SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number: 000-24669
HOMETOWN AUTO RETAILERS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 06-1501703
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
831 Straits Turnpike
Watertown, CT 06795
(Address of principal executive offices) (Zip code)
(860) 945-4900
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding
- ------------------------------------------------ -----------
Common Stock, Class A, par value $.001 per share 2,040,000
Common Stock, Class B, par value $.001 per share 3,760,000
1
<PAGE>
FORWARD LOOKING STATEMENTS
When used in the Quarterly Report on Form 10Q, the words "may", "will",
"should", "expect", "believe", "anticipate", "continue", "estimate", "project",
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act regarding events, conditions and financial trends that
may affect the Company's future plans of operations, business strategy, results
of operations and financial condition. The Company wishes to ensure that such
statements are accompanied by meaningful cautionary statements pursuant to the
safe harbor established in the Private Securities Litigation Reform Act of 1995.
Prospective investors are cautioned that any forward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors including the ability
of the Company to consummate, and the terms of, acquisitions. Such
forward-looking statements should, therefore, be considered in light of various
important factors, including those set forth herein and others set forth from
time to time in the Company's reports and registration statements filed with the
Securities and Exchange Commission (the "Commission"). The Company disclaims any
intent or obligation to update such forward-looking statements.
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
HOMETOWN AUTO RETAILERS, INC.
BASIS OF PRESENTATION
In July 1998, Hometown Auto Retailers, Inc. ("Hometown" or the "Company")
completed simultaneously the combination of three automobile dealership groups
(the "Core Operating Companies"), the acquisition of certain assets and
liabilities of another three dealerships (the "Acquisitions") and an initial
public offering (the "Offering"). The Core Operating Companies were acquired in
exchange for common stock of Hometown Auto Retailers, Inc. The Acquisitions were
acquired for cash.
The accompanying historical balance sheet as of December 31, 1997, the
statements of operations for the three months and nine months ended September
30, 1997, and the statement of cash flows for the nine months ended September
30, 1997, presents the operations of E.R.R. Enterprises, Inc. ("Shaker"), one of
the Core Operating Companies which has been identified as the accounting
acquirer for financial presentation purposes in accordance with SAB No. 97
because its stockholders hold the single largest voting interest subsequent to
the Offering.
The accompanying historical balance sheets as of September 30, 1998, the
statements of operations for the three months and nine months ended September
30, 1998, and the statement of cash flows for the nine months ended September
30, 1998, presents the consolidated operations of: (i) Shaker for all periods;
and (ii) the remaining Core Operating Companies and Acquisitions effective with
the respective acquisition dates.
The Company believes that; (i) the accompanying financial information
contains all the material adjustments necessary to fairly present its financial
position as of September 30, 1998; (ii) all adjustments necessary to present
fairly the results for the interim periods have been made; and (iii) all
adjustments are of a normal recurring nature. Operating results of interim
periods are not necessarily indicative of the results for full year periods.
The unaudited pro forma financial information presented in footnote 5,
"Business Combinations", 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 Company's operations are subject to seasonal variations, with the
second and third quarters generally contributing more revenues and operating
profit than the first and fourth quarters. This seasonality is driven primarily
by: (i) factors related to the automobile and truck manufacturers from which the
Company holds franchises ("Manufacturer"), 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.
3
<PAGE>
HOMETOWN AUTO RETAILERS, INC,
UNAUDITED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ -----------
<S> <C> <C>
Current Assets
Cash and cash equivalents .................................. $ 6,409 $ 3,539
Accounts receivable, net ................................... 4,404 914
Inventories ................................................ 25,594 7,609
Prepaid expenses and other current assets .................. 553 234
Deferred income taxes ...................................... 16 --
------- -------
Total current assets .................................... 36,976 12,296
Property and equipment, net ................................... 2,477 1,346
Receivable from finance companies ............................. 1,177 --
Due from related parties ...................................... 386 294
Deferred income taxes ......................................... 908 --
Excess of purchase price over net tangible
assets acquired, net of amortization ...................... 19,545 --
Other assets .................................................. 119 106
------- -------
Total Assets ............................................ $61,588 $14,042
======= =======
Current Liabilities
Floor plan notes payable ................................... $23,584 $ 6,761
Accounts payable and accrued expenses ...................... 3,822 463
Current maturities of long-term debt ....................... 263 278
Other current bank borrowings .............................. 1,270 85
Advances from Officers and Affiliates ...................... 72 --
Income taxes payable ....................................... 726 146
------- -------
Total current liabilities ............................... 29,737 7,733
Long-term debt ................................................ 934 107
Long-term deferred income taxes ............................... 1,062 164
Due to related parties ........................................ 709 888
Other long-term liabilities ................................... 58 52
Stockholders' Equity
Preferred stock, $.001 par value, 2,000,000 shares
Authorized, no shares issued and outstanding ............... -- --
Common stock, Class A, $.001 par value, 24,000,000
shares Authorized, 2,040,000 issued and outstanding; ....... 2 --
Common stock, Class B, $.001 par value, 3,760,000
shares Authorized, issued and outstanding .................. 4 --
Additional paid-in capital ................................. 25,214 69
Retained earnings .......................................... 3,868 5,029
------- -------
Total stockholders' equity .............................. 29,088 5,098
------- -------
Total liabilities and stockholders' equity .............. $61,588 $14,042
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements
4
<PAGE>
HOMETOWN AUTO RETAILERS, INC,
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
New vehicle sales .................................. $ 25,008 $ 7,826 $ 38,457 $ 22,519
Used vehicle sales ................................. 10,729 5,997 21,695 16,977
Parts and service sales ............................ 3,387 1,576 6,623 4,915
Other dealership revenues, net ..................... 1,014 444 1,929 1,274
----------- ----------- ----------- -----------
Total revenues .................................. 40,138 15,843 68,704 45,685
Cost of sales
New vehicle sales .................................. 23,441 7,304 36,058 21,104
Used vehicle sales ................................. 9,760 5,631 19,639 15,485
Parts and service sales ............................ 1,576 777 3,309 2,576
----------- ----------- ----------- -----------
Cost of sales ......................................... 34,777 13,712 59,006 39,165
----------- ----------- ----------- -----------
Gross profit .................................... 5,361 2,131 9,698 6,520
Amortization of excess of purchase price
Over net tangible assets acquired .................. 150 -- 150 --
Selling, general and administrative
expenses ........................................... 4,728 1,717 10,635 5,210
----------- ----------- ----------- -----------
Income (loss) from operations ................... 483 414 (1,087) 1,310
Other income (expense)
Interest expense, net .............................. (99) (40) (199) (180)
Other income (expense), net ........................ (29) 121 4 126
----------- ----------- ----------- -----------
Income (loss) before taxes ...................... 355 495 (1,282) 1,256
Provision (benefit) for income taxes .................. 533 198 (121) 502
----------- ----------- ----------- -----------
Net income (loss) ............................... $ (178) $ 297 $ (1,161) 754
=========== =========== =========== ===========
Earnings per share, basic and diluted (see note 3) .... $ (.04) $ 0.16 $ (.42) $ .40
Weighted average shares (see note 3) .................. 4,493,333 1,880,000 2,751,111 1,880,000
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
5
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the nine months ended
September 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ (1,161) $ 754
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities -
Depreciation and amortization .................................... 297 138
Deferred income taxes ............................................ (605) 89
Changes in assets and liabilities:
Accounts receivable, net ...................................... (1,108) (204)
Inventories ................................................... (199) 1,549
Prepaid expenses and other current assets ..................... (9) (215)
Other assets .................................................. 88 62
Floor plan notes payable ...................................... (206) (1,732)
Accounts payable, accrued expenses and accrued compensation ... (129) 107
Income taxes payable .......................................... 380 162
Other long term liabilities ................................... (54) 23
-------- --------
Net cash provided by (used in) operating activities .............. (2,706) 733
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................... (47) (70)
Acquisition, net of cash acquired ................................ (6,216) --
-------- --------
Net cash provided by (used in) investing activities .............. (6,263) (70)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings ............................... -- 45
Principal payments of long-term debt ............................. (123) (95)
Other current bank borrowings, net of repayments ................. (15) (25)
Due from/to related parties ...................................... (954) (96)
Issuance of common stock ......................................... 12,931 --
-------- --------
Net cash provided by (used in) financing activities .............. 11,839 (171)
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................... 2,870 492
CASH AND CASH EQUIVALENTS, beginning of period ...................... 3,539 3081
-------- --------
CASH AND CASH EQUIVALENTS, end of period ........................... $ 6,409 $ 3,573
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for - Interest ........................................... $ 211 $ 107
Cash paid for - Taxes .............................................. 103 251
</TABLE>
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
6
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Business of Hometown Auto Retailers, Inc. ("Hometown" or the "Company")
Hometown was founded on March 10, 1997 as Dealerco, Inc., a New York
Corporation, and later changed its state of incorporation by merging 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 three other dealerships (the Acquisitions) located in Connecticut,
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
For financial statement presentation purposes, as required by the
Securities and Exchange Commission, E.R.R. Enterprises, one of the Core
Operating Companies, was identified as the accounting acquirer in the July 1998
combination.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability and be measured at its fair value.
Additionally, any changes in the derivative's fair value are to be recognized
currently in earnings, unless specific hedge accounting criteria are met. This
statement is effective for fiscal years beginning after June 15, 1999. The
Company does not believe that adoption of this statement will have a material
impact on its consolidated financial statements.
3. EARNINGS PER SHARE:
Statement No. 128 "Earnings Per Share" ("SFAS 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
potentially dilutive securities. As of September 30, 1998 and 1997, the Company
does not have any potentially dilutive securities.
For this presentation, the "Earnings per share" and "Weighted average
shares" are the weighted average of the outstanding equivalent Hometown shares
of Shaker for seven months and outstanding shares of Hometown since the
offering.
For the pro forma presentation, the "Earnings per share" and "Weighted
average shares" are those of Hometown Auto Retailers, Inc and are based on the
weighted average outstanding shares of Hometown Auto Retailers, Inc. since the
offering.
7
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. 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:
9/30/98 12/31/97
------- --------
(in thousands)
New Vehicles $16,536 $ 4,623
Used Vehicles 7,150 2,420
Parts, accessories and other 1,908 566
------- -------
Total Inventories $25,594 $ 7,609
======= =======
5. BUSINESS COMBINATIONS:
In July 1998, Hometown Auto Retailers, Inc. completed simultaneously its
combination of the Core Operating Companies, the Acquisitions and the Offering.
The Core Operating Companies were acquired in exchange for common stock of
Hometown Auto Retailers, Inc. and the Acquisitions were acquired for cash.
The following table sets forth the consideration paid to the stockholders
of the Core Operating Companies (excluding E.R.R. Enterprises, the accounting
acquirer), the Acquisitions and the associated transaction costs, along with the
estimated "Excess of purchase price over net tangible assets acquired". For
presentation purposes, Muller represents the total of Muller Toyota and Muller
Chevrolet:
<TABLE>
<CAPTION>
Associated
Westwood Muller Bay State Brattleboro Pride Costs Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Cash .............................. $ -- $ -- $ 2,995 $ 2,675 $ 872 $ 175 $ 6,717
Common Stock ...................... 6,110 6,110 -- -- -- -- 12,220
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total ....................... 6,110 6,110 2,996 2,675 872 175 18,938
Less: Book value of net tangible
assets acquired ................... 1,040 (2,081) 95 (113) 301 -- (758)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Excess of purchase price over net
book value of assets acquired ..... $ 5,070 $ 8,191 $ 2,900 $ 2,788 $ 571 $ 175 $ 19,695
=========== =========== =========== =========== =========== =========== ===========
Number of shares .................. 940,000 940,000 -- -- -- -- 1,880,000
</TABLE>
8
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. BUSINESS COMBINATIONS (Continued):
The 1998 pro forma combined data presented on the following pages
represents a summation of certain data on an historical basis on the assumption
that the combination of the Core Operating Companies, the Acquisitions, and the
Offering had occurred on January 1, 1997, and includes the effects of the
specific pro forma adjustments detailed below. This data may not be comparable
to and may not be indicative of Hometown's post-combination results of
operations because the acquired dealerships were not under common control of
management. The pro forma adjustments primarily relate to: (a) amortization of
the "excess purchase price over net tangible assets acquired" using an estimated
useful life of 40 years; (b) adjusting 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 combination and the Acquisitions; (c) adjusting rent expense to
reflect newly negotiated fair market value leases; (d) adjustments to interest
income on Cash and Cash Equivalents not realized as part of the combination 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) adjustments to interest expense
resulting from the repayment of floor plan obligations with proceeds from the
Offering and the interest savings for refinancing the balance of the floor plan
obligations with a commercial lender; (f) adjustments for 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; (g) the accounting adjustments required to
reflect the purchase of the Core Operating Companies and the Acquisitions, the
recording of the associated transaction costs and the settlement of certain
related party payables and a distribution to the owners of Shaker; (h) the
adjustments needed to record the receipt of the net Offering; (i) adjustments to
reflect the settlement of the cash portion of the acquisitions; and (j)
adjustments to reflects the pay-down of certain long-term debt; and (k)
adjustment to reflects the pay-down of floor plan obligations with proceeds from
the Offering.
9
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. BUSINESS COMBINATIONS (Continued):
The following table of summary pro forma unaudited financial data
presents, for the three months ended and for the nine months ended September 30,
1998, certain combined pro forma financial data as if the combinations of the
Core Operating Companies, the Acquisitions and the Offering had occurred as of
January 1, 1997.
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income Statement Data:
Revenues
New vehicle sales .................... $ 34,616 $ 37,257 $ 102,620 $ 102,107
Used vehicle sales ................... 16,236 20,492 55,680 60,480
Parts and service sales .............. 4,578 5,016 15,022 15,424
Other dealership revenues, net ....... 1,443 1,485 4,494 4,386
----------- ----------- ----------- -----------
Total revenues .................... 56,873 64,250 177,816 182,397
Cost of sales ........................... 49,320 56,177 154,486 158,275
----------- ----------- ----------- -----------
Gross profit ...................... 7,553 8,073 23,330 24,122
Amortization of excess of purchase
price over net tangible assets
acquired ............................. 150 100 349 299
Selling, general and administrative
expenses ............................. 6,361 6,259 18,477 18,439
----------- ----------- ----------- -----------
Income from operations ............ 1,042 1,714 4,504 5,384
Other income (expense) .................. (90) 70 (570) (232)
----------- ----------- ----------- -----------
Income before taxes ............... 952 1,784 3,934 5,152
Provision for income taxes .............. 441 714 1,634 2,061
----------- ----------- ----------- -----------
Net income ........................ $ 511 $ 1,070 $ 2,300 $ 3,091
=========== =========== =========== ===========
Earnings per share, basic and
diluted (see note 3) .............. $ 0.09 $ 0.18 $ 0.40 $ 0.53
Weighted average shares ................. 5,800,000 5,800,000 5,800,000 5,800,000
Other Data:
Retail new vehicles sold ................ 1,356 1,523 3,967 4,203
Retail used vehicles sold ............... 930 1,191 3,089 3,695
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The discussion of "The Company - Pro Forma Information" should be read in
conjunction with footnote 5, "Business Combinations". The discussion on
"Hometown Auto Retailers, Inc." should be read in conjunction with the
Consolidated Financial Statements and related notes thereto appearing elsewhere
in the Company's Form 10Q for the three months and nine months ended September
30, 1998.
The Company - Pro Forma Information
Overview
In July 1998, Hometown Auto Retailers, Inc. ("Hometown" or the "Company")
completed simultaneously its acquisition of three automobile dealership groups
(the "Core Operating Companies"), the acquisition of certain assets and
liabilities of another three dealerships (the "Acquisitions") and an initial
public offering (the "Offering"). The Core Operating Companies were acquired in
exchange for common stock of Hometown Auto Retailers, Inc. The Acquisitions were
acquired for cash.
In the attached consolidated financial statements, the Exchange and the
Acquisitions are accounted for using the purchase method of accounting. E.R.R.
Enterprises, Inc. (Shaker), one of the Core Operating Companies, was identified
as the accounting acquirer for pro forma 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. Until July 31,
1998, Hometown Auto Retailers, Inc. conducted no operations under its own name
and its predecessor companies generated all revenues.
Operating Strategy
Since July 31, 1998, the Company has begun to integrate certain functions
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.
11
<PAGE>
Pro Forma Combined Revenues, Units, Gross Profit and Gross Profit Percentage to
Revenues
On a pro forma combined basis, the total revenue by category for Hometown
for the third quarter and nine months ended September 30, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
New vehicle $ 34,616 $ 37,257 $102,620 $102,107
Used vehicle - retail 12,446 15,477 41,775 46,864
Used vehicle - wholesale 3,790 5,015 13,905 13,616
Parts and service 4,578 5,016 15,022 15,424
F&I and other 1,443 1,485 4,494 4,386
-------- -------- -------- --------
Total Revenue $ 56,873 $ 64,250 $177,816 $182,397
======== ======== ======== ========
</TABLE>
On a pro forma combined basis, the units sold by category for Hometown for
the third quarter and nine months ended September 30, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
New vehicle 1,356 1,523 3,967 4,203
Used vehicle - retail 930 1,191 3,089 3,695
Used vehicle - wholesale 933 1,037 3,025 3,198
-------- -------- -------- --------
Total units sold 3,219 3,751 10,081 11,096
======== ======== ======== ========
</TABLE>
12
<PAGE>
On a pro forma combined basis, the new vehicle revenue by manufacturer for
Hometown for the third quarter and nine months ended September 30, 1998 and
1997, are as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Ford Motor $ 21,797 $ 21,781 $ 62,981 $ 59,608
Chrysler 4,290 5,701 14,703 16,025
Toyota Motor 6,990 5,863 18,246 16,846
GM 1,059 3,267 5,519 7,951
All Other 480 645 1,171 1,677
-------- -------- -------- --------
Total Revenue $ 34,616 $ 37,257 $102,620 $102,107
======== ======== ======== ========
</TABLE>
On a pro forma combined basis, the new vehicle units sold by manufacturer
for Hometown for the third quarter and nine months ended September 30, 1998 and
1997, are as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Ford Motor 801 812 2,226 2,248
Chrysler 189 261 649 738
Toyota Motor 301 269 786 758
GM 41 148 247 375
All Other 24 33 59 84
-------- -------- -------- --------
Total units sold 1,356 1,523 3,967 4,203
======== ======== ======== ========
</TABLE>
13
<PAGE>
On a pro forma combined basis, the gross profit by category for Hometown
for the third quarter and nine months ended September 30, 1998 and 1997, are as
follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
New vehicle $ 2,212 $ 2,305 $ 6,311 $ 6,291
Used vehicle - retail 1,495 1,557 5,077 5,706
Used vehicle - wholesale (2) (19) 84 43
Parts and service 2,405 2,745 7,364 7,696
F&I and other 1,443 1,485 4,494 4,386
-------- -------- -------- --------
Total Gross Profit $ 7,553 $ 8,073 $ 23,330 $ 24,122
======== ======== ======== ========
</TABLE>
On a pro forma combined basis, the gross profit percent of revenue by
category for Hometown for the third quarter and nine months ended September 30,
1998 and 1997, are as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- -------- --------
(percent) (percent)
<S> <C> <C> <C> <C>
New vehicle 6.4 6.2 6.2 6.2
Used vehicle - retail 12.0 10.1 12.2 12.2
Used vehicle - wholesale (0.1) (0.4) 0.6 0.3
Parts and service 52.5 54.7 49.0 49.9
F&I and other 100.0 100.0 100.0 100.0
-------- -------- -------- --------
Total Gross Profit percent 13.3 12.6 13.1 13.2
======== ======== ======== ========
</TABLE>
14
<PAGE>
Core Operating Companies' and Acquisitions' Revenue Comparison for the three
months and nine months ended September 30, 1998 against 1997
Total revenue for the Core Operating Companies and the Acquisitions for
the three months ended September 30, 1998, compared to total revenue for the
three months ended September 30, 1997, is as follows:
<TABLE>
<CAPTION>
For the three months ended September 30,
------------------------------------------------------
1998 1997
-------------------------- --------------------------
Core Operating Companies and Revenue % of Total Revenue % of Total
Acquisitions (in thousands) Revenue (in thousands) Revenue
-------------- --------- -------------- ---------
<S> <C> <C> <C> <C>
E.R.R. Enterprises
(Shaker including Pride) $ 16,204 28.5% $ 19,033 29.6%
Westwood 16,603 29.2% 15,329 23.9%
Muller 14,488 25.5% 17,124 26.7%
Brattleboro 5,105 9.0% 5,995 9.3%
Bay State 4,658 8.1% 6,769 10.5%
Intercompany Eliminations (185) (0.3)%
-------- -------- -------- --------
Total Revenue $ 56,873 100.0% $ 64,250 100.0%
======== ======== ======== ========
</TABLE>
Total revenue for the Core Operating Companies and the Acquisitions for
the nine months ended September 30, 1998, compared to total revenue for the nine
months ended September 30, 1997, is as follows:
<TABLE>
<CAPTION>
For the nine months ended September 30,
-------------------------------------------------------
1998 1997
-------------------------- ---------------------------
Core Operating Companies and Revenue % of Total Revenue % of Total
Acquisitions (in thousands) Revenue (in thousands) Revenue
-------------- --------- -------------- ---------
<S> <C> <C> <C> <C>
E.R.R. Enterprises
(Shaker including Pride) $ 49,925 28.1% $ 54,968 30.0%
Westwood 52,019 29.2% 41,861 23.0%
Muller 43,684 24.6% 47,141 25.9%
Brattleboro 16,067 9.0% 18,994 10.4%
Bay State 16,306 9.2% 19,433 10.7%
Intercompany Elimination (185) (0.1)%
-------- -------- -------- --------
Total Revenue $177,816 100.0% $182,397 100.0%
======== ======== ======== ========
</TABLE>
15
<PAGE>
Pro forma three months ended September 30, 1998 compared with pro forma three
months ended September 30, 1997.
Revenue
Total Revenue decreased $7.4 million, or 11.5% from $ 64.3 million for
three months ended September 30, 1997 to $56.9 million for three months ended
September 30, 1998.
Most of the decrease was in the sale of used vehicles. Revenue from the
sale of used vehicles at retail decreased $ 3.1 million, or 19.6%, from $15.5
million for the three months ended September 30, 1997, to $12.4 million for the
three months ended September 30, 1998. The decrease consisted of a decline in
unit sales of used vehicles at retail of 261 vehicles offset by an increase in
average revenue per vehicle of $390. Revenue from the sale of used vehicles at
wholesale decreased $1.2 million, or 24.4%, from $5.0 million for the three
months ended September 30, 1997, to $3.8 million for the three months ended
September 30, 1998. The decrease consisted of a decline in unit sales of used
vehicles at wholesale of 104 vehicles along with a decrease in revenue per
vehicle of $773. The Company reduced its purchases of used vehicles at auction
in the third quarter due to significant price increases, which translated into
lower used vehicle inventories and lower sales. This situation reversed itself
by the end of the third quarter and the Company is once again actively
purchasing used vehicles at auction and replenishing its inventory. The decline
in the number of used vehicles sold at wholesale reflects the lower retail
activity. The wholesaling of used vehicles is done strictly for the purpose of
pruning used vehicle inventory to maintain a fresh stock of vehicles and keep
the inventory within guidelines.
Revenue from the sale of new vehicles decreased $2.7 million, or 7.1% from
$37.3 million for the three months ended September 30, 1997 to $34.6 million for
three months ended September 30, 1998. The decrease consisted of a decline in
unit sales of new vehicles of 167, offset by an increase in average revenue per
vehicle of $1,062. The Company experienced severe shortages of several critical
brands of vehicles in the third quarter, primarily in GM products due to its
labor strike. As a result, the sales of GM vehicles fell sharply from 148 units
for the 3 months ended September 30, 1997 to 41 units for three months ended
September 30, 1998, for a drop of 107 units. In addition, there was a delay in
the arrival of new model Jeeps which negatively impacted sales in the third
quarter. Sales of new Jeeps decreased by 40 units, from 100 units for the third
quarter of 1997 to 60 units for the third quarter of 1998. The Company also
experienced shortages of other Chrysler vehicles and experienced a drop of 32
vehicles in unit sales between the third quarter of 1997, and the third quarter
of 1998.
Parts and service sales revenue decreased $0.4 million, or 8.7% from $5.0
million for the three months ended September 30, 1997, to $4.6 million for the
three months ended September 30, 1998. The decrease was primarily attributable
to the decline in warranty work on the corresponding sales of new and used
vehicles.
Finance, Insurance, Extended Service and other dealership revenues
decreased $.1 million, or 2.8% from $1.5 million for the three months ended
September 30, 1997 to $1.4 million for the three months ended September 30,
1998. The decrease was primarily attributable to the decline in sales of new and
used vehicles.
Gross Profit
Total gross profit decreased $0.5 million, or 6.4%, from $8.1 million for
the three months ended September 30, 1997, to $7.6 million for the three months
ended September 30, 1998.
Gross profit on the sale of new vehicles decreased $0.1 million, or 4.0%,
from $2.3 million for the three months ended September 30, 1997, to $2.2 million
for the three months ended September 30, 1998. The decline was due to the drop
in the sale of new vehicle units offset by an increase of $119 in the average
gross profit per unit.
16
<PAGE>
Gross profit as a percent of revenue for new vehicles increased from 6.2% for
the three months ended September 30, 1997, to 6.4% for the three months ended
September 30, 1998.
Gross profit on the sale of used vehicles at retail decreased $0.1
million, or 4.0%, from $1.6 million for the three months ended September 30,
1997, to $1.5 million for the three months ended September 30, 1998. The decline
was due to the drop in the sale of used vehicle units offset by an increase of
$291 in the average gross profit per unit. Gross profit as a percent of revenue
for used vehicles increased from 10.1% for the three months ended September 30,
1997, to 12.0% for the three months ended September 30, 1998.
Parts and service gross profit decreased $0.3 million, or 12.4%, from $2.7
million for the three months ended September 30, 1997, to $2.4 million for the
three months ended September 30, 1998. The decline in gross profit was the
directly related to the decreased revenue.
Selling, General and Administrative Expenses
The pro forma combination of Hometown's selling, general and
administration expenses includes various adjustments made to the Company's
historical financial statements for changes in compensation of the owners and
differences in the negotiated cost of the fair market valued leases.
On a pro forma basis, after adjustment, selling, general and
administrative expenses increased $0.1 million, or 1.6%, from $6.3 million for
the three months ended September 30, 1997, to $6.4 million for the three months
ended September 30, 1998. Most of the increase is due to the addition of
corporate overhead expenses related to the formation of Hometown on August 1.
The Company has not yet realized the savings from the integration of the
dealerships, the largest of which will result from refinancing its floor plan
line of credit and centralizing its cash function. Total projected integration
savings are expected to significantly offset additional corporate expenses.
Net Interest Expense
Interest expense, stated on a pro forma basis after giving effect to the
expected savings from refinancing the floor plan line of credit, increased by
$62,000, or 109%, from $57,000 for the three months ended September 30, 1997, to
$119,000 for the three months ended September 30, 1998. The floor plan interest
expense for the third quarter of 1998 includes only one month of the expected
refinancing savings because subsequent to the transaction and formation of
Hometown on August 1, 1998, reported expenses must be actual. Had the third
quarter 1998 reported floor plan interest expense included the additional two
months of pro forma interest rate savings from refinancing, interest expense for
the third quarter of 1998 and 1997 would have been approximately the same.
Other Income
Other income decreased by $98,000, or 77.2%, from $127,000 for the three
months ended September 30, 1997, to $29,000 for the three months ended September
30, 1998. The decrease resulted principally from a one-time gain on sale of
securities at Shaker in the third quarter of 1997.
Pre-Tax Income
Income before taxes decreased $0.8 million, or 46.6 %, from $1.8 million
for the three months ended September 30, 1997, to $1.0 million for the three
months ended September 30, 1998. The decrease was primarily due to the decline
in gross profit of $0.5 million, increased selling, general and administrative
expenses of $.1 million, increased floor plan interest expense of $.06 million,
and the decrease in other income of $.1 million. Pre-tax income as a percent of
total revenue is 2.8% for the three months ended September 30, 1997, and 1.7%
for the three months ended September 30, 1998.
17
<PAGE>
Pro forma nine months ended September 30, 1998 compared with pro forma nine
months ended September 30, 1997.
Revenue
Total Revenue decreased $ 4.6 million, or 2.5%, from $ 182.4 million for
nine months ended September 30, 1997 to $177.8 million for nine months ended
September 30, 1998.
Most of the decrease was in the sale of used vehicles. Revenue from the
sale of used vehicles at retail decreased $5.1 million, or 10.9%, from $46.9
million for the nine months ended September 30, 1997, to $41.8 million for the
nine months ended September 30, 1998. The decrease consisted of a decline in
unit sales of used vehicles at retail of 606 vehicles offset by an increase in
average revenue per vehicle of $841. Revenue from the sale of used vehicles at
wholesale increased $.3 million, or 2.1%, from $13.6 million for the nine months
ended September 30, 1997, to $13.9 million for the nine months ended September
30, 1998. The decrease consisted of a decline in unit sales of used vehicles at
wholesale of 173 vehicles along with an increase in revenue per vehicle of $301.
Of the total decline of $5.1 million, $2.1 million occurred in the first six
months of 1998, and can be partly attributed to consumer reaction to strong new
vehicle sales driven by new model introductions and manufacturer incentive
programs. In the third quarter, the Company reduced its purchases of used
vehicles at auction due to significant price increases, which translated into
lower used vehicle inventories and lower sales. This situation reversed itself
by the end of the third quarter and the Company is once again actively
purchasing used vehicles at auction and replenishing its inventory. The increase
in the number of used vehicles sold at wholesale reflects a strong wholesale
market in the first six months offset by a decline in wholesale sales in the
third quarter. The wholesaling of used vehicles is done strictly for the purpose
of pruning used vehicle inventory to maintain a fresh stock of vehicles and keep
the inventory within guidelines.
Revenue from the sale of new vehicles increased $.5 million, or .5% from
$102.1 million for the nine months ended September 30, 1997 to $102.6 million
for nine months ended September 30, 1998. The increase consisted of a decline in
unit sales of new vehicles of 236, offset by an increase in average revenue per
vehicle of $1,574. The increase is mostly due to new model introductions in the
first half of 1998, which generated a revenue increase of almost $3.2 million.
The consumer excitement generated by new model introductions tends to maintain
new vehicle prices at higher levels, thereby increasing a dealership's average
revenue per vehicle sold. The first half gain in revenue was offset by a decline
in the third quarter of 1998, due to severe shortages of several critical brands
of vehicles. The shortages were experienced principally in GM vehicles as a
result of the GM strike, the new redesigned Jeep as a result of manufacturer
delivery delays, and delays in shipment of some Chrysler vehicles.
Parts and service sales revenue decreased $0.4 million, or 2.6% from $15.4
million for nine months ended September 30, 1997, to $15.0 million for nine
months ended September 30, 1998. The decrease was primarily attributable to the
decline in sales of used vehicles.
Finance, Insurance and Extended Service revenue increased $0.3 million, or
9.4% from $3.2 million for the nine months ended September 30, 1997 to $3.5
million for the nine months ended September 30, 1998. Most of the increase is
due to the first half increase in new livery sales at Westwood Lincoln Mercury
associated with the introduction of the new model Lincoln Towncar. Sales of new
Lincoln Towncars into the livery industry generates significant finance and
insurance revenue.
Other dealership revenues decreased $0.2 million, or 16.6% from $1.2
million for the nine months ended September 30, 1997, to $1.0 million for the
nine months ended September 30, 1998. The decrease was primarily attributable to
the decline in unit sales of used and new vehicles.
18
<PAGE>
Gross Profit
Total gross profit decreased $0.8 million, or 3.3%, from $24.1 million for
the nine months ended September 30, 1997, to $23.3 million for the nine months
ended September 30, 1998.
Gross profit on the sale of new vehicles increased $0.02 million, or 0.3%,
from $6.29 million for the nine months ended September 30, 1997, to $6.31
million for the nine months ended September 30, 1998. The increase was due to
the drop in the sale of new vehicle units offset by an increase of $94 in the
average gross profit per unit. Gross profit as a percent of revenue for new
vehicles remained flat at 6.2%.
Gross profit on the sale of used vehicles at retail decreased $0.6
million, or 11.0%, from $5.7 million for the nine months ended September 30,
1997, to $5.1 million for the nine months ended September 30, 1998. The decline
was due to the drop in the sale of used vehicle units offset by an increase of
$129 in the average gross profit per unit.
Parts and service gross profit decreased $0.3 million, or 4.3%, from $7.7
million for the nine months ended September 30, 1997, to $7.4 million for the
nine months ended September 30, 1998. The decline in gross profit was the
directly related to the decreased revenue.
Selling, General and Administrative Expenses
The pro forma combination of Hometown's selling, general and
administration expenses includes various adjustments made to the Company's
historical financial statements for changes in compensation of the owners and
differences in the negotiated cost of the fair market valued leases.
On a pro forma basis, after adjustment, selling, general and
administrative expenses increased $0.04 million, or 0.2%, from $18.44 million
for the nine months ended September 30, 1997, to $18.48 million for the nine
months ended September 30, 1998. Most of the increase is due to the addition of
corporate overhead expenses related to the formation of Hometown on August 1.
The Company has not yet realized the savings from the integration of the
dealerships, the largest of which will result from refinancing its floor plan
line of credit and centralizing its cash function. Total projected integration
savings are expected to significantly offset additional corporate expenses.
Net Interest Expense
Interest expense, stated on a pro forma basis after giving effect to the
expected savings from refinancing the floor plan line of credit, increased by
$0.2 million, or 50.5%, from $0.4 million for the nine months ended September
30, 1997, to $0.6 million for the nine months ended September 30, 1998. The
increase is due partly to increased floor plan interest expense at Westwood
Lincoln Mercury associated with the increase in new model Towncar sales and the
difference in pro forma floor plan interest expense. The floor plan interest
expense for the third quarter of 1998 includes only one month of the expected
refinancing savings because subsequent to the transaction and formation of
Hometown on August 1, 1998, reported expenses must be actual. Part of the
interest expense increase reflects the additional two months of pro forma
interest rate savings from refinancing, that was not included in the third
quarter of 1998.
Other Income
Other income decreased by $.15 million, from an income of $.14 million for
the nine months ended September 30, 1997, to an expense of $.01 million for the
nine months ended September 30, 1998. The decrease resulted principally from a
one-time gain on sale of securities at E.R.R. in the third quarter of 1997.
19
<PAGE>
Pre-Tax Income
Income before taxes decreased $1.2 million, or 23.6 %, from $5.1 million
for the nine months ended September 30, 1997, to $3.9 million for the nine
months ended September 30, 1998. The decrease was primarily due to the decline
in gross profit of $0.8 million, increased selling, general and administrative
expenses of $.04 million, increased interest expense of $0.2 million, and the
decrease in other income of $.15 million. Pre-tax income as a percent of total
revenue is 2.8% for the nine months ended September 30, 1997, and 2.2% for the
nine months ended September 30, 1998.
Earnings Per Share, Basic and Diluted
On a pro forma combined basis, the earnings per share for the three months
and for the nine months ended September 30, 1998 are $.09 and $.40,
respectively. As of September 30, 1998, the Company does not have any
potentially dilutive securities.
Weighted Average Shares
On a pro forma combined basis, the weighted average shares for the three
months and for the nine months ended September 30, 1998 are both 5,800,000
shares. The weighted average shares represent the sum of the outstanding Class A
share (2,040,000) and Class B shares (3,760,000).
Liquidity and Capital Resources.
The Company's primary source of financing for 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 assistance, totaled approximately $1.6 million
for the nine months ended September 30, 1997 and $1.8 million for the nine
months ended September 30, 1998. Manufacturer interest assistance, which is
recorded as a reduction of interest expense, totaled approximately $0.5 million
for the nine months ended September 30, 1997 and $0.6 million for the nine
months ended September 30, 1998. The balance of the Company's floor plan lines
at September 30, 1998 was $23.6 million before the pay-down of floor plan
obligations. Of the $6.2 million proceeds from the Offering, $5.0 million was
applied to the floor plan liability accounts until the funds are needed for
future acquisitions and the balance of $1.2 million was used to provide working
capital at the acquired dealerships.
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 $47.7
million and $1.8 million respectively, to the Company's pro forma revenues and
income before income taxes for the nine months ended September 30, 1998. As
indicated above, these Acquisitions have closed.
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. Since the closing of this Acquisition, the
Company owns Brattleboro a dealership in Vermont which holds franchises to sell
the Chrysler, Dodge and Plymouth brands.
20
<PAGE>
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 Bay State Lincoln Mercury ("Bay State"), for a purchase price
of $3.0 million and the assumption of certain of Bay State's liabilities. Since
the closing of this Acquisition, the Company owns the Bay State dealership in
Framingham, Massachusetts holding franchises to sell the Lincoln and Mercury
brands.
The Company has entered into fifteen-year lease for property owned by an
affiliate of Leominster at a monthly rental of $30,000 during the first five
years, $35,000 during the second five years and $38,000 thereafter.
Pride. 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 a purchase price of approximately $872,000, including a
$55,000 deposit previously paid, plus the assumption of the floor plan and
certain other liabilities. Since the closing, Hometown has closed the Pride
facility and consolidated its operations with those of another Hometown
Jeep/Eagle dealership located less than two miles away.
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 revenues and 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 1997
and 1998, inflation did not have a significant effect on the results of the Core
Operating Companies and the Acquisitions during those periods.
21
<PAGE>
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. The statement establishes standards for the
way enterprises report information about operating segments and related
disclosures about products, services, geographic areas and major customers. This
statement is effective for annual financial statements for periods beginning
after December 15, 1997.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. The statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability and be measured at its fair value.
Additionally, any changes in the derivative's fair value are to be recognized
currently in earnings, unless specific hedge accounting criteria are met. This
statement is effective for fiscal years beginning after June 15, 1999. The
Company does not believe that adoption of this statement will have a material
impact on its financial statements.
Year 2000 Conversion
Year 2000 issues result from the inability of computer programs or
computerized equipment to accurately calculate, store or use a date subsequent
to December 31, 1999. The erroneous date can be interpreted in a number of
different ways; typically the year 2000 is represented as the year 1900. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
Hometown has recognized the need to ensure that its computer systems, equipment
and operations will not be adversely impacted by the change to the calendar year
2000. As such, the Company has taken steps to identify potential areas of risk
and has begun addressing these in its planning, purchasing and daily operations.
The total cost of converting all internal systems, equipment and operations for
the year 2000 has not been fully quantified, but, based on current facts and
circumstances, is not expected to be material to Hometown's financial position.
With respect to acquisitions, the Company reviews an acquisition's year 2000
readiness during the due diligence process. The Company is currently reviewing
the potential adverse impact resulting from the possible failure of third party
service providers and vendors to prepare for the year 2000.
The Company is dependent upon its dealerships' computer systems in its
daily operations. All of the Company's dealerships are, or are expected to be,
using a computer system supported by a major automobile dealership computer
system provider. The Company has contacted each of these providers and has
received assurance from the providers that their systems are, or will be, year
2000 ready. The Company is dependent upon these providers, as are most
dealerships in the United States, to address the year 2000 issue.
The Company is primarily dependent upon the Manufacturers for the
production and delivery of new vehicles and parts. Although the Company has no
reason to believe that the Manufacturers are not year 2000 ready, the Company
has been unable to obtain written assurance from them that their systems are
year 2000 ready.
Failure by the Company, the Manufacturers or the Company's third party
service providers and vendors to adequately address the year 2000 issue could
have a material adverse effect on the Company.
Forward Looking Statement
When used in the Quarterly Report on Form 10Q, the words "may", "will",
"should", "expect", "believe", "anticipate", "continue", "estimate", "project",
"intend" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act regarding events, conditions and financial trends that
may affect the Company's future
22
<PAGE>
plans of operations, business strategy, results of operations and financial
condition. The Company wishes to ensure that such statements are accompanied by
meaningful cautionary statements pursuant to the safe harbor established in the
Private Securities Litigation Reform Act of 1995. Prospective investors are
cautioned that any forward-looking statements are not guarantees of future
performance and are subject to risks and uncertainties and that actual results
may differ materially from those included within the forward-looking statements
as a result of various factors including the ability of the Company to
consummate, and the terms of, acquisitions. Such forward-looking statements
should, therefore, be considered in light of various important factors,
including those set forth herein and others set forth from time to time in the
Company's reports and registration statements filed with the Securities and
Exchange Commission (the "Commission"). The Company disclaims any intent or
obligation to update such forward-looking statements.
23
<PAGE>
Hometown Auto Retailers, Inc.
The following discussion and analysis are based on the historical
financial statements of Hometown Auto Retailers, Inc. ("Hometown"), since July
1998, and E.R.R. Enterprises, Inc. ("Shaker") collectively referred to as
Hometown. Shaker was one of the three Core Operating Companies of Hometown and
was deemed to be the accounting acquirer.
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 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% annually, 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.
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Revenues
Revenues increased by $24.3 million, or 153.3%, from $15.8 million for the
three months ended September 30, 1997, to $40.1 million for the three months
ended September 30, 1998. Most of the increase was due to the acquisition of six
dealerships on August 1, 1998, acquired with the proceeds of the initial public
offering completed on July 31, 1998.
24
<PAGE>
New vehicle sales increased by $17.2 million, or 219.6%, from $7.8 million
for the three months ended September 30, 1997, to $25.0 million for the three
months ended September 30, 1998. Of that increase $0.5 million was the result of
an increase of 25 units sold at the Shakers dealerships offset by a decline of
$177 in the average revenue received. The remaining $16.7 million increase was
due to the acquisitions.
Used vehicle sales increased by $4.7 million, or 78.9%, from $6.0 million
for the three months ended September 30, 1997, to $10.7 million for the three
months ended September 30, 1998. That increase consisted of a $5.7 million
increase due to the acquisitions offset by a decline of $1.0 million at the
Shaker dealerships. The Shaker dealerships sold 89 fewer used vehicles offset by
an increase of $397 in the average revenue received. Used vehicle sales were
adversely affected by an increase in the auction price of used cars. Shaker
chose not to buy at the inflated auction prices thereby lowering inventory and
sales. Prices have since returned to normal levels and Shaker is once again
purchasing used vehicles at auction.
Parts and service revenue increased by $1.8 million, or 114.9%, from $1.6
million for the three months ended September 30, 1997, to $3.4 million for the
three months ended September 30, 1998. Parts and service revenue at the Shaker
dealerships were essentially flat and balance of the increase resulted from the
acquisitions.
Other dealership revenues increased by $0.6 million, or 128.4%, from $0.4
million for the three months ended September 30, 1997, to $1.0 million for the
three months ended September 30, 1998. Other dealership revenues at the Shaker
dealerships was essentially flat and balance of the increase resulted from the
acquisitions.
Gross Profit
Gross profit increased $3.3 million or 152.0%, from $2.1 million for the
three months ended September 30, 1997, to $5.4 million for the three months
ended September 30, 1998.
Gross profit at the Shaker dealerships was essentially flat, increasing by
only $70,000 mostly from the increase in the average revenue per used car sold.
The remaining $3.2 million increase was due to the acquisitions.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased by $3.0 million, or
175.4%, from $1.7 million for the three months ended September 30, 1997, to $4.7
million, for the three months ended September 30, 1998. The increase resulted
primarily from the acquisitions.
Interest Expenses, Net
Net interest expense increased by $0.6 million, or 147.5%, from $0.04
million, for the three months ended September 30, 1997, to $0.1 million for the
three months ended September 30, 1998. The increase was due primarily to
increased floor plan interest resulting from the assumption of additional floor
plan debt associated with the acquisitions.
Pre-Tax Income
Pre-Tax Income decreased from $0.5 million for the three months ended
September 30, 1997, to $0.4 million for the three months ended September 30,
1998, a decrease of $0.1 million or 28.3%. The decrease is due to an increase of
$0.5 million in pre-tax income from the combined entities acquired plus the
$0.25
25
<PAGE>
million in pre-tax income earned by the Shaker dealerships in the third quarter,
offset by $0.4 million in goodwill amortization and additional overhead expenses
at the corporate level associated with becoming a public company.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September 30,
1997
Revenues
Revenues increased by $23.0 million, or 50.4%, from $45.7 million for the
nine months ended September 30, 1997, to $68.7 million for the nine months ended
September 30, 1998. Most of the increase was due to the acquisition of six
dealerships on August 1, 1998, acquired with the proceeds of the initial public
offering completed on July 31, 1998.
New vehicle sales increased by $15.9 million, or 70.8%, from $22.5 million
for the nine months ended September 30, 1997, to $38.4 million for the nine
months ended September 30, 1998. Of that increase $0.7 million was the result of
an increase of $202 in the average revenue received per unit sold offset by a
decline in units sold of 42 units at the Shaker dealerships. The remaining $15.2
million increase was due to the acquisitions.
Used vehicle sales increased by $4.7 million, or 27.8%, from $17.0 million
for the nine months ended September 30, 1997, to $21.7 million for the nine
months ended September 30, 1998. That increase consisted of a $3.7 million
increase due to the acquisitions offset by a decrease of $1.0 million at the
Shaker dealerships. The Shaker dealerships sold 70 fewer used vehicles at a
decreased average revenue received of $790. Most of the decline in used vehicle
sales at the Shaker dealerships resulted from an increase in the auction price
of used cars in the third quarter. Shaker chose not to buy at the inflated
auction prices thereby lowering inventory and sales. Prices have since returned
to normal levels and Shaker is once again purchasing used vehicles at auction.
Parts and service revenue increased by $1.7 million, or 34.8%, from $4.9
million for the nine months ended September 30, 1997, to $6.6 million for the
nine months ended September 30, 1998. Parts and service revenue at the Shaker
dealerships was essentially flat and most of the increase resulted from the
acquisitions.
Other dealership revenues increased by $0.7 million, or 51.4%, from $1.3
million for the nine months ended September 30, 1997, to $1.9 million for the
nine months ended September 30, 1998. Other dealership revenues at the Shaker
dealerships was essentially flat and most of the increase resulted from the
acquisitions.
Gross Profit
Gross profit increased $3.2 million or 48.7%, from $6.5 million for the
nine months ended September 30, 1997, to $9.7 million for the nine months ended
September 30, 1998. Gross profit at the Shaker dealerships was essentially flat
and most of the increase resulted from the acquisitions.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased by $5.4 million, or
104.1%, from $5.2 million for the nine months ended September 30, 1997, to $10.6
million, for the nine months ended September 30, 1998. Of the increase,
approximately $2.7 million resulted from increased owner's compensation accrued
in the first quarter of 1998. The remaining $2.7 million resulted from the
acquisitions.
26
<PAGE>
Interest Expenses, Net
Net interest expense increased by $0.02 million, or 10.6%, from $0.18
million, for the nine months ended September 30, 1997, to $0.2 million for the
nine months ended September 30, 1998. The increase was due primarily to
increased floor plan interest resulting from the assumption of additional floor
plan debt associated with the acquisitions of approximately $0.14 million offset
by a decrease in floor plan interest expense at the Shaker dealerships of
approximately $0.1 million.
Pre-Tax Income
Pre-Tax Income decreased from $1.3 million for the nine months ended
September 30, 1997, to a loss of $1.3 million for the nine months ended
September 30, 1998, a decrease of $2.6 million or 202.1%. The decrease is due to
an increase of $0.5 million in pre-tax income from the combined entities
acquired less the $1.4 million in pre-tax loss in the Shaker dealerships for the
nine months, and less the $0.4 million in goodwill and additional overhead
expenses at the corporate level associated with becoming a public company. The
$1.4 million loss in the Shaker dealerships was due primarily to the increased
owner's compensation accrued in the first quarter.
Liquidity and Capital Resources
The principal sources of liquidity are cash on hand, cash from operations
and floor plan financing.
Cash and Cash Equivalents
Total cash and cash equivalents at September 30, 1998 were $6.4 million.
The net increase of $2.9 million in cash and cash equivalents from December 31,
1997 was primarily due to $12.9 million proceeds received from the issuance of
shares of Hometown stock, the $6.7 million cash disbursement for the
acquisitions and the distribution of $2.5 million to the owner employees of
Shaker.
Cash Flow from Operations
For the nine months ended September 30, 1998, Hometown used $2.7 million
in cash from operating activities to fund the distribution to the owner
employees of Shaker and to fund net increases in current operating accounts.
Floor Plan Financing
The dealerships obtain primarily all of their floor plan financing for its
vehicle inventory from the vehicle's manufacturer. As of September 30, 1998,
Hometown had approximately $23.6 million of floor plan financing outstanding,
primarily bearing interest at prime rate plus 100 basis points.
Cyclicality
Hometown'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 Hometown's business, Hometown believes that the impact
on the Hometown'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.
27
<PAGE>
Seasonality
Hometown's operations will be subject to seasonal variations, with the
second and third quarters generally contributing more revenues and 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 1997
and 1998, inflation did not have a significant effect on the results of Shaker
or Hometown during those periods.
28
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
1. 27.1 Financial Data Schedule
b. Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Hometown Auto Retailers, Inc.
November 18, 1998 By: /s/ Joseph Shaker
- ----------------- ----------------------------------
Date Joseph Shaker, President and Chief
Operating Officer
November 18, 1998 By: /s/ John Rudy
- ----------------- ----------------------------------
Date John Rudy, Chief Financial and
Accounting Officer
29
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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