of the Warrant(s). In any such case, appropriate adjustment will
be made in the application of the provisions set forth herein with respect to
the rights and interest thereafter of the Warrantholder, to the end that the
provisions set forth herein will thereafter be applicable, as nearly as
reasonably may be, in relation to any shares of stock or other property
thereafter deliverable upon the exercise of the Warrant(s). The Company will
not permit any change in its capital structure to occur unless the issuer of the
shares of stock or other securities to be received by the holder of the Warrant
Certificate, if not the Company, agrees to be bound by and comply with the
provisions of the Warrant Certificate.
(c) When any adjustment is required to be made in the number of shares of
Common Stock or other securities, or property purchasable upon exercise of the
Warrant(s), the Company will promptly determine the new number of such shares or
other securities or property purchasable upon exercise of the Warrant(s) and (i)
prepare and retain on file a statement describing in reasonable detail the
method used in arriving at the new number of such shares or other securities or
property purchasable upon exercise of the Warrant(s) and (ii) cause a copy of
such statement to be mailed to the Warrantholder within thirty (30) days after
the date of the event giving rise to the adjustment.
(d) No fractional shares of Common Stock or other securities will be
issued in connection with the exercise of the Warrant(s), but the Company will
pay, in lieu of fractional shares, a cash payment therefor on the basis of the
Market Price as that term is defined in paragraph (b) of Section 2.
(e) If preferred securities of the Company or securities of any subsidiary
of the Company are distributed pro rata to holders of any or all of the
Company's securities, such number of securities will be distributed to the
Warrantholder or its assignee upon exercise of its rights hereunder as such
Warrantholder or assignee would have been entitled to if the Warrant Certificate
had been exercised prior to such distribution. The provisions with respect to
adjustment of the Common Stock provided in this Section 3 will also apply to the
preferred securities and securities of any subsidiary to which the Warrantholder
or his assignee is entitled under this paragraph (e) of Section 3.
(f) Notwithstanding anything herein to the contrary, there will be no
adjustment made hereunder on account of the sale of the Common Stock or other
Securities purchasable upon exercise of the Warrant(s).
4. FORM OF WARRANT AFTER ADJUSTMENTS. The form of the Warrant
Certificates need not be changed because of any adjustments in the Exercise
Price or number of Shares, and warrant certificates theretofore or thereafter
issued may continue to express the same Exercise Price and number of Shares as
are stated in the respective Warrant Certificates as
5
<PAGE>
initially issued.
5. RESERVATION OF SHARES. The Company agrees that the number of shares
of Common Stock or other Securities sufficient to provide for the exercise of
the Warrant(s) upon the basis set forth above will at all times during the term
of the Warrant(s) be reserved for exercise.
6. VALIDITY OF SECURITIES. All Securities delivered pursuant the
exercise of the Warrant(s) will be duly and validly issued in accordance with
their terms, and the Company will pay all documentary and transfer taxes, if
any, in respect of the original issuance thereof upon exercise of the
Warrant(s).
7. RESTRICTION ON TRANSFER OF WARRANTS. The Holder of a Warrant
Certificate, by its acceptance thereof, covenants and agrees that the Warrants
are being acquired as an investment and not with a view to the distribution
thereof; that the Warrants may not be sold, transferred, assigned, hypothecated
or otherwise disposed of, in whole or in part, for a period of one (1) year from
the date hereof, except to officers, directors, or partners of the
Representative and members of the selling group.
8. REGISTRATION OF SECURITIES ISSUABLE ON EXERCISE OF WARRANT(S).
(a) The Company shall register the Securities with the Commission pursuant
to the Act so as to allow the unrestricted sale of the Securities to the public
from time to time during a five year period commencing on the first anniversary
of the Effective Date and ending at 5:00 p.m. Pacific Time on the fifth
anniversary of the Effective Date (the "Registration Period"). The Company
shall also file such applications and other documents necessary to permit the
sale of the Securities to the public during the Registration Period in those
states in which the Shares were qualified for sale in the Offering or such other
states as to which the Company and the Warrantholder agree. In order to comply
with the provisions of this Section 8(a), the Company shall not be required to
file more than one registration statement (excluding post-effective amendments
thereto). No registration right of any kind, "piggyback" or otherwise, is
required to be in effect longer than five years from the Closing Date.
Furthermore, the Company shall not be obligated to so register the Securities to
the extent that the Securities cease to be "restricted securities" within the
meaning of the Act and may be sold or otherwise disposed of and are freely
transferable by each holder thereof without registration under any applicable
securities law and are freely transferable by the transferees thereof without
any such registration.
(b) The Company shall pay all of the Company's Expenses and each
Warrantholder will pay its pro rata share of the Warrantholder's Expenses
relating to the registration, offer, and sale of the Securities.
(c) Except as specifically provided herein, the manner and conduct of the
registration, including the contents of the registration statement, will be
entirely in the control and at the discretion of the Company. The Company shall
file such post-effective amendments and
6
<PAGE>
supplements as may be necessary to maintain the currency of the registration
statement during the period of its use. In addition, if the Warrantholder
participating in the registration is advised by counsel that the registration
statement, in its opinion, is deficient in any material respect, the Company
shall use its best efforts to cause the registration statement to be amended to
eliminate the concerns raised.
(d) The Company shall furnish to the Warrantholder the number of copies of
a prospectus, including a preliminary prospectus, in conformity with the
requirements of the Act, and such other documents as the Warrantholder may
reasonably request in order to facilitate the disposition of Securities owned by
it.
(e) The Company shall, at the request of Warrantholder: (i) furnish an
opinion of the counsel representing the Company for the purposes of the
registration pursuant to this Section 9, addressed to the Warrantholder and any
Participating Underwriter, (ii) furnish an appropriate letter from the
independent public accountants of the Company, addressed to the Warrantholder
and any Participating Underwriter, and (iii) make representations and warranties
to the Warrantholder and any Participating Underwriter. A request pursuant to
this subsection (e) may be made on three occasions. The documents required to
be delivered pursuant to this subsection (e) will be dated within 30 days of the
request and will be, in form and substance equivalent to similar documents
furnished to the underwriters in connection with the Offering, with such changes
as may be appropriate in light of changed circumstances.
9. INDEMNIFICATION IN CONNECTION WITH REGISTRATION.
(a) In connection with its registration obligations, the Company shall
indemnify and hold harmless the selling Warrantholder, any person who controls
the selling Warrantholder within the meaning of the Act, and any Participating
Underwriter against any losses, claims, damages, or liabilities, joint or
several, to which the Warrantholder, controlling person, or Participating
Underwriter may be subject under the Act or otherwise; and it shall reimburse
each Warrantholder, each controlling person, and each Participating Underwriter
for any legal or other expenses reasonably incurred by the Warrantholder,
controlling person, or Participating Underwriter in connection with
investigating or defending any such loss, claim, damage, liability, or action,
insofar as such losses, claims, damages, or liabilities, joint or several (or
actions in respect thereof), arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained, on the effective
date thereof, in any such registration statement or any preliminary prospectus
or final prospectus, or any amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading; provided, however, that the Company will not be liable in any case
to the extent that any loss, claim, damage, or liability arises out of or is
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in any registration statement, preliminary prospectus,
final prospectus, or any amendment or supplement thereto, in reliance upon and
in conformity with written information furnished by the Warrantholder or any
person controlling the Warrantholder or any Participating Underwriter for use in
the preparation thereof. The indemnity agreement contained in this subparagraph
(a) will not apply to amounts paid to any
7
<PAGE>
claimant in settlement of any suit or claim unless such payment is first
approved by the Company, such approval not to be unreasonably withheld or
delayed.
(b) The selling Warrantholder, as a condition of the Company's
registration obligation, shall indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed any registration statement
or other filing or any amendment or supplement thereto, and any person who
controls the Company within the meaning of the Act, against any losses, claims,
damages, or liabilities to which the Company or any such director, officer, or
controlling person may become subject under the Act or otherwise, and shall
reimburse any legal or other expenses reasonably incurred by the Company or any
such director, officer, or controlling person in connection with investigating
or defending any such loss, claim, damage, liability, or action, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
out of or are based upon any untrue or alleged untrue statement of any material
fact contained in said registration statement, any preliminary or final
prospectus, or other filing, or any amendment or supplement thereto, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in said
registration statement, preliminary or final prospectus, or other filing, or
amendment or supplement, in reliance upon and in conformity with written
information furnished by the Warrantholder or any person controlling the
Warrantholder or any Participating Underwriter for use in the preparation
thereof; provided, however, that the indemnity agreement contained in this
subparagraph (b) shall not apply to amounts paid to any claimant in settlement
of any suit or claim unless such payment is first approved by the Warrantholder,
such approval not to be unreasonably withheld or delayed. In no event, however,
shall the selling Warrantholder's indemnification obligations exceed the value
of the Securities sold on behalf of such selling Warrantholder in connection
with such registration statement, preliminary or final prospectus, or other
filing.
(c) Promptly after receipt by an indemnified party under subparagraphs (a)
or (b) above of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party,
notify the indemnifying party of the commencement thereof, but the omission to
notify the indemnifying party will not relieve it from any liability that it may
have to any indemnified party otherwise than under subparagraphs (a) and (b).
(d) If any such action is brought against any indemnified party and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified parry; and after
notice from the indemnifying party to such indemnified party of its election to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
8
<PAGE>
10. RESTRICTIONS ON TRANSFER. The Warrant Certificate and the
Warrant(s) may not be sold, transferred, assigned or hypothecated except to
underwriters of the Offering or to individuals who are either a partner or an
officer or a director of such an underwriter or by will or by operation of law.
The Warrant(s) may only be exercised by one of the aforesaid persons or by a
successor entity or legal representative. The Warrant(s) may be divided or
combined, upon request to the Company by the Warrantholder, into a certificate
or certificates evidencing the same aggregate number of Warrants.
11. EXCHANGE AND REPLACEMENT OF WARRANT CERTIFICATES. Each Warrant
Certificate is exchangeable without expense, upon the surrender thereof by the
registered Holder at the principal executive office of the Company, for a new
Warrant Certificate of like tenor and date representing in the aggregate the
right to purchase the same number of Shares in such denominations as shall be
designated by the Holder thereof at the time of such surrender.
Upon receipt by the Company of evidence reasonably satisfactory to it of the
loss, theft, destruction or mutilation of any Warrant Certificate, and, in case
of loss, theft or destruction, of indemnity or security reasonably satisfactory
to it, and reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of the Warrant Certificate, if
mutilated, the Company will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
12. NO RIGHTS AS A STOCKHOLDER. Except as otherwise provided herein, the
Warrantholder will not, by virtue of ownership of the Warrant(s), be entitled
to any rights of a stockholder of the Company but will, upon written request to
the Company, be entitled to receive such quarterly or annual reports as the
Company distributes to its stockholders. If, however, at any time prior to the
expiration of the Warrants and their exercise, any of the following events shall
occur:
(a) the Company shall take a record of the holders of its shares of
Common Stock for the purpose of entitling them to receive a dividend or
distribution payable otherwise than in cash, or a cash dividend or
distribution payable otherwise than out of current or retained earnings or
capital surplus (in accordance with applicable law), as indicated by the
accounting treatment of such dividend or distribution on the books of the
Company; or
(b) the Company shall offer to all the holders of its Common Stock
any additional shares of capital stock of the Company or securities
convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefor; or
(c) a dissolution, liquidation or winding up of the Company (other
than in connection with a consolidation or merger) or a sale of all or
substantially all of its property, assets and business as an entirety shall
be proposed;
then, in any one or more of said events, the Company shall give written notice
of such event at
9
<PAGE>
least thirty (30) days prior to the date fixed as a record date or the date of
closing the transfer books for the determination of the stockholders entitled to
such dividend, distribution, convertible or exchangeable securities or
subscription rights, or entitled to vote on such proposed dissolution,
liquidation, winding up or sale. Such notice shall specify such record date or
the date of closing the transfer books, as the case may be. Failure to give
such notice or any defect therein shall not affect the validity of any action
taken in connection with the declaration or payment of any such dividend, or the
issuance of any convertible or exchangeable securities, or subscription rights,
options or warrants, or any proposed dissolution, liquidation, winding up or
sale.
13. NOTICE. All notices, requests, consents and other communications
required or permitted to be given hereunder will be in writing and may be served
personally or by mail; and if served will be addressed as follows:
If to the Company:
831 Straits Turnpike
Watertown, CT 06795
Attn: Joseph Shaker
President and Chief Executive Officer
and
Morse Zelnick Rose & Lander LLP
450 Park Avenue
New York, NY 10022
If to the Warrantholder:
at the address furnished
by the Warrantholder to the
Company for the purpose of
notice.
Any notice so given by mail will be deemed effectively given 48 hours after
mailing when deposited in the United States mail, registered or certified mail,
return receipt requested, postage prepaid and addressed as specified above. Any
party may by written notice to the other specify a different address for notice
purposes.
14. SUPPLEMENTS AND AMENDMENTS. The Company and the Representative may
from time to time supplement or amend this Agreement in a writing signed by both
parties without the approval of any Holders of Warrant Certificates (other than
the Representative) in order to cure any ambiguity, to correct or supplement any
provision contained herein which may be defective or inconsistent with any
provisions herein, or to make any other
10
<PAGE>
provisions in regard to matters or questions arising hereunder which the Company
and the Representative may deem necessary or desirable and which the Company and
the Representative deem shall not adversely affect the interests of the Holders
of Warrant Certificates.
15. SUCCESSORS. All the covenants and provisions of this Agreement
shall be binding upon and inure to the benefit of the Company, the
Representative, the Holders and their respective successors and assigns
hereunder.
16. TERMINATION. This Agreement shall terminate at the close of business
on July _____, 2003. Notwithstanding the foregoing, the indemnification
provisions of Section 10 shall survive such termination until the close of
business on July ___, 2008.
17. APPLICABLE LAW. This Warrant Agreement and the Warrant(s) issuable
pursuant to the provisions hereof will be governed by and construed in
accordance with the laws of the State of Oregon, without reference to conflict
of laws principles thereunder. All disputes relating to this Warrant Agreement
and/or the Warrant(s) issuable hereunder shall be tried before the courts of
Oregon located in Multnomah County, Oregon to the exclusion of all other courts
that might have jurisdiction.
18. ENTIRE AGREEMENT; MODIFICATION. This Agreement (including the
Underwriting Agreement to the extent portions thereof are referred to herein)
contains the entire understanding between the parties hereto with respect to the
subject matter hereof and may not be modified or amended except by a writing
duly signed by the party against whom enforcement of the modification or
amendment is sought
19. SEVERABILITY. If any provision of this Agreement shall be held to be
invalid or unenforceable by a court or competent jurisdiction, such invalidity
or unenforceability shall not affect any other provision of this Agreement.
20. CAPTIONS. The caption headings of the Sections of this Agreement are
for convenience of reference only and are not intended, nor should they be
construed as, a part of this Agreement and shall be given no substantive effect.
21. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be
construed to give to any person or corporation other than the Company and the
Representative and any other registered Holder(s) of the Warrant Certificates or
Shares any legal or equitable right, remedy or claim under this Agreement; and
this Agreement shall be for the sole benefit of the Company and the
Representative and any other registered Holders of Warrant Certificates or
Warrant Securities.
22. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall for all purposes be deemed to be an original,
and such counterparts shall together constitute but one and the same instrument.
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Representative's
Warrant Agreement to be duly executed, all as of the day and year first above
written.
HOMETOWN AUTO RETAILERS, INC.
By:
-------------------------------
Joseph Shaker
President and Chief Executive Officer
[Corporate Seal]
Attest:
- -------------------------------
Name:
Title:
Agreed and Accepted as of July _____,1998
PAULSON INVESTMENT COMPANY, INC.
By:
-----------------------------
Name:
Title:
12
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
THE SECURITIES ISSUABLE UPON EXERCISE OF THE WARRANTS REPRESENTED BY THIS
CERTIFICATE MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (ii) TO THE
EXTENT APPLICABLE, RULE 144 UNDER SUCH ACT (OR ANY SIMILAR RULE UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES), OR (iii) UPON RECEIPT BY THE ISSUER
OF AN OPINION OF COUNSEL, IF SUCH OPINION SHALL BE REASONABLY SATISFACTORY TO
COUNSEL FOR THE ISSUER, THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE.
THE TRANSFER OR EXCHANGE OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS
RESTRICTED IN ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., PACIFIC TIME, ________, 2003
NO. RW _______________ WARRANTS TO PURCHASE
______________________
SHARES OF COMMON STOCK
WARRANT CERTIFICATE
HOMETOWN AUTO RETAILERS INC.
(a Delaware corporation)
This WARRANT CERTIFICATE certifies that ___________________________ or its
registered assigns, is the registered holder of a Warrant to purchase, at any
time from July ___, 1999 until 5:00 p.m., Pacific time, on July _____, 2003
("Expiration Date"), up to 200,000 fully-paid and non-assessable shares of
common stock, $0.001 par value (the "Common Stock"), of HOMETOWN AUTO RETAILERS,
INC., a Delaware corporation (the "Company"), at the exercise price, subject to
adjustment in certain events (the "Exercise Price"), of $____________ per share
of Common Stock upon surrender of this Warrant Certificate and payment of the
A-1
<PAGE>
Exercise Price in cash or in warrants as provided in paragraphs (a) and (b), as
the case may be, of Section 2 of the Warrant Agreement (defined below) at an
office or agency of the Company, but subject to the conditions set forth herein
and in the Warrant Agreement dated as of July ____, 1998 between the Company and
Paulson Investment Company, Inc. (the "Warrant Agreement"). Payment of the
Exercise Price, where payment is made in cash pursuant to paragraph (a) of
Section 2 of the Warrant Agreement, shall be made by certified or official bank
check in New York Clearing House funds payable to the order of the Company or,
where payment is made in Warrant(s) pursuant to paragraph (b) of Section 2 of
the Warrant Agreement, by surrender of this Warrant Certificate, as provided in
the Warrant Agreement.
The Warrant(s) may not be exercised after 5:00 p.m., Pacific time, on the
Expiration Date, at which time the Warrant(s) shall become null and void.
The Warrants evidenced by this Warrant Certificate have been issued
pursuant to the Representative's Warrant Agreement, dated as of July ____, 1998,
between Hometown Auto Retailers, Inc. and Paulson Investment Company, Inc. (the
"Warrant Agreement") which Warrant Agreement is hereby incorporated by reference
in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations and duties
thereunder of the Company and the holder (the word "holder" meaning the
registered holder) of the Warrant(s).
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price and the type and/or number of the Company's securities
issuable upon exercise of the Warrant(s) may, subject to certain conditions, be
adjusted. In such event, the Company will, at the request of the holder, issue
a new Warrant Certificate evidencing the adjustment in the Exercise Price and
the number and/or type of securities issuable upon the exercise of the
Warrant(s); provided, however, that the failure of the Company to issue such new
Warrant Certificate shall not in any way change, alter, or otherwise impair, the
rights of the holder as set forth in the Warrant Agreement.
Upon due presentment for registration of transfer of this Warrant
Certificate at an office or agency of the Company, a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing a like number of securities
for which this Warrant may be exercised shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection with such transfer.
Upon the exercise of less than all of the securities for which this Warrant
may be exercised, the Company shall forthwith issue to the holder hereof a new
Warrant Certificate representing the remaining number of unexercised Warrants.
The Company may deem and treat the registered holder(s) hereof as the
absolute owner(s) of this Warrant Certificate (notwithstanding any notation of
ownership or other writing hereon made by anyone), for the purpose of any
exercise hereof, and of any distribution to the holder(s) hereof, and for all
other purposes, and the Company shall not be affected by any notice to the
contrary.
A-2
<PAGE>
All terms used in this Warrant Certificate which are defined in the Warrant
Agreement shall have the meanings assigned to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed under its corporate seal.
Dated as of July ___, 1998
HOMETOWN AUTO RETAILERS, INC.
By:
-------------------------------
Joseph Shaker
President and Chief Executive Officer
[Corporate Seal]
Attest:
- -----------------------------
Name:
Title:
A-3
<PAGE>
FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 2(a)
OF THE BELOW DESCRIBED WARRANT AGREEMENT
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ___________________ shares
of Common Stock and herewith tenders in payment for such securities a certified
or official bank check payable in New York Clearing House funds to the order of
Hometown Auto Retailers, Inc. in the amount of $________________, all in
accordance with the terms of Section 2(a) of the Representative's Warrant
Agreement, dated as of July ____, 1998, between Hometown Auto Retailers, Inc.
and Paulson Investment Company, Inc. The undersigned requests that a
certificate for such securities be registered in the name of
_____________________ whose address is __________________________ and that such
certificate be delivered to ______________ whose address is
________________________.
Dated: _______________________________
Signature:____________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate)
- --------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
A-4
<PAGE>
FORM OF ELECTION TO PURCHASE PURSUANT TO SECTION 2(b)
OF THE BELOW DESCRIBED WARRANT AGREEMENT
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase __________________ shares
of Common Stock and herewith tenders in payment for such securities such number
of the Warrant(s) as shall be determined in accordance with the terms of Section
2(b) of the Representative's Warrant Agreement, dated as of July ____, 1998,
between Hometown Auto Retailers, Inc. and Paulson Investment Company, Inc. The
undersigned requests that a certificate for such securities be registered in the
name of ____________________ whose address is _____________________and that such
certificate be delivered to _____________whose address is
________________________________________. The undersigned also requests that a
certificate for the remaining number of unexercised warrants be registered in
the name of ___________ whose address is _____________________________ and that
such certificate be delivered to ________________________ whose address is
______________________________________________.
Dated: _______________________________
Signature:____________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate)
- --------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
A-5
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to
transfer the Warrant Certificate or any part thereof, such
assignment to be subject to restrictions of the
Warrant Agreement referred to in the
Warrant Certificate.)
FOR VALUE RECEIVED, ______________________ hereby sells, assigns and transfers
unto _________________________________________
(Please print name and address of transferee)
[this Warrant Certificate] [________ warrants exercisable pursuant to this
Warrant Certificate], together with all right, title and interest therein. The
undersigned requests that a certificate for such securities be registered in the
name of _________________________whose address is
_________________________________ and that such certificate be delivered to
__________________ whose address is ________________________________________.
The undersigned also requests that a certificate for the remaining number of
unexercised warrants be registered in the name of ____________ whose address is
____________________________ and that such certificate be delivered to
________________________ whose address is
______________________________________________.
Dated: _______________________________
Signature:____________________________
(Signature must conform in all
respects to name of holder as
specified on the face of the Warrant
Certificate)
- --------------------------------------
(Insert Social Security or Other
Identifying Number of Holder)
A-6
<PAGE>
Exhibit 5.1
MORSE, ZELNICK, ROSE & LANDER, L.L.P.
450 PARK AVENUE
NEW YORK, NY 10022-2605
PHONE: (212) 838-1177
FAX: (212) 838-9190
July 7, 1998
Hometown Auto Retailers, Inc.
831 Straits Turnpike
Watertown, CT 06795
Dear Sirs:
We have acted as counsel to Hometown Auto Retailers, Inc., a Delaware
corporation (the "Company"), in connection with the preparation of a
registration statement on Form S-1 (the "Registration Statement") filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"), to register the offering by the Company of (a) 2,000,000 shares of
Class A Common Shares, $.001 par value per share, (the "Common Stock")
(2,300,000 shares of Class A Common Stock if the over-allotment option is
exercised in full), (b) Class A Common Stock Purchase Warrants to be issued to
the representative of the underwriters (the "Representative's Warrants"), (c)
200,000 shares (plus such additional indeterminate number of shares as may
become issuable pursuant to the anti-dilution provisions of the Representative's
Warrants) of Class A Common Stock underlying the Representative's Warrants and
(d) such additional number of shares of Common Stock as may be offered by the
Company and as may underlie the Representative's Warrants covered by any
additional registration statement filed pursuant to Rule 462 promulgated under
the Securities Act of 1933, as amended.
In this regard, we have reviewed the Certificate of Incorporation of the
Company, as amended and restated, resolutions adopted by the Company's Board of
Directors, the Registration Statement, the proposed form of the Representative's
Warrants, the other exhibits to the Registration Statement and such other
records, documents, statutes and decisions as we have deemed relevant in
rendering this opinion. Based upon the foregoing, we are of the opinion that:
Each share of Class A Common Stock being offered, the Representative's
Warrants, and the shares of Class A Common Stock underlying the Representative's
Warrants have been duly and validly authorized for issuance and when issued and
sold as contemplated by the Registration Statement or upon exercise of the
Representative's Warrants will be legally issued, fully paid and non-assessable.
Partners, associates and employees of this firm own, in the aggregate,
60,000 shares of Class A Common Stock.
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement. In giving such opinion, we do not hereby admit that we
are acting within the category of persons whose consent is required under
Section 7 of the Act or the rules or regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
/s/ Morse, Zelnick, Rose & Lander, LLP
---------------------------------------
MORSE, ZELNICK, ROSE & LANDER, LLP
<PAGE>
Exhibit 10.2
HOMETOWN AUTO RETAILERS, INC.
C/O MORSE, ZELNICK, ROSE & LANDER, LLP
450 PARK AVENUE
NEW YORK, N.Y. 10022
(212) 838-1177
July 8, 1998
Brattleboro Chrysler Plymouth Dodge, Inc.
P.O. Box 8068
North Brattleboro, VT 05304
Attention: Philip Price, President
Gentlemen:
Hometown Auto Retailers, Inc. ("Purchaser") is party to an acquisition
agreement with Brattleboro Chrysler Plymouth Dodge, Inc. ("Seller") dated July
2, 1997, as previously amended (the "Agreement").
The Agreement is hereby further amended as follows:
The last sentence of Section 9 of the Agreement is modified by deleting the
date "July 15, 1998" and substituting in its place "July 31, 1998".
The Agreement, as modified by this amendment, is hereby ratified and
reaffirmed.
Very truly yours,
HOMETOWN AUTO RETAILERS, INC.
by:___________________________
JOSEPH SHAKER, PRESIDENT
ACCEPTED AND AGREED TO THIS
8TH DAY OF JULY, 1998
BRATTLEBORO CHRYSLER PLYMOUTH DODGE, INC.
BY: /s/ PHILIP PRICE
-----------------------------
PHILIP PRICE, PRESIDENT
SHAREHOLDERS CONSENT:
/s/ PHILIP PRICE
- --------------------------------
PHILIP PRICE
<PAGE>
Exhibit 10.11
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT dated as of the 20th day of April, 1998 between
HOMETOWN AUTO RETAILERS, INC., a Delaware corporation (the "COMPANY"), with its
principal place of business at 831 Straits Turnpike, Watertown, CT 06795 and
MATTHEW J. VISCONTI JR. ("EXECUTIVE"), residing at 657 Daniel Court, Wyckoff, NJ
07481.
1. TERM.
(a) Subject to the terms and conditions hereof, the term of employment of
the Executive under this Agreement shall be for the five year period (the
"EMPLOYMENT PERIOD") commencing (the "COMMENCEMENT DATE") on the closing date of
the initial public offering of the Common Stock of the Company (the "OFFERING")
and expiring on the fifth anniversary thereof, unless sooner terminated as
provided in any of Sections 5, 6 or 7 hereof (the "TERMINATION DATE").
(b) The parties agree to use their reasonable best efforts to commence
discussions beginning on the fourth anniversary of the Commencement Date with
respect to the status of the Executive's employment after the Termination Date.
2. DUTIES AND RESPONSIBILITIES. The Company shall employ the Executive,
and the Executive accepts such employment, as Vice President--Mergers and
Acquisitions of the Company during the Employment Period. The Executive shall
report
<PAGE>
to and be subject to the direction of the President and Chief Operating Officer
of the Company and shall render such executive and administrative services as
the Board of Directors may from time to time assign to him, provided they are
consistent with his status as Vice President--Mergers and Acquisitions. During
the Employment Period, the Executive shall devote his full time, energy, skill
and attention to the businesses of the Company and shall perform his duties in a
diligent, trustworthy, loyal and businesslike manner. Notwithstanding the
foregoing, the Executive shall have the right to engage in limited real estate
brokerage activities and to direct financing transactions to Falcon Financial,
LLC, PROVIDED, HOWEVER, that none of such activities shall, in the opinion of
the President, interfere with the performance by the Executive of his duties for
the Company and, PROVIDED, FURTHER, that none of such activities shall be
commenced by the Executive without the prior written consent in each instance of
the President in his sole discretion.
3. COMPENSATION AND BENEFITS. During the Employment Term:
(a) The Executive's base compensation shall be at the rate of
$150,000 per year, payable in regular installments in accordance with the
Company's practice for its executives, less applicable withholding for income
and employment taxes as required by law and other deductions as to which the
Executive shall agree. Such base compensation shall be subject to increases as
and when determined by the Board in its sole discretion.
(b) Except as otherwise herein provided, the Executive shall be
entitled to participate, to the extent he qualifies, in any bonus or other
incentive compensation, profit-sharing or retirement plans, life or health
insurance plans or other
2
<PAGE>
benefit plans maintained by the Company, upon such terms and conditions as are
generally made available to executives of the Company.
(c) The Executive shall be entitled to reimbursement of all
reasonable, ordinary and necessary business related expenses incurred by him in
the course of his duties and upon compliance with the Company's procedures.
(d) The Executive shall be entitled to paid vacation during each
calendar year in accordance with the policies and procedures of the Company in
effect from time to time.
4. STOCK OPTIONS. The Company's present intention is to adopt a Stock
Option Plan (the "STOCK OPTION PLAN"). Promptly following its adoption of the
Stock Option Plan, the Company shall grant to the Executive options (the "STOCK
OPTIONS") to acquire 14,000 shares of Class A Common Stock, par value $.001 per
share, of the Company (the "COMMON STOCK") at a price equal to the per share
price to the public in the Offering and upon such other terms and conditions as
are set forth therein. Such Stock Options are intended to constitute Incentive
Stock Options as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "CODE") to the maximum extent permitted under the Code. Such Stock
Options may be exercised at such time and in such manner as provided in the
Stock Option Agreement; PROVIDED, HOWEVER, that one-third of such Stock Options
shall vest and become exercisable on each anniversary of the Commencement Date
during the Employment Period. In the event that the Executive's employment is
terminated for any reason other than death or Disability (as defined in Section
5 hereof) any nonvested Incentive Stock Options shall immediately be cancelled
without any further action being required to be taken by the Company.
3
<PAGE>
5. TERMINATION IN CASE OF DISABILITY; DEATH. In case of a Disability
which, for purposes of this Agreement only, shall mean that as a result of
illness or injury, the Executive is unable substantially to perform his duties
hereunder for a period of at least 180 consecutive days, or a total of at least
270 days in any period of 365 consecutive days, the Company may terminate the
Executive's employment hereunder upon giving the Executive at least thirty (30)
days' written notice of termination. In addition, this Agreement shall
automatically terminate upon the death of the Executive.
6. TERMINATION BY THE COMPANY FOR CAUSE.
(a) The Company may terminate the Executive's employment for Cause
(as defined in paragraph (b) below). Upon such termination, the Company shall
have no further obligations to the Executive on account of his employment by the
Company.
(b) "CAUSE" shall mean (i) a material breach by the Executive of any
of the terms, covenants, agreements or representations set forth herein, or (ii)
the Executive's engaging in misconduct which is materially injurious to the
Company, monetarily or otherwise, including, but not limited to, engaging in any
conduct which constitutes a crime under federal, state or local laws (other than
minor traffic violations).
7. TERMINATION BY THE EXECUTIVE FOR GOOD REASON. The Executive may
terminate his employment for "GOOD REASON" if: (i) he is assigned, without his
express written consent, any duties inconsistent with his positions, duties,
responsibilities, authority and status with the Company as of the date hereof,
or any adverse change in his reporting responsibilities or titles as in effect
as of the date hereof except in connection with the termination of his
employment by him without Good Reason; or (ii) his
4
<PAGE>
compensation is reduced other than in connection with a Company-wide reduction
of executive compensation. Upon such termination, the Company's sole obligation
to the Executive, in addition to paying any amounts owed to the Executive
through the date of termination, shall be to continue paying the base
compensation provided for herein, subject to any reduction permitted by
applicable law in connection with the Executive's duty to mitigate such damages.
The Executive hereby agrees that he shall not have any other claims or rights
against the Company.
8. DATE AND TERMS OF TERMINATION. "DATE OF TERMINATION" shall mean
the date on which a notice of termination is given. In the event of termination
under paragraph 5, 6 or 7, the Executive or his estate, as the case may be,
shall be entitled to salary and benefits accrued to the Date of Termination, as
well as the right to convert benefits such as health, disability and life
insurance to his own name and continue the same at his own expense. In the
event of termination by the Executive pursuant to paragraph 7, there shall be no
duty on the part of the Executive to mitigate damages which may be suffered by
the Company on account of such termination.
9. CERTAIN EMPLOYEE COVENANTS.
9.1 CONFIDENTIALITY. The Executive agrees that during the term hereof, or
at any time thereafter, he will not, directly or indirectly, use for his own
benefit or for the benefit of any third party, or reveal or cause to be revealed
to any person, firm, entity or corporation, any Confidential Information (as
defined herein) which relates to the Company or any Affiliate of the Company or
any of their customers and that upon termination of his employment he will
deliver all lists of customers, notes, records and all other property belonging
to the Company or any Affiliate of the Company or relating to
5
<PAGE>
its or their business or customers. "CONFIDENTIAL INFORMATION" shall include,
but not be limited to, trade secrets, supplier lists, customer lists,
intellectual property and any other information, whether or not proprietary,
which relates to the business of the Company or any Affiliate of the Company and
which otherwise is not considered to be public information. Confidential
Information shall not include general information regarding the automotive
industry which is generally known to those involved in the operation of an
automotive dealership.
9.2 NON-COMPETE. The Executive further agrees that during the term of
this Agreement and for a period of two (2) years after the termination of this
Agreement, he will not, directly or indirectly, in any manner: (i) engage in any
other business in which the Company or any Affiliate of the Company is engaged
on the Date of Termination within a 20-mile radius of any business then
conducted by the Company or any Affiliate of the Company, and will not, directly
or indirectly, own, manage, operate, join, control or participate in the
ownership, management, operation or control of, or be employed by or connected
in any manner with any corporation, firm, entity, or business that is so engaged
unless duly authorized by written consent of the Company; PROVIDED, HOWEVER,
that nothing herein shall prohibit the Executive from owning not more than three
(3%) percent of the outstanding stock of any publicly held corporation, (ii)
persuade or attempt to persuade any employee of the Company or of any Affiliate
of the Company to leave the employ of the Company or of such Affiliate or to
become employed by any other entity, (iii) persuade or attempt to persuade any
current client or former client to reduce the amount of business it does or
intends or anticipates doing with the Company or with any Affiliate of the
Company or (iv) take any action which might divert from the
6
<PAGE>
Company or any Affiliate of the Company any opportunity of which he became aware
during his employment with the Company or with any Affiliate of the Company
which would be within the scope of any of the businesses then engaged in or
planned to be engaged in by the Company or any Affiliate of the Company.
9.3 GENERAL PROVISIONS.
(a) The Executive acknowledges that a violation of any of the covenants
contained in paragraph 2 or in this paragraph 9 may cause irreparable injury to
the Company or any Affiliate of the Company and that the Company, including any
Affiliate of the Company, will be entitled, in addition to any other rights and
remedies it may have, to injunctive relief; PROVIDED, HOWEVER, that nothing
contained herein constitutes a waiver by the Executive of his rights to contest
the existence of any such violation of such covenants.
(b) In the event the covenants contained in this paragraph 9 should be
held by any court or other duly constituted judicial authority to be void or
otherwise unenforceable in any particular jurisdiction or with respect to any
particular activity, then such covenants so affected shall be deemed to have
been amended and modified so as to eliminate therefrom the particular
jurisdiction or activity as to which such covenants are so held to be void or
otherwise unenforceable, and, as to all other jurisdictions and activities
covered hereby, the terms and provisions hereof shall remain in full force and
effect.
(c) As used herein, the term "AFFILIATE" shall mean any corporation or
other entity of which the Company owns, directly or indirectly, at least 40% of
the equity interest thereof.
7
<PAGE>
(d) In the event that this Agreement shall be terminated, then
notwithstanding such termination, the provisions of this paragraph 9 shall
survive such termination.
10. EXECUTIVE REPRESENTATIONS. The Executive hereby represents and
warrants to the Company that he is not a party to any other agreement or
understanding, whether of employment or otherwise, which would in any way
restrict or prohibit him from undertaking or performing the duties and
obligations provided for herein in accordance with the terms and conditions of
this Agreement.
11. SUCCESSORS; BINDING AGREEMENT. This Agreement shall inure to the
benefit of and be enforceable by the parties hereto, their personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Executive should die while any amount would still
be payable to him hereunder had he continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to his devisee, legatee or other designee or, if there be no such
designee, to his estate.
12. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by certified or
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement (except that
all notices to the Company shall be directed to the attention of a senior
officer of the Company other than the Executive, with a copy to the Secretary of
the Company) or to such other address as either party may have furnished to the
other in writing in accordance herewith, except that notice of change of address
shall be effective only upon receipt.
8
<PAGE>
13. GOVERNING LAW; CHANGE OR TERMINATION. This Agreement shall be
governed by, and construed in accordance with, the laws of the State of
Connecticut applicable to agreements made and to be performed in Connecticut,
and may not be changed or terminated orally.
14. VALIDITY. The invalidity or unenforceability of any provision of this
Agreement in any respect shall not affect the validity or enforceability of such
provision in any other respect or of any other provision of this Agreement, all
of which shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Employment
Agreement to be duly executed and delivered as of the date first hereinabove
written.
Hometown Auto Retailers, Inc.
By: /s/ Joseph Shaker
---------------------------------
Joseph Shaker
President and Chief Operating Officer
/s/ Matthew J. Visconti Jr.
------------------------------------
Matthew J. Visconti Jr.
9
<PAGE>
Exhibit 10.23
LEASE
-----
THIS LEASE, made as of April 20, 1998, between the Landlord identified on
Schedule A ("Landlord") and HOMETOWN AUTO RETAILERS, INC., a Delaware
corporation, having its principal office at 831 Straits Turnpike, Watertown,
Connecticut 06795 ("Tenant").
W I T N E S S E T H:
ARTICLE 1 - CERTAIN BASIC TERMS
1.1 SCHEDULE A hereto contains certain basic terms of this Lease,
including the Premises, Commencement Date, Expiration Date, Base Rent and, if
applicable, Lease Extension Option and Premises Purchase Option. Certain
capitalized terms used herein shall have the meanings set forth in Schedule A.
ARTICLE 2 - DEMISE AND TERM
2.1 Upon and subject to the terms and conditions set forth herein,
Landlord hereby leases to Tenant, and Tenant hereby hires from Landlord, the
Premises. Each party hereby expressly covenants and agrees to observe and
perform all of the obligations herein contained on its part to be observed and
performed.
2.2 The term of this Lease (the "TERM") shall commence on the
"COMMENCEMENT DATE" and, unless this Lease is sooner terminated as provided
herein, shall continue to and end at midnight on the "EXPIRATION DATE," such
terms as defined in Schedule A hereto.
2.3 If Schedule A specifically so provides and provided no default
has occurred and is continuing beyond any applicable grace period, Tenant shall
have the option to extend the term of this Lease (the "EXTENSION TERM"), on the
same terms and conditions contained in this Lease, except that the annual Base
Rent during the Extension Term shall be as set forth in Schedule A. If
applicable, Tenant may exercise such extension option by giving notice to
Landlord of its intention to extend the Term on or before the date that is six
months before the Expiration Date of the initial Term of this Lease. If so
extended, the word "Term" shall include the Extension Term as if the same were
originally included in the initial Term of this Lease.
ARTICLE 3 - BASE RENT
3.1 Tenant shall pay to Landlord, at Landlord's address shown above,
or at such other address as Landlord may from time to time designate in writing,
an annual rental
<PAGE>
(the "BASE RENT") set forth in Schedule A. Such rent shall be payable without
notice or demand and without deduction or abatement or set off.
3.2 The Base Rent shall be payable in consecutive monthly
installments in advance on the first day of each calendar month during the Term.
If the Commencement Date or the Expiration Date does not fall on the first day
of a calendar month, then the first and last payments shall be for only the
portion of the month attributable to the Term prorated on a daily basis.
3.3 It is the purpose and intent of Landlord and Tenant that, except
as provided in Sections 8.1 (structural repairs and replacements) and 17
(environmental matters), the Base Rent shall be absolutely net to Landlord, so
that this Lease shall yield, except as otherwise provided in Sections 8.1 and
17, net, to Landlord, the Base Rent specified in Schedule A hereof, in each year
during the term hereof and that all costs, expenses and obligations of every
kind and nature whatsoever relating to the Premises (except the taxes of
Landlord referred to in Section 5.3 hereof) which may arise or become due during
the term hereof shall be paid by Tenant. Landlord's obligations with respect to
structural and environmental matters shall be referred to hereinafter as
"LANDLORD'S OBLIGATIONS".
3.4 Tenant shall also pay without notice, except as may be required
in this Lease, and without abatement, deduction or set-off as additional rent,
all sums, "Impositions" (as defined in Section 5.1 hereof), costs, expenses and
other payments which Tenant in any of the provisions of this Lease assumes or
agrees to pay, and, in the event of any non-payment thereof, Landlord shall have
(in addition to all other rights and remedies) all the rights and remedies
provided for herein or by law in the case of non-payment of the Base Rent.
ARTICLE 4 - CPI ADJUSTMENT
4.1 At the expiration of the initial period thereafter ending
December 31, 2003 and each five year period during the Term, the Base Rent shall
be subject to CPI adjustment as follows:
At the expiration of the initial period ending December 31, 2003 and
each five year period thereafter, the annual rent for the succeeding five year
period shall be determined by multiplying the annual Base Rent in effect for the
immediately preceding five year period times the "CPI Factor" (as hereinafter
defined), PROVIDED, HOWEVER, that the CPI Factor shall never be less than 1.00.
As used herein, the "CPI FACTOR" which shall be determined at the
expiration of each five year period during the Term, shall be determined as
follows:
(A) The United States Bureau of Labor Statistics "Consumer Price
Index for Urban Consumers All Items-U.S. City Average" (commonly referred
to as "CPI-U"), as the same may from time to time be revised, updated or
replaced, hereinafter referred to as the "INDEX" (if said index is no
longer published, Landlord will use a comparable
2
<PAGE>
index) shall be used to determine the CPI Factor set forth in subsection
(B) immediately below;
(B) The index value in effect for December 1997, December 2003 and
each subsequent December at the end of a five-year period shall be the "OLD
CPI"; the index value for December 2003 and each subsequent December at the
end of a five year period shall be the "NEW CPI"; and the CPI Factor shall
be determined by the following formula:
Base Rent as adjusted by CPI = 1 + (NEW CPI - OLD CPI)
-------------------
Old CPI
4.2 For example: If the CPI for December of 1997 were 354.4 ("Old
CPI") and the CPI for December 2003 were 379.2 ("New CPI"), the CPI factor would
be 1.0699. If the previous annual Base Rent were $30,000, then the new annual
Base Rent for the period commencing January 2004 would be $32,097.
ARTICLE 5 - REAL ESTATE TAXES
5.1 Tenant shall pay, as additional rent, all Real Estate Taxes
(including personal property taxes, if any), assessments, water and sewer rent
rates and charges, charges for public utilities, excise levies, license and
permit fees and other governmental charges, general and specified, of any kind
whatsoever (collectively "IMPOSITIONS") assessed against the Premises with
respect to the Term, but not income, franchise or other taxes assessed against
Landlord's income or profits. Such payments shall be made within thirty (30)
days after receipt of a bill therefor from Landlord, which bill shall contain a
copy of the municipal or other taxing authority tax bill. Tenant shall be
entitled to the benefit of any statute or ordinance permitting Real Estate Taxes
to be paid in installments and, upon such election, Tenant's payments hereunder
shall be made in such installments. Landlord shall bill Tenant for the
applicable installment at least thirty (30) days before the installment may be
paid to the taxing authority without interest or penalty, and Tenant shall not
be responsible for any such interest or penalty resulting from Landlord's delay
in payment of such amounts to the taxing authority.
5.2 Tenant shall have the right to contest the amount or validity, in
whole or in part, of any Real Estate Tax, or to seek a reduction in the
valuation of the Premises, or any part thereof, as assessed for Real Estate Tax
purposes, by appropriate proceedings diligently conducted in good faith.
Landlord shall cooperate with any such tax reduction proceeding. If Landlord
receives notice of an increase in the Real Estate Tax assessment for the
Premises and fails to notify Tenant of such increase at least 30 days before the
last day for filing an objection to such increase, then Tenant shall not be
responsible for paying any Real Estate Taxes to the extent they result from such
increased assessment. Any refund of Real Estate taxes with respect to the Term
shall promptly be paid to and be the property of Tenant.
3
<PAGE>
5.3 Real Estate Taxes shall be apportioned between Landlord and
Tenant as of the beginning and the expiration or sooner termination of the Term,
so that Tenant shall pay only the portion of the Real Estate Taxes allocable to
the Term; PROVIDED, HOWEVER, that Landlord need not make any apportionment in
favor of Tenant if this Lease shall have been terminated by reason of an Event
of Default.
ARTICLE 6 - USE AND COMPLIANCE
6.1 Tenant may use and occupy the Premises as an automotive
dealership which shall include the purchase, sale, trade, storage, repair and
servicing of new and used motor vehicles and related tools and equipment and for
any other legal purpose related to the conduct of such business. Landlord
warrants that said permitted use complies with the existing zoning of the
Premises. In the event of any change in zoning laws or regulations that would
restrict Tenant's use as aforesaid, Tenant shall have the right to terminate
this Lease without any further obligation except with respect to any amounts
owing for use by Tenant prior to such termination.
6.2 Tenant shall, at its expense, substantially comply or cause
compliance with all laws, statutes, ordinances, orders, rules, regulations and
requirements of all governmental units applicable to the Premises ("LEGAL
REQUIREMENTS") and all requirements of insurance rating organization applicable
to the Premises ("INSURANCE REQUIREMENTS"), foreseen or unforeseen, ordinary as
well as extraordinary, whether or not the same shall presently be within the
contemplation of the parties hereto, which are related to Tenant's particular
use of the Premises, except that Landlord shall, at its expense, promptly comply
with any Legal Requirements or Insurance Requirements which have been or are
being violated as of the date hereof.
6.3 Tenant shall have the right, after notice to Landlord, to contest
by appropriate legal proceedings, diligently conducted in good faith, the
validity or application of any Legal Requirement or Insurance Requirement and
Landlord shall cooperate in such proceedings.
6.4 Landlord shall, at its expense, procure and maintain at all times
during the Term a certificate of occupancy for the Premises permitting the use
described in Section 6.1.
[balance of this page intentionally left blank]
4
<PAGE>
ARTICLE 7 - INSURANCE
7.1 Tenant shall at all times during the Term, at its expense keep
the Premises insured for the mutual benefit of Landlord and Tenant against loss
or damage by fire and against such other risks as would be covered by an
extended coverage endorsement to a fire insurance policy in an amount not less
than one hundred percent (100%) of the full replacement value of the buildings,
improvements and fixtures then a part of the Premises if such one hundred
percent (100%) coverage is available from any insurance company of recognized
responsibility licensed to do business in the state where the Premises are
located. If such insurance is not available, the Tenant shall take out
insurance in an amount not less than the amount sufficient to avoid the effect
of the co-insurer provisions of the applicable policy or policies.
7.2 Tenant shall, at its own expense, but for the mutual benefit and
protection of Landlord and Tenant, maintain:
(a) general public and garage liability insurance against claims for
bodily injury or death or property damage occurring upon, in or about the
Premises and on, in or about the adjoining roads, ways, sidewalks, and
passageways, such insurance to afford protection to the limit of not less than
three million dollars ($3,000,000)
(b) automobile liability insurance to the limit of not less than one
million dollars ($1,000,000);
(c) fire and extended coverage (including water damage and malicious
vandalism) insurance for property of tenant and bailors in an amount equal to
the full replacement cost; and
(d) such other insurance, insuring loss, damage or injury occurring
to or on the Premises as is usual and customary for the protection of leased
premises of this character or as may be deemed from time to time prudent and
reasonable in view of new risks or changed conditions.
7.3 Within fifteen days (15) from the execution of this Lease and
thereafter not less than fifteen days (15) prior to the expiration dates of the
expiring policies theretofore furnished pursuant to this Article 7, certificates
of insurance issued by the respective insurers shall be delivered by Tenant to
Landlord.
7.4 All policies of insurance relating to the Premises procured by
Tenant shall name Landlord and Tenant as the insured as their respective
interests may appear. All such policies, or certificates therefor, issued by
the respective insurers shall cover any increased risks as a result of
construction, repairs, alterations and additions to the Premises and shall
contain an agreement by such insurers that such policies shall not be cancelled
without at least ten (10) days' prior written notice to Tenant and Landlord.
All such policies of insurance
5
<PAGE>
shall provide that any proceeds from any insured loss shall be payable to
Landlord, subject to any prior right of any mortgagee notwithstanding any act of
negligence of Tenant which might otherwise result in forfeiture of said
insurance. Landlord shall have the right to negotiate, to adjust and settle
with the insurers on behalf of Landlord and Tenant.
7.5 Tenant, as its option, may keep all equipment and personalty on
the Premises insured with the insurer of its choice and for the benefit of
Tenant.
ARTICLE 8 - REPAIRS AND MAINTENANCE OF PREMISES
8.1 Tenant shall maintain the Premises, including buildings,
improvements, parking areas, walks and paved areas, and keep the same in good
order and condition throughout the Term of this Lease, PROVIDED, HOWEVER, that
Tenant shall have no obligation to make any structural repairs or improvements.
In addition, Tenant shall have the right to make such nonstructural changes,
alterations, repairs and improvements in or upon the Premises, including in or
upon the interior of any building or other improvement located thereon, during
the term hereof as it may desire. Tenant may install awnings, advertisements,
or signs on any part of the Premises. Except as provided in Section 11.1 with
respect to Landlord's obligations following a casualty and in Section 12.2 with
respect to Landlord's obligations following the Taking of a "material portion of
the Premises" (as defined in Section 12.1), all non-structural changes and
repairs shall be performed at Tenant's sole cost and expense. Tenant shall not
make any structural changes to the Premises except upon the consent of the
Landlord which shall not be unreasonably withheld or delayed.
8.2 Landlord, at its sole cost and expense, shall, in addition to its
obligations under Articles 11 and 12 of this Lease, make all structural changes,
alterations and repairs to the Premises, including any building or improvements
located thereon, upon prior notice to Tenant at mutually agreeable times which
will not interfere with the conduct of Tenant's business on the Premises as
normally conducted to the extent such changes are necessary for the repair,
replacement or restoration of the building or improvements on the Premises.
8.3 The party performing the changes, alterations, improvements
and/or repairs contemplated by Sections 8.1 and 8.2 hereby agrees that it shall
indemnify the other party hereto and hold such party harmless from any cost,
expenses, damages and/or liability arising out of the performance of such work
in accordance with Article 16.
8.4 All trade fixtures, appliances and other equipment and property
placed or installed in or on the Premises by Tenant shall remain the property of
Tenant and, unless the parties hereto otherwise agree, Tenant shall remove the
same at the expiration of this Lease and restore the Premises to their original
condition after such removal.
6
<PAGE>
8.5 (a) No change or alteration of the Building shall be undertaken
until any necessary governmental permits and authorizations are obtained and
Landlord and Tenant each agrees to join, at the expense of the party seeking to
make such change, alteration, repair and/or improvement, in the application for
such permits or authorizations whenever such action is necessary.
(b) No change or alteration shall be undertaken by Tenant until
plans and specifications and cost estimates therefor prepared by an architect or
engineer reasonably satisfactory to Landlord, shall have been approved by
Landlord, which approval shall not be unreasonably withheld or delayed.
(c) Each change or alteration shall, when completed, be of such
a character as not adversely to affect the value of the Premises for use of the
type described in Section 6.1 hereof immediately before such change or
alteration.
(d) All work done in connection with any change or alteration
shall be done promptly and in a good and workmanlike manner and in compliance
with all Legal Requirements; the cost of any such change or alteration shall be
timely paid so that the Premises shall at all times be free of liens for labor
and materials supplied or claimed to have been supplied to the Premises; the
work of any change or alteration shall be prosecuted with reasonable dispatch,
unavoidable delays excepted.
(e) Tenant shall not construct additional structures nor add to
the present structures without the written consent of the Landlord. Such
consent by the Landlord shall be within the sole discretion of the Landlord.
ARTICLE 9 - UTILITIES AND SERVICES
9.1 Landlord shall provide at the Commencement Date the normal and
customary utility service connections in and to the Premises for use in
accordance with Section 6.1 hereof, including water, sewer, gas and electricity
service. Tenant shall promptly pay when due directly to the appropriate utility
all amounts and charges for, the providing of heat, ventilation,
air-conditioning, cleaning service, hot and chilled water and any other water,
sewer, electricity, light, power, telephone or other communication service, and
any other utility or service required, used, rendered or supplied in or to the
Premises during the Term.
ARTICLE 10 - MECHANICS' AND OTHER LIENS
10.1 Neither Landlord nor Tenant shall suffer or permit any mechanics'
or other liens to be recorded or filed against the Premises or any part thereof
or against the interests therein of Landlord or Tenant as a result of any work
performed by or on behalf of Tenant. If any such lien shall at any time be
recorded or filed against the Premises or any such interest therein, the party
whose work in or about the Premises was responsible therefor shall cause the
same to be discharged of record within ninety (90) days after such party
receives notice of the recording or filing of the same, by either payment,
deposit or bond.
7
<PAGE>
Notwithstanding the foregoing, either party shall have the right, after notice
to the other, to contest by appropriate legal proceedings, diligently conducted
in good faith, the amount or validity of any such mechanics' or other lien filed
against the Premises.
ARTICLE 11 - DAMAGE OR DESTRUCTION
11.1 If any building or other improvements located on the Premises
should be damaged by fire or other casualty, Tenant shall promptly notify
Landlord of such casualty and Landlord shall within thirty (30) days after such
fire or other casualty, commence, and thereafter diligently proceed, to repair
or reconstruct (both structural and non-structural) such building or other
improvements as nearly as may be possible to their condition immediately prior
to such casualty.
11.2 In the event of a casualty, Landlord shall make all insurance
proceeds received by it available for repair and restoration of the Premises,
PROVIDED HOWEVER, that Landlord's time to repair and restore the Premises, as
provided in Section 11.1, shall not be extended on account of the non-receipt by
Landlord of any insurance proceeds. If the net amount of any insurance proceeds
on account of such damage or destruction shall be insufficient to pay the entire
cost of such work, Landlord shall pay and be responsible for the deficiency. If
any of such insurance proceeds shall remain after the full completion of such
repairs, restoration, replacements or rebuilding, the excess shall be retained
by or paid over to Landlord.
11.3 In the event of fire or other casualty rendering the Premises
either partially or totally untenantable, Base Rent and any additional rent
shall abate as herein provided from the date of such casualty until the date
that is ten (10) days after Landlord notifies Tenant that the Premises have
again been rendered fully tenantable and a certificate of occupancy for the
restored Premises has been obtained. In the event that, and for so long as, the
Premises are not usable by Tenant substantially in the manner used by Tenant
immediately prior to the casualty, the entire amount of Base Rent and any
additional rent shall be abated. In the event that there has been damage to a
"MATERIAL PORTION" of the Premises (as defined in subparagraphs (a) through (d)
in the second sentence of Section 12.1), Tenant shall have the right to
terminate this Lease unless Landlord shall, promptly following the occurrence of
such casualty, commit to restore the Premises, and shall actually complete such
restoration, within ninety (90) days from the date on which the casualty occurs.
If this Lease is not terminated in accordance with the immediately preceding
sentence, then, pending completion of restoration of the Premises, the Base Rent
and any additional rent payable by Tenant shall be abated in proportion to the
amount of the Premises which Tenant is unable to use for the continuation of its
business. The term "material portion" shall have the same meaning with respect
to a casualty as that set forth in Section 12.1 with respect to a Taking.
ARTICLE 12 - CONDEMNATION
12.1 If all or a "material portion" of the Premises shall be
appropriated or condemned by any public or quasi public authority in the
exercise of its right of condemnation
8
<PAGE>
or eminent domain (the "TAKING"), this Lease shall terminate as of the time when
possession shall be required by such public or quasi public authority. The term
"MATERIAL PORTION" as used in the preceding sentence shall mean a Taking of: (a)
at least one-third (a) of the Premises; or (b) the Building or any part thereof;
or (c) shall result in cutting off direct access to and from the Premises to any
adjacent public street or highway; or (d) such portion of the Premises as shall
otherwise substantially alter Tenant's ability to use the same in the manner
used by Tenant immediately prior to the Taking. Notwithstanding the termination
of this Lease, both Landlord and Tenant shall have the right to prosecute their
claims for an award and/or to share in the proceeds of any award based upon
their respective interests. If the interests of Landlord and Tenant are both
compensated in a single award, then Tenant shall be entitled to that portion of
the award necessary to compensate it for its leasehold improvements and moving
expenses and Landlord shall be entitled to the remainder of the award.
12.2 In the event of a Taking of less than a material portion of the
Premises (as defined in Section 12.1) during the Term, this Lease shall continue
unaffected except that the Base Rent shall be reduced as of the date of vesting
of title under such Taking to the Base Rent in effect immediately before the
Taking multiplied by a fraction, the numerator of which shall be the value of
the untaken portion of the Premises (valued after the Taking, giving effect to
any completed restoration) and the denominator of which shall be the value of
the Premises immediately prior to the Taking.
12.3 In the event of a Taking of less than a material portion of the
Premises which results in a continuation of this Lease, then the net award or
payment, if any, after reimbursement out of such amounts for any costs and
expenses (including reasonable attorneys' fees for obtaining same) (herein
called the "NET RESTORATION FUND") shall be received and held by Landlord and
shall be applied to the cost of restoration (whether structural or
non-structural) of the Premises as nearly as may be practicable to its
condition, character and value immediately prior to such Taking. Except as
expressly provided to the contrary in this Article, all of the provisions
contained in Article 11 for repair, restoration replacement or rebuilding after
any damage or destruction, by fire or other cause shall apply to restoration
necessitated by a Taking. For such purposes any reference in Article 11 to
insurance proceeds shall be construed to refer to the Net Restoration Fund. If
any of the Net Restoration Fund shall remain after the full completion of such
restoration, the excess shall be paid over to Landlord. If the Net Restoration
Fund shall be insufficient to pay the entire cost of such restoration, Landlord
shall pay and be responsible for the deficiency. Notwithstanding the foregoing,
Landlord shall commence and diligently proceed to completion of all restoration
necessitated by a Taking of a material portion of the Premises within thirty
(30) days after such material portion is not available for use by Tenant in
accordance with this Lease whether or not the Net Restoration Fund has then been
received by Landlord.
12.4 In the event that ingress to and/or egress from the Premises are
in any way blocked or partially blocked as a result of any road construction or
other improvements, Landlord agrees to waive all of Tenant's obligations
hereunder during such period of construction or improvement.
9
<PAGE>
ARTICLE 13 - DEFAULT BY TENANT
13. If at any time during the Term any one or more of the following events
(each of which being herein called an "Event of Default") shall occur, to wit:
(a) if Tenant shall fail to pay any installment of Base Rent on
the date that same is due and such failure shall continue for a period of ten
(10) days after receipt by Tenant of written notice from Landlord of such
failure;
(b) if Tenant shall make an assignment of all or substantially
all of its property for the benefit of its creditors; or
(c) if any petition shall be filed against Tenant in any court,
whether or not pursuant to any statute of the United States or of any state, in
any bankruptcy, reorganization, composition, extension, arrangement or
insolvency proceeding, and if any such proceeding shall not be dismissed within
one hundred and twenty (120) days after the institution of the same, or if any
such petition shall be so filed by Tenant; or
(d) if, in any proceeding, a receiver or trustee shall be
appointed for all or substantially all of Tenant's property, and such
receivership or trusteeship shall not be vacated or set aside within 120 days
after the appointment of such receiver or trustee, or if any such appointment is
consented to by Tenant; or
(e) if Tenant shall fail to substantially perform or observe any
other requirement of this Lease (not hereinbefore in this Section specifically
referred to) on the part of Tenant to be performed or observed and such failure
shall continue for thirty (30) days after notice thereof from Landlord to
Tenant, except that if such failure cannot be cured within such thirty (30)-day
period, and if Tenant shall commence the curing of such failure promptly after
notice thereof from Landlord and shall thereafter proceed with reasonable
diligence to complete the curing of such failure, it being the intention hereof
that in connection with any such failure which is not susceptible of being cured
with due diligence within said thirty (30)-day period, that the time to cure
such failure shall be extended for such period as may be necessary to complete
such cure with reasonable diligence;
then, upon the occurrence of any such Event of Default, Landlord shall have the
option to terminate this Lease upon ten (10) days' prior written notice to
Tenant, to re-enter the Premises, to evict Tenant and to remove Tenant's
possessions, both without being liable for trespass, and relet the Premises and
receive rent therefor. Pursuit of any of the foregoing remedies shall not
preclude pursuit of any of the other remedies herein provided or any other
remedies provided by law, nor shall pursuit of any remedy herein provided
constitute a forfeiture or waiver of any rent due to Landlord hereunder or of
any damages accruing to Landlord by reason of the violation of any of the terms,
conditions and covenants herein contained.
10
<PAGE>
ARTICLE 14 - SURRENDER OF PREMISES
14.1 Tenant shall, upon the expiration of the Term for any reason
whatsoever, surrender to Landlord the Premises, broom clean and in good order,
condition and repair, except for reasonable wear and tear and damage from fire
or other casualty.
14.2 Title to all personal property and fixtures of Tenant shall
remain in Tenant and Tenant may remove such personal property and fixtures upon
or prior to the expiration of the Term.
ARTICLE 15 - ASSIGNMENT AND SUBLETTING
15.1 Tenant shall not, without Landlord's prior written consent,
assign this Lease or sublet the Premises or any part thereof, which consent
Landlord will not unreasonably withhold or delay; PROVIDED, HOWEVER, that Tenant
may, without Landlord's consent, assign this Lease or sublet the Premises or any
part thereof to any firm or corporation directly or indirectly controlled by, in
control of, or under common control with, Tenant.
ARTICLE 16 - INDEMNITY
16.1 Tenant shall indemnify and hold Landlord harmless from and
against any loss, cost, damage, claim, liability and expense (including, without
limitation, reasonable attorneys' fees and disbursements) arising from (a)
Tenant's possession of the Premises and any claims arising from its management
of, or from any work or thing whatsoever done by Tenant in and on the Premises,
(b) any default by Tenant hereunder beyond the expiration of any applicable
grace period, (c) any misrepresentation by Tenant herein, or (d) any negligent
act or omission or willful misconduct of Tenant or its agents, contractors or
invitees in connection with the use or occupancy of the Premises.
16.2 Landlord shall indemnify and hold Tenant harmless from and
against any loss, cost, damage, claim, liability and expense (including, without
limitation, reasonable attorneys' fees and disbursements) arising from (a) any
default by Landlord hereunder beyond the expiration of any applicable grace
period, (b) any misrepresentation by Landlord herein, or (c) any negligent act
or omission or willful misconduct of Landlord or its agents, contractors or
invitees in connection with the use or occupancy of the Premises, (c) any
conditions, including environmental, existing at the time of the execution of
this Lease, or (d) Landlord's failure to timely make repairs or restorations
required by the terms of this Lease.
ARTICLE 17 - ENVIRONMENTAL MATTERS
17.1 Tenant, at its expense, shall substantially comply with all
environmental laws and regulations affecting or relating to its particular use
of the Premises. Tenant shall pay all costs, exist, fines and penalties imposed
upon Landlord or the Premises by reason of Tenant's failure to comply with the
provisions of this Section 17.1.
11
<PAGE>
17.2 Landlord represents and warrants to Tenant that as of the
Commencement Date (a) there were no hazardous waste or material located on or
under the Premises, (b) there were no asbestos containing materials in the
Premises, and (c) there were no underground storage tanks or transformers
containing PCB's located on or under the Premises. Landlord shall indemnify and
hold Tenant harmless from and against any loss, cost, damage or expense incurred
by Tenant as a result of the inaccuracy of the foregoing representation and
warranty.
ARTICLE 18 - INVALIDITY - PARTICULAR PROVISIONS
18.1 If any provision of this Lease or the application thereof to any
person or circumstance shall be to any extent invalid or unenforceable, the
remainder of this Lease, or the application of such provision to persons or
circumstances other than those as to which it is invalid or unenforceable, shall
not bc affected thereby, and each provision of this Lease shall be valid and
enforceable to the fullest extent permitted by law.
ARTICLE 19 - SUBORDINATION
19.1 This Lease shall be subject and subordinate to any mortgage which
may now or hereafter be an encumbrance on the Premises and to all renewals,
modifications, consolidations, replacements, extensions or refinancings thereof,
all of which are collectively called the "MORTGAGE", provided the same shall
meet the requirements and comply with the conditions hereinafter in this Section
set forth. The subordination provided for in this section shall be
self-operative but Tenant covenants, on demand, to execute, acknowledge and
deliver to Landlord such instruments as may be reasonably necessary and proper
to effect such subordination. It is covenanted, and the foregoing subordination
of this Lease to a mortgage is conditioned upon, however, that so long as Tenant
is not in default in the payment of Base Rent or additional rent hereunder and
otherwise performs and complies with the terms and conditions of this Lease on
its part to be performed within the applicable grace period, Tenant will not be
named or joined in any action or proceeding to foreclose any mortgage affecting
the Premises, that any such action or proceeding will not result in a
cancellation or termination of this Lease and that this Lease shall continue in
full force and effect upon all of the terms, covenants and conditions herein
contained. If Landlord shall default under any mortgage covering the Premises,
Tenant shall have the right, but not the obligation, to cure such default and
the next installment (s) of Base Rent and any additional rent hereunder shall be
abated by an amount equal to the cost of such cure.
ARTICLE 20 - NOTICES
20.1 All notices, consents, approvals, demands and requests
(collectively "NOTICES") which are required or desired to be given by either
party to the other hereunder shall be in writing and shall be sent by United
States registered or certified mail and deposited in a United States post
office, return receipt requested, postage prepaid. Notices which are served upon
Landlord or Tenant in the manner provided herein shall be deemed to have been
given or served for all purposes hereunder on the date accepted or refused at
the address to
12
<PAGE>
which it was sent. Notices which are given by either party may be given by the
attorney for such party without the signature of such party.
20.2 All notices given to Landlord or Tenant shall be addressed to
such party at its address set forth below or at such other place as such party
may from time to time designate in a written notice to the other party:
(a) If to Landlord, at the address set forth on Schedule A hereto.
(b) If to Tenant:
Hometown Auto Retailers, Inc.
831 Straits Turnpike
Watertown, Connecticut 06795
ARTICLE 21 - QUIET ENJOYMENT
21.1 Landlord hereby covenants and agrees that if Tenant shall perform
all the covenants and agreements herein stipulated to be performed by Tenant,
Tenant shall, at all times during the Term of this Lease, have peaceable and
quiet enjoyment and possession of the Premises without any manner of hindrance
from Landlord or any other person, firm or corporation.
ARTICLE 22 - AUTHORITY
22.1 Landlord and Tenant each represents and warrants to the other
that it has full right, power and authority to enter into and perform all its
obligations under this Lease, without the consent or approval of any other
entity or person, and to make these representations knowing that the other party
will rely thereon.
22.2 The respective signatory on behalf of Landlord and Tenant further
represent and warrant that they have full right, power and authority to act for
and on behalf of Landlord and Tenant, respectively, in entering into this Lease.
ARTICLE 23 - MISCELLANEOUS PROVISIONS
23.1 The term "LANDLORD" shall mean only the owner of the Premises at
the time in question and, in the event of a sale or transfer of the Premises,
the transferor shall be and hereby is automatically and entirely released and
discharged, from and after the date of such sale or transfer, of all liability
in respect of the performance of any of the terms of this Lease on the part of
Landlord thereafter to be performed, provided that the purchaser or transferee
shall agree in writing to be bound by all of the terms of this Lease on the part
of landlord to be performed during its period of ownership. Nothing contained
in this Section shall in any way release Landlord from any actions, omissions,
or failure of performance attributable to any period prior to Landlord's sale or
transfer of its interest in the Premises.
13
<PAGE>
23.2 This Lease constitutes thc entire agreement between the parties
with respect to the subject matter hereof; prior leases, if any, between either
party hereto or the predecessors of either party are automatically terminated on
the Commencement Date set forth or described in Schedule A.. Any modification,
amendment or waiver of this Lease or any provision hereof must be in writing and
executed by the party against whom enforcement of such modification, amendment
or waiver is sought. In the event that of any inconsistency between the
provisions of this Lease and the provisions of any rider or schedule hereto, the
terms of the rider or schedule shall govern.
23.3 The parties acknowledge that each has had an opportunity to
review and negotiate this Lease. This Lease shall be construed without regard to
any presumption or other rule requiring construction against the party causing
this Lease or any part hereof to be drafted.
23.4 The table of contents and the captions of this Lease are for
convenience of reference only, and shall in no way be construed to define, limit
or describe the scope or intent of this Lease or the intent of any provision
hereof and same shall not in any way affect the provisions of this Lease.
23.5 Tenant shall have the right to record a memorandum of this Lease
provided it pays all costs in connection with such recording. Landlord will
cooperate with Tenant in connection therewith.
23.6 This Lease shall be governed by, and construed and enforced in
accordance with, the laws of the state in which the Premises are located.
23.7 Each party hereby waives all right to trial by jury in a summary
or other action, proceeding or counterclaim out of or in any way connected with
this Lease, the relationship of Landlord and Tenant, the Premises and the use
and occupancy thereof, and any claim of injury or damages relating thereto.
23.8 All terms and words used in this Lease, regardless of the number
or gender in which they are used, shall be deemed to include any other number,
and any other gender as the context may require. The word "persons" as used in
this Lease shall mean a natural person or persons, a partnership, corporation,
limited liability company, and any other form of business or legal association
or entity as the context may require.
23.9 This Lease shall become binding and effective only upon the
execution and delivery of this Lease by both Landlord and Tenant.
14
<PAGE>
23.10 This Lease shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and permitted assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Lease to be
executed as of the date first above written.
LANDLORD: THOMAS E. COSENZI
By: /s/ Thomas E. Cosenzi
------------------------------
TENANT:
HOMETOWN AUTO RETAILERS, INC.
By: /s/ Joseph Shaker
------------------------------
Its: President
15
<PAGE>
SCHEDULE A
Premises: Route 5, Putney Road
N. Brattleboro, VT 05304
Initial Base Annual Rent: $240,000
Base Rent Monthly Installment: $20,000
Commencement Date: closing date of initial public offering of
Common Tenant's Stock
Expiration Date: fifth anniversary of date immediately
preceding Commencement Date
Lease Extension Option: one additional five-year term at same rental
(if applicable):
Landlord's Name: Thomas E. Cosenzi
Landlord's Address: 71 Pheasant Crossing
West Springfield, MA 01772
Purchase Option: exercisable at any time; purchase price to be
(if applicable) fair market value at time of exercise, as
determined by appraisals by mutually
acceptable independent appraiser (or, if
Landlord and Tenant are unable to agree on an
appraiser, each party shall select one
appraiser and the two appraisers shall select
a third, with the fair market value to be the
average of the three appraisals), but in no
event less than $1.5 million
16
<PAGE>
Exhibit 10.24
HOMETOWN AUTO RETAILERS, INC.
FORM OF STOCK OPTION AGREEMENT
Dated: _________, 1998
Hometown Auto Retailers, Inc. a Delaware corporation (the "COMPANY"),
grants to _____________ (the "OPTIONEE"), a stock option to purchase a total of
_______ shares of the Company's Common Stock, par value $.001 per share, at the
initial public offering price of $______ per share on the terms and conditions
set forth herein and in the Company's 1998 Stock Option Plan.
1. DURATION.
This option shall expire five (5) years from the date hereof (the
"Termination Date").
2. CHARACTERIZATION OF OPTIONS.
The option granted pursuant to this Agreement is intended to constitute and
qualify as an Incentive Stock Option, as defined by Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"). That part of the option that
does not meet the criteria of an Incentive Stock Option, as defined in Section
422 of the Code, shall constitute a non-qualified option, subject to Section 83
of the Code.
3. ANTI-DILUTION PROVISIONS.
(a) If there is any stock dividend, stock split, or combination of
shares of Common Stock of the Company, the number and amount of shares then
subject to this option shall be proportionately and appropriately adjusted; no
change shall be made in the aggregate purchase price to be paid for all shares
subject to this option, but the aggregate purchase price shall be allocated
among all shares subject to this option after giving effect to the adjustment.
(b) If there is any other change in the Common Stock of the Company,
including recapitalization, reorganization, sale or exchange of assets, exchange
of shares, offering of subscription rights, or a merger or consolidation in
which the Company is the surviving corporation, an adjustment, if any, shall be
made in the shares then subject to this
<PAGE>
option as the Board of Directors may deem equitable. Failure of the Board of
Directors to provide for an adjustment pursuant to this subparagraph prior to
the effective date of any Company action referred to herein shall be conclusive
evidence that no adjustment is required in consequence of such action.
(c) If the Company is merged into or consolidated with any other
corporation, or if it sells all or substantially all of its assets to any other
corporation, then either (i) the Company shall cause provisions to be made for
the continuance of this option after such event, or for the substitution for
this option of an option covering the number and class of securities which the
Optionee would have been entitled to receive in such merger or consolidation by
virtue of such sale if the Optionee had been the holder of record of a number of
shares of Common Stock of the Company equal to the number of shares covered by
the unexercised portion of this option, or (ii) the Company shall give to the
Optionee written notice of its election not to cause such provision to be made
and this option shall become exercisable in full (or, at the election of the
Optionee, in part) at any time during a period of 20 days, to be designated by
the Company, ending not more than 10 days prior to the effective date of the
merger, consolidation or sale, in which case this option shall not be
exercisable to any extent after the expiration of such 20-day period. In no
event, however, shall this option be exercisable after the Termination Date.
4. INVESTMENT REPRESENTATION; LEGEND ON CERTIFICATES; SPECIAL RESTRICTION
ON RESALE.
The Optionee agrees that until such time as a registration statement
under the Securities Act of 1933 becomes effective with respect to the option
and/or the stock, the Optionee is taking this option and will take the stock
underlying this option, for his own account, for investment and not with a view
to the resale or distribution thereof. The Company shall have the right to
place upon the face of any stock certificate or certificates evidencing shares
issuable upon the exercise of this option such legend as the Board of
2
<PAGE>
Directors may prescribe for the purpose of preventing disposition of such shares
in violation of the Securities Act of 1933, as now or hereafter provided.
3
<PAGE>
5. NON-TRANSFERABILITY.
This option shall not be transferable by the Optionee other than by
will or by the laws of descent or distribution, and is exercisable during the
lifetime of the Optionee only by the Optionee.
6. CERTAIN RIGHTS NOT CONFERRED BY OPTION.
The Optionee shall not, by virtue of holding this option, be entitled
to any rights of a stockholder in the Company.
7. EXPENSES.
The Company shall pay all original issue and transfer taxes with
respect to the issuance and transfer of shares of Common Stock of the Company
pursuant hereto and all other fees and expenses necessarily incurred by the
Company in connection therewith.
8. EXERCISE OF OPTIONS.
(a) This option shall become exercisable in accordance with its
terms, as follows:
[one-third] shares commencing one year after the date of grant;
[one-third] additional shares commencing on each of the second and
third anniversaries of the date of grant; provided the
Optionee shall then be an employee of the Company.
(b) An option shall be exercisable by written notice of such
exercise, in the form prescribed by the Board of Directors, to the Secretary or
Treasurer of the Company at its principal office. The notice shall specify the
number of shares for which the option is being exercised (which number, if less
than all of the shares then subject to exercise, shall be 50 or a multiple
thereof) and shall be accompanied by payment (i) in cash or by check in the
amount of the full exercise price of such options, (ii) made by the surrender to
the Company of that number of options having an aggregate spread value (ie. the
difference between the exercise price of an option and the closing price of the
Common Stock on the Nasdaq SmallCap Market or other national quotation system or
stock exchange on which the Common Stock is listed on the date of the written
notice of exercise) equal to the aggregate exercise price of the options
4
<PAGE>
being exercised, or (iii) in such other manner as the Board shall deem
acceptable. No shares shall be delivered upon exercise of any option until all
laws, rules and regulations which the Board of Directors may deem applicable
have been complied with.
(c) The person exercising an option shall not be considered a record
holder of the stock so purchased for any purpose until the date on which he is
actually recorded as the holder of such stock in the records of the Company.
(d) The option shall be exercisable only so long as the Optionee
shall continue to be an employee of the Company and within the thirty day period
after the date of termination of his employment to the extent it was exercisable
on the day prior to the date of termination. Notwithstanding the foregoing, in
no event shall the option be exercisable after the Termination Date.
(e) Notwithstanding the provision of Section 8(d) above, in the
event the Optionee is unable to continue his employment with the Company as a
result of his total and permanent disability (as defined in Section 105(d)(4)
of the Code), he may, but only within three (3) months from the date of
disability, exercise the option to the extent he was entitled to exercise it
at the date of such disability. Notwithstanding the foregoing, in no event
shall the option be exercisable after the Termination Date.
(f) Notwithstanding the provisions of Section 8(d) above, in the
event of death of the Optionee:
(i) during the term hereof, the option may be exercised, at any
time within twelve (12) months following the date of death, by the Optionee's
estate or by a person who acquired the right to exercise this option by bequest
or inheritance, but only to the extent of the right that would have accrued had
the Optionee continued living one (1) month after the date of death, provided
that at the time of his death the Optionee is an employee of the Company and
shall have been in Continuous Status (as defined in the Plan) as an employee
from the date hereof; or
5
<PAGE>
(ii) within thirty (30) days after the termination of Continuous
Status as an employee, the option may be exercised, at any time within three (3)
months following the date of death, by the Optionee's estate or by a person who
acquired the right to exercise the Option by bequest or inheritance, but only to
the extent of the right to exercise that had accrued at the date of termination.
Notwithstanding the provisions of this Section (f), in no event shall this
option be exercisable after the Termination Date.
9. Nothing herein shall be deemed to create any employment agreement or
guaranty of continued employment or limit in any way the Company's right to
terminate Optionee's employment arrangement at any time.
HOMETOWN AUTO RETAILERS INC.
By:
------------------------------
[Name], [Title]
Accepted as of the date
first set forth above.
- -------------------------------------
OPTIONEE
6
<PAGE>
SCHEDULE OF OPTIONEES
Officers
Name No. of Option Shares
Joseph Shaker 36,500
Corey Shaker 36,500
Salvatore A. Vergopia 3,000
Edward A. Vergopia 37,000
William C. Muller Jr. 20,000
James Christ 20,000
Matthew J. Visconti Jr. 14,000
Steven Shaker 10,000
Employees
Name No. of Option Shares
Janet Shaker 10,000
Edward D. Shaker 10,000
Scott Deedon 2,000
Paul Janicki 2,000
Christopher Birmelin 4,000
Robert C. Grieve 4,000
Robert E. Grieve 8,000
Charles Featherstone 8,000
Thomas Cosenzi 15,000
7
<PAGE>
Exhibit 10.25
HOMETOWN AUTO RETAILERS, INC.
831 STRAITS TURNPIKE
WATERTOWN, CT O6795
May 28,1998
Pride Auto Center, Inc.
2101 Baldwin Street
Waterbury, CN 06706
Attention: Benjamin Graziano, Dealer Principal
Gentlemen:
This will set forth the agreement under which Hometown Auto Retailers, Inc.
("Purchaser") will purchase, or obtain rights to use, substantially all of the
business and assets owned or leased by Pride Auto Center, Inc. ("Seller") in the
conduct of its dealership business (the "Business"), other than cash and
receivables (the "Acquired Assets").
1. The Acquired Assets shall include, without limitation, (a) all
furniture and fixtures, equipment, tools, lifts, signage, (b) parts inventories
and supplies (c) software, manuals, product brochures, business methods and
procedures, trade names, vehicle franchises and the customer list of the
Business, (d) used cars inventory (e) new car inventory and (f) all of Seller's
rights under contracts wherein Seller has agreed to provide to any third party
products or services or under which any third party provides products, services,
financing or equipment to Seller, including each vehicle manufacturer whose new
vehicles are, or at the closing will be, sold or leased by Seller and the
Seller's lease with Reynolds & Reynolds it being understood that Seller will
retain any reserves previously paid under 1 (f) (the "Assumed Contracts").
2. The purchase price for the Acquired Assets shall be the sum of the
following amounts:
(a) $50,000 for the items specified in 1 (a) above
(b) an amount equal to the book value of all factory fresh parts
inventory
(c) $500,000 for the items specified in 1(c), above
(d) an amount equal to the book value of all used car inventory, but
in no event more than the lower of the prices specified for any
vehicle in the NADA Official Used Car Guide or the Galves Auto
Price List
(e) an amount equal to the aggregate net invoice price (after all
hold backs, "Credits") credited to Seller by Chrysler Corp. or
any affiliate thereof for all new car inventory.
The above sum shall be payable $55,000 upon the execution hereof and the balance
in cash at Closing, except that new car inventory shall be paid through the
assumption of "floor plan" obligations, to the greatest extent feasible, and
$200,000 thereof shall be payable pursuant to a self amortizing 36 month
Promissory Note bearing interest at 8% APR and payable in equal monthly
installments commencing one month after the Closing. The Note may be assigned
to Benjamin Graziano, per separate agreement and on such other terms and
conditions acceptable to Seller's attorney. The $55,000 deposit shall be
retained by Seller, as liquidated damages if Purchaser does not close the
transaction, except if such
<PAGE>
failure occurs because any of the conditions to Purchaser's obligations set
forth in Section 5 are not satisfied.
3. The Purchaser shall assume all liabilities and obligations of Seller
under the Assumed Contracts arising from and after the closing of the
transaction contemplated hereby (the "Closing") including Seller's obligations
under its "floor planning" finance agreements with respect to all new vehicles
in inventory at the Closing it being understood that Purchaser shall have the
right to receive all holdbacks from the manufacturers with respect to such
vehicles under arrangements now in effect and if any such holdbacks have
theretofore been received by Seller they shall be offset against the Purchase
Price. All unpaid liabilities of Seller existing at the Closing, including
taxes or other liabilities accrued as a result of the transaction contemplated
hereby, shall remain the responsibility of Seller. Purchaser shall consider,
but shall not be obligated to offer continuing employment to Seller's employees,
but, in any event, all compensation, fees or commissions, the cost of any
applicable employee benefit plans shall be paid by Seller prior to Closing.
Subsequent to the Closing, Purchaser will make available to Seller, without
charge, two mid-sized automobiles for two years, provided that Seller or its
shareholders shall pay for registration and insurance on such vehicles.
4. Seller and its Shareholders (who have signed this Agreement at the
foot hereof) represent and warrant to Purchaser that Seller at the date hereof
and at the Closing (a) has duly authorized the transaction contemplated hereby;
(b) operates its business, uses its assets and occupies its properties in
compliance with all material applicable laws, ordinances, rules or regulations,
and that Seller has received no notice of violation of any of the foregoing; (c)
has obtained all necessary licenses and permits, which will be available to
Purchaser upon the consummation of the transaction, and (d) has delivered to
Purchaser unaudited financial statements (including balance sheet, profit and
loss statement and cash flow statement) for each of the two years ended December
31, 1997 and the three months ended March 31, 1998, each of which fairly
presents the results of operation and the financial position of Seller as at and
for the periods therein presented in accordance with generally accepted
accounting principles, consistently applied. The representations and warranties
contained herein shall survive the Closing. In addition, all federal and state
income tax and other tax liabilities accrued through the Closing, including
liability as a result of the transaction contemplated hereby, shall remain the
responsibility of Seller and its Shareholders
5. The obligations of each party at Closing are subject to (a) the
receipt of all third party consents required to transfer assets, assign leases
or otherwise consummate the transaction, including consents from each
manufacturer whose vehicles are being offered for sale or lease by Seller now or
at the Closing and the consent of Reynolds and Reynolds to the assignment of its
computer lease to Purchaser; (b) the agreement by every manufacturer whose
vehicles are offered for sale or lease by Seller to pay all holdbacks from and
after the Closing to Purchaser and not to Seller if not previously adjusted
pursuant to paragraph 3; (c) the payment by Chrysler Corp. to Purchaser of
$35,000 to be used as moving expenses; (d) the agreement by Chrysler Corp. to
accept from Purchaser, for a full and prompt refund of all amounts theretofore
paid by Seller, automotive parts acquired by Purchaser from Seller, such return
to be permitted on two occasions,once on or, at the option of Purchaser, within
ten days following the Closing and the second on or before the first anniversary
of the Closing; (e) the closing of an initial public offering of Purchaser's
Class A Common Stock; and (f) the performance by the other party of all
obligations to be performed at or prior to Closing. Each of us will use our
best efforts to obtain all material third-party consents.
2
<PAGE>
The obligations of Purchaser are also subject to (a) a review of Seller's
business and prospects confirming that there has been no material adverse change
to Seller's business or business prospects; and (b) with bulk sales laws or
other assurance that Purchaser has no liability for Seller's obligations other
than those specifically assumed hereunder.
6. The Closing shall be held within 30 days of the satisfaction of the
conditions specified in Section 5 on such date as is reasonably acceptable to
the parties. Pending the Closing the business of Seller shall be operated only
in the ordinary course and Seller shall make or enter into no extraordinary
transactions nor dispose of any material assets, except as contemplated herein
or take any other steps that are not in the ordinary course of business and
consistent with past practices without the advance written approval of
Purchaser. At its option either party may terminate this agreement if the
Closing has not occurred by July 31, 1998.
7. Until Closing the Seller and Purchaser will make available to the
other all information which may be reasonably requested in connection with the
transaction.
8. Until Closing Seller will not, directly or indirectly, solicit,
initiate or engage in any discussions with any person (other than the Purchaser)
relating to the sale of all or any part of the Business.
9. Each of the parties shall be responsible for its own counsel,
accounting and professional fees and expenses incurred in connection with this
agreement and the transactions contemplated hereby. Seller and its Shareholder
shall cooperate with Purchaser and its auditors in the preparation of such
financial statements.
HOMETOWN AUTO RETAILERS, INC.
By: /s/ Joseph Shaker
----------------------------
Joseph Shaker, President
Accepted and agreed to
this day of May, 1998
Pride Auto Center, Inc.
By: /s/ Benjamin Graziano
----------------------------------
Benjamin Graziano, Dealer Manager,
3
<PAGE>
SHAREHOLDERS CONSENT
The undersigned, being the holders of all of Seller's outstanding shares,
hereby consent to the transaction with Purchaser provided for herein and joins,
jointly and severally, in the representations and warranties set forth in
Section 4 above.
/s/ Benjamin Graziano
--------------------------------
--------------------------------
--------------------------------
4
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all reference to our firm) included in or made a part of the
Registration Statement on Form S-1 registering 2,000,000 shares of Class A
Common Stock (2,300,000 if the over-allotment option is exercised in full).
/s/ Arthur Andersen LLP
New York, New York
July 13, 1998
<PAGE>
Exhibit 23.6
CRAIN'S AUTOMOTIVE NEWS
1400 WOODBRIDGE AVENUE
DETROIT MI 48207-3187
(313) 446-6000
Hometown Auto Retailers, Inc.
c/o Morse, Zelnick, Rose & Lander
450 Park Avenue
New York, NY 10022
July 6, 1998
To Whom It May Concern:
This will constitute our consent to the use by Hometown Auto Retailers,
Inc. in its prospectus of data extracted from AUTOMOTIVE NEWS--1997 MARKET DATA
BOOK and AUTOMOTIVE NEWS--1998 MARKET DATA BOOK.
This will also constitute our consent to the use of references to
AUTOMOTIVE NEWS and to CRAINS COMMUNICATIONS INC. in connection with the use of
such data.
Very truly yours,
/s/ Peter Brown
-----------------------
Peter Brown
[Title] Editor
