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 June 30, 1999
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 2,140,000
Common Stock, Class B, par value $.001 per share 3,760,000
2
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Consolidated Financial Statements (unaudited) 5
Consolidated Balance Sheets at June 30, 1999
and December 31, 1998 6
Consolidated Statements of Operations for
the six and three months ended June 30, 1999 and 1998 7
Consolidated Statements of Cash Flows for
the six months ended June 30, 1999 and 1998 8
Notes to Consolidated Financial Statements 9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of Proceeds 28
ITEM 6 Exhibits and Reports on Form 8-K 28
SIGNATURES 29
3
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FORWARD LOOKING STATEMENTS
Certain statements made in this Quarterly Report on Form 10-Q are
"forward-looking statements" (within the meaning of the Private Securities
Litigation Reform Act of 1995) regarding the plans and objectives of management
for future operations. Such statements involve known and unknown risks,
uncertainties and other factors that may cause actual results, performance or
achievements of the Company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. The forward-looking statements included herein are based on current
expectations that involve numerous risks and uncertainties. The Company's plans
and objectives are based, in part, on assumptions involving the continued
expansion of business. Assumptions relating to the foregoing involve judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond the control of the
Company. Although the Company believes that its assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate and, therefore, there can be no assurance that the forward-looking
statements included in this Report will prove to be accurate. In light of the
significant uncertainties inherent in the forward-looking statements included
herein particularly in view of the Company's limited history of operating
multiple dealerships in a combined entity, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. Factors that
could cause actual results to differ materially from those expressed or implied
by such forward-looking statements include, but are not limited to, the factors
set forth herein under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
4
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
HOMETOWN AUTO RETAILERS, INC.
BASIS OF PRESENTATION
In July 1998, Hometown simultaneously completed the combination of the
Core Operating Companies, the Acquisitions and the Offering. The Core Operating
Companies were acquired in exchange for common stock of Hometown. The
Acquisitions were acquired for cash.
The accompanying statement of operations for the three months and six
months ended June 30, 1998, and the statement of cash flows for the six months
ended June 30, 1998, present 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 ofJune 30, 1999 and December
31, 1998, the statements of operations for the three months and six months ended
June 30, 1999, and the statement of cash flows for the six months ended June 30,
1999, present the consolidated operations of: (i) Shaker; and (ii) the remaining
Core Operating Companies and Acquisitions.
The Company believes that; (i) the accompanying financial information
contains all the material adjustments necessary to fairly present its financial
position as of June 30, 1999; (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 the 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.
5
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HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands)
June 30, December 31,
ASSETS 1999 1998
(Note 2) (Note 2)
----------- ---------
Current Assets
Cash and cash equivalents $ 658 $ 5,514
Accounts receivable, net 7,845 4,665
Inventories 42,840 30,554
Prepaid expenses and other current assets 2,706 1,534
------- -------
Total current assets 54,049 42,267
Property and equipment, net 7,863 2,293
Goodwill, net 23,275 20,879
Other assets 1,520 972
------- -------
Total Assets $86,707 $66,411
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Floor plan notes payable $40,604 $29,624
Accounts payable and accrued expenses 4,945 4,798
Current maturities of long-term debt 823 946
Other current bank borrowings -- 1,200
------- -------
Total current liabilities 46,372 36,568
Long-term debt 9,195 375
Due to related parties 71 238
------- -------
Total liabilities 55,638 37,181
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, 2,140,000(`99) 2,040,000
(`98) issued and outstanding 2 2
Common stock, Class B, $.001 par value, 3,760,000
shares authorized, issued and outstanding 4 4
Additional paid-in capital 26,194 25,194
Retained earnings 4,869 4,030
------- -------
Total stockholders' equity 31,069 29,230
------- -------
Total liabilities and stockholders' equity $86,707 $66,411
======= =======
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
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HOMETOWN AUTO RETAILERS, INC
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
New vehicle sales $ 45,702 $ 7,482 $ 81,301 $ 13,449
Used vehicle sales 23,530 5,243 40,306 10,966
Parts and service sales 6,126 1,623 11,034 3,236
Other dealership revenues, net 1,802 474 3,149 915
----------- ----------- ----------- -----------
Total revenues 77,160 14,822 135,790 28,566
Cost of sales
New vehicle sales 43,005 7,027 76,668 12,617
Used vehicle sales 21,338 4,742 36,608 9,879
Parts and service sales 2,593 848 4,684 1,733
----------- ----------- ----------- -----------
Cost of sales 66,936 12,617 117,960 24,229
----------- ----------- ----------- -----------
Gross profit 10,224 2,205 17,830 4,337
Amortization of goodwill 150 -- 286 --
Selling, general and administrative
expenses 8,343 1,713 15,268 5,907
----------- ----------- ----------- -----------
Income (loss) from operations 1,731 492 2,276 (1,570)
Other income (expense)
Interest expense, net (482) (43) (775) (100)
Other income (expense), net (42) 39 (43) 33
----------- ----------- ----------- -----------
Income (loss) before taxes 1,207 488 1,458 (1,637)
Provision (benefit) for income taxes 519 196 619 (654)
----------- ----------- ----------- -----------
Net income (loss) $ 688 $ 292 $ 839 $ (983)
=========== =========== =========== ===========
Earnings (loss) per share, basic (Note 3) $ 0.12 $ .16 $ .14 $ (0.52)
Earnings (loss) per share, diluted (Note 3) $ 0.11 $ .16 $ 0.14 $ (0.52)
Weighted average shares, basic (Note 3) 5,900,000 1,880,000 5,850,000 1,880,000
Weighted average shares, diluted (Note 3) 6,052,000 1,880,000 5,927,000 1,880,000
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
7
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HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Six Months ended
June 30,
------------------------
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 839 $ (983)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities -
Depreciation and amortization 545 82
Gain on sale of assets (28)
Deferred income taxes 479 (655)
Changes in assets and liabilities:
Accounts receivable, net (958) (325)
Inventories (5,252) 1,323
Prepaid expenses and other
current assets (1,524) (408)
Other assets (451) 106
Floor plan notes payable 6,938 (1,886)
Accounts payable, accrued expenses (1,341) 2,894
------- -------
Net cash provided by (used in)
operating activities (725) 120
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (5,123) (18)
Proceeds from sales of property and
equipment 37 54
Acquisition, net of cash acquired (3,171) --
------- -------
Net cash provided by (used in)
investing activities (8,257) 36
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 9,389 --
Principal payments of long-term debt (1,219) (45)
Payments of floor plan notes (2,538)
Other current bank borrowings, net
of repayments (1,700) (2)
Due from/to related parties 194 30
------- -------
Net cash provided by (used in)
financing activities 4,126 (17)
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (4,856) 139
CASH AND CASH EQUIVALENTS, beginning
of period 5,514 3,539
------- -------
CASH AND CASH EQUIVALENTS, end
of period $ 658 $ 3,678
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid for - Interest $ 775 $ 76
Cash paid for - Taxes 417 --
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
8
<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 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
In July 1998, Hometown simultaneously completed the combination of the
Core Operating Companies, the Acquisitions and the Offering. The Core Operating
Companies were acquired in exchange for common stock of Hometown. The
Acquisitions were acquired for cash.
The accompanying consolidated statements of operations and cash flows for
the three month and six month periods ended June 30, 1998 present the operations
of E.R.R. Enterprises, Inc, and Subsidiaries ("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 consolidated balance sheets as of June 30, 1999 and
December 31, 1998, and the consolidated statements of operations for the three
month and six month periods ended June 30, 1999 and the consolidated statement
of cash flows for the six months ended June 30, 1999, present the consolidated
operations of: (i) Shaker for all periods; and (ii) the remaining Core Operating
Companies, the Acquisitions and any additional acquisitions, effective with the
respective acquisition dates.
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.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosure About Segments of
an Enterprise and Related Information". SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Comparative information for earlier
years presented is to be restated. The Company considers its business to be a
single segment entity and therefore the adoption has had no impact on the
Company's consolidated financial position, results of operations or cash flows.
9
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HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 1998, the Financial Accounting Standards Board issued SFAS 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, 2000. The Company does not believe that
adoption of this statement will have a material impact on its consolidated
financial statements.
3. EARNINGS (LOSS) PER SHARE:
"Basic earnings (loss) per share" represents net income (loss) divided by
the weighted average shares outstanding. "Diluted earnings (loss) per share"
represents net income (loss) divided by weighted average shares outstanding
adjusted for the incremental dilution of potentially dilutive securities. For
the three months and six months ended June 30, 1998, the Company did not have
any potentially dilutive securities. For the three months and six months ended
June 30, 1999, weighted average shares include potentially dilutive shares
related to a share price guarantee in connection with the acquisition of Toyota
of Newburgh (See Note 5).
"Earnings (loss) per share" and "Weighted average shares", for the three
months and six months ended June 30, 1999, are based on the weighted average of
the outstanding Hometown shares. The "Earnings (loss) per share" and "Weighted
average shares", for the three months and six months ended June 30, 1998, are
based on the weighted average of the outstanding equivalent Hometown shares of
Shaker only.
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.
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:
6/30/99 12/31/98
------- --------
(in thousands)
New Vehicles $29,665 $21,759
Used Vehicles 11,180 7,209
Parts, accessories and other 1,995 1,586
------- -------
Total Inventories $42,840 $30,554
======= =======
10
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HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. BUSINESS COMBINATIONS:
In July 1998, Hometown Auto Retailers, Inc. simultaneously completed 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. (the "Exchange") and the Acquisitions were
acquired for cash.
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, 1998, and includes the effects of pro forma
adjustments. 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 goodwill 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; (j) adjustments to reflect the pay-down of certain long-term debt;
and (k) adjustment to reflect the pay-down of floor plan obligations with
proceeds from the Offering.
In January 1999, the Company acquired all of the Common Stock of
Morristown Auto Sales, Inc., a Lincoln/Mercury dealer in New Jersey for
approximately $.5 million in cash. The transaction has been accounted for as a
purchase and the resulting goodwill was approximately $.6 million which will be
amortized over 40 years.
In April 1999, the Company acquired its first dealership in New York,
Newburgh Toyota, for a purchase price of approximately $2.9 million in cash,
100,000 shares of Hometown Class A Common Stock and the assumption of floor plan
and various other debt for the fully capitalized operation. The Company has
guaranteed that the stock issued in connection with this transaction will have a
value of $1,000,000 at the end of a two-year period. Additional shares of the
Company's Common stock will be issuable if there is a shortfall. This dealership
is expected to add approximately $50.0 million and $1.0 million, respectively,
to the Company's annualized revenues and income before income taxes for the year
ended December 1999.
11
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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
the unaudited consolidated results of operations for the three months and six
months ended June 30, 1999; and for the three months and six months ended June
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, 1998.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------------- --------------------------
1999 1998 1999 1998
(Pro forma) (Pro forma)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income Statement Data:
Revenues
New vehicle sales $ 45,702 $ 38,323 $ 81,301 $ 71,816
Used vehicle sales 23,530 20,196 40,306 40,709
Parts and service sales 6,126 5,587 11,034 11,283
Other dealership revenues, net 1,802 1,558 3,149 3,068
----------- ----------- ----------- -----------
Total revenues 77,160 65,664 135,790 126,876
Cost of sales 66,936 57,380 117,960 110,453
----------- ----------- ----------- -----------
Gross profit 10,224 8,284 17,830 16,423
Amortization of goodwill 150 102 286 208
Selling, general and
administrative expenses 8,343 6,314 15,268 12,578
----------- ----------- ----------- -----------
Income from operations 1,731 1,868 2,276 3,637
Other expense
Interest expense, net (482) (236) (775) (497)
Other expense, net (42) (22) (43) (33)
----------- ----------- ----------- -----------
Income before taxes 1,207 1,610 1,458 3,107
Provision for income taxes 519 644 619 1,243
----------- ----------- ----------- -----------
Net income $ 688 $ 966 $ 839 $ 1,864
=========== =========== =========== ===========
Earnings per share,
basic (Note 3) $ 0.12 $ 0.16 $ 0.14 $ 0.32
Earnings per share,
dilutive (Note 3) $ 0.11 $ 0.16 $ 0.14 $ 0.32
Weighted average shares,
basic 5,900,000 5,800,000 5,850,000 5,800,000
Weighted average shares,
Dilutive 6,052,000 5,800,000 5,927,000 5,800,000
Other Data:
Retail new vehicles sold 1,970 1,464 3,331 2,722
Retail used vehicles sold 1,351 1,093 2,387 2,220
</TABLE>
12
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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 ended June 30, 1999.
The Company - Pro Forma Information
Overview
In July 1998, Hometown simultaneously completed the combination of the
Core Operating Companies, the Acquisitions and the Offering. The Core Operating
Companies were acquired in exchange for common stock of Hometown. The
Acquisitions were acquired for cash.
In the attached pro forma consolidated financial statements, the Exchange,
the Acquisitions and other 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.
The 1998 pro forma combined data 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 the first day of
the period presented, and includes the effects of pro forma adjustments. 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 goodwill 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
reflect the pay-down of certain long-term debt; and (k) adjustment to reflect
the pay-down of floor plan obligations with proceeds from the Offering.
13
<PAGE>
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.
Combined Revenues, Units, Gross Profit and Gross Profit Percentage to Revenues
The total revenue by category for Hometown for the quarters and six months
ended June 30, 1999 and June 30, 1998 (Pro forma), are as follows:
For the three months ended For the six months ended
June 30, June 30,
1999 1998 1999 1998
(Pro forma) (Pro forma)
--------- -------- -------- --------
(in thousands) (in thousands)
New vehicle $ 45,702 $ 38,323 $ 81,301 $ 71,816
Used vehicle - retail 18,966 14,895 33,376 30,368
Used vehicle - wholesale 4,564 5,301 6,930 10,341
Parts and service 6,126 5,587 11,034 11,283
F&I and other 1,802 1,558 3,149 3,068
-------- -------- -------- --------
Total Revenue $ 77,160 $ 65,664 $135,790 $126,876
======== ======== ======== ========
The units sold by category for Hometown for the quarters and six months
ended June 30, 1999 and June 30, 1998 (Pro forma), are as follows:
For the three months ended For the six months ended
June 30, June 30,
1999 1998 1999 1998
(Pro forma) (Pro forma)
-------- ----------- -------- ------------
New vehicle 1,970 1,464 3,331 2,722
Used vehicle - retail 1,351 1,093 2,387 2,220
Used vehicle - wholesale 842 1,102 1,467 2,135
----- ----- ----- -----
Total units sold 4,163 3,659 7,185 7,077
===== ===== ===== =====
14
<PAGE>
The new vehicle revenue by manufacturer for Hometown for the quarters and
six months ended June 30, 1999 and June 30, 1998 (Pro forma), are as follows:
For the three months ended For the six months ended
June 30, June 30,
1999 1998 1999 1998
(Pro forma) (Pro forma)
--------- ----------- --------- -----------
(in thousands) (in thousands)
Ford Motor $24,465 $23,425 $47,317 $44,997
Toyota Motor 14,269 6,658 20,450 11,256
Chrysler 5,274 5,625 9,931 10,413
GM 1,459 2,216 2,909 4,461
All Other 235 399 694 689
------- ------- ------- -------
Total Revenue $45,702 $38,323 $81,301 71,816
======= ======= ======= =======
The new vehicle units sold by manufacturer for Hometown for the quarters
and six months ended June 30, 1999 and June 30, 1998 (Pro forma), are as
follows:
For the three months ended For the six months ended
June 30, June 30,
1999 1998 1999 1998
(Pro forma) (Pro forma)
-------- ----------- --------- -----------
Ford Motor 1,015 814 1,843 1,536
Toyota Motor 656 284 924 485
Chrysler 225 249 406 460
GM 60 97 120 206
All Other 14 20 38 35
----- ----- ----- -----
Total units sold 1,970 1,464 3,331 2,722
===== ===== ===== =====
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The gross profit by category for Hometown for the quarters and six months
ended June 30, 1999 and June 30, 1998 (Pro forma), are as follows:
For the three months ended For the six months ended
June 30, June 30,
1999 1998 1999 1998
(Pro forma) (Pro forma)
--------- ----------- ---------- -----------
(in thousands) (in thousands)
New vehicle $ 2,697 $ 2,395 $ 4,633 $ 4,340
Used vehicle - retail 2,100 1,643 3,644 3,631
Used vehicle - wholesale 92 43 54 86
Parts and service 3,533 2,645 6,350 5,298
F&I and other 1,802 1,558 3,149 3,068
------- ------- ------- -------
Total Gross Profit $10,224 $ 8,284 $17,830 $16,423
======= ======= ======= =======
The gross profit percent of revenue by category for Hometown for the
quarters and six months ended June 30, 1999 and June 30, 1998 (Pro forma), are
as follows:
For the three months ended For the six months ended
June 30, June 30,
1999 1998 1999 1998
(Pro forma) (Pro forma)
--------- ----------- ---------- -----------
New vehicle 5.9% 6.2% 5.7% 6.0%
Used vehicle - retail 11.1% 11.0% 10.9% 12.0%
Used vehicle - wholesale 2.0% 0.8% 0.8% 0.8%
Parts and service 57.7% 47.3% 57.5% 47.0%
F&I and other 100.0% 100.0% 100.0% 100.0%
Total Gross Profit percent 13.3% 12.6% 13.1% 12.9%
Three months ended June 30, 1999 compared with pro forma three months ended June
30, 1998.
Revenue
Total Revenue increased $11.5 million, or 17.5% from $65.7 million for the
three months ended June 30, 1998 to $77.2 million for the three months ended
June 30, 1999.
An increase of $17.2 million related to the acquisitions of Toyota of
Newburgh on April 1, 1999 and Morristown Lincoln/Mercury on January 1, 1999 was
offset by reductions in "same store" revenues for the other dealerships of $5.7
million or 8.7%.
16
<PAGE>
Same store revenue from the sale of new vehicles decreased $2.7 million,
or 7.0% from $38.3 million for the three months ended June 30, 1998 to $35.6
million for the three months ended June 30, 1999. The decrease consisted of a
decline in unit sales of new vehicles of 68, and a decrease in average revenue
per vehicle of $660. Same store revenue per unit of Lincoln/Mercury cars (which
is the highest selling brand in the Company) decreased $2,090 reflecting changes
in pricing and a change in mix to lower priced models. This change was
principally caused by reductions in the sales of Lincoln Town Cars to livery
operators related to the introduction of model changes in the 1998 model year.
Livery operators typically replace their fleets in the year of a model change
and therefore sales tend to be reduced in the succeeding year.
Revenue from the sale of used vehicles at retail increased $ 4.1 million,
or 27.5%, from $14.9 million for the three months ended June 30, 1998, to $19.0
million for the three months ended June 30, 1999. The principal reasons for the
increase included acquisition related increases of $4.2 million offset by a
decrease in same store revenues of $0.1 million or 0.7%. A decline in same store
unit sales of used vehicles at retail of 47 vehicles was offset by an increase
in average revenue per vehicle of $503. Same store unit sales of used vehicles
at wholesale declined 480 units or 43.6% reflecting the implementation of an
inventory management strategy whereby used cars are transferred between
dealerships to be sold at retail rather than being sold at wholesale which can
result in much lower gross profit.
Same store parts and service sales revenue decreased $.7 million, or 12.5%
from $5.6 million for the three months ended June 30, 1998, to $4.9 million for
the three months ended June 30, 1999. The decrease was primarily attributable to
the decline in warranty work on the corresponding reduced sales of new and used
vehicles.
Same store finance, insurance, extended service and other dealership
revenues decreased $0.1 million, or 6.3% from $1.6 million for the three months
ended June 30, 1998 to $1.5 million for the three months ended June 30, 1999.
This decline is a result of the reduced sales levels referred to above.
Gross Profit
Total gross profit increased $1.9 million, or 22.9%, from $8.3 million for
the three months ended June 30, 1998, to $10.2 million for the three months
ended June 30, 1999. The primary reason for this increase was the effect of the
aforementioned acquisitions.
Same store gross profit decreased $0.4 million, or 4.8%, from $8.3 million
for the three months ended June 30, 1998, to $7.9 million for the three months
ended June 30, 1999.
Average gross profit per new vehicle on a same store basis decreased $128
as a result of changes in pricing and mix.
Same store gross profit on the sale of used vehicles at retail decreased
$0.2 million, or 12.5%, from $1.6 million for the three months ended June 30,
1998, to $1.4 million for the three months ended June 30, 1999. The decline was
due to the decrease in the sale of used vehicle units together with a decrease
of $211 in the average gross profit per unit.
Same store parts and service gross profit increased $0.2 million, or 7.7%,
from $2.6 million for the three months ended June 30, 1998, to $2.8 million for
the three months ended June 30, 1999. The increase in gross profit is related to
improved pricing together with increased cost control at the dealerships.
Amortization of Goodwill
Goodwill amortization increased to $150,000 for the quarter ended June 30,
1999 from $102,000 for the quarter ended June 30, 1998, reflecting the
acquisitions referred to above.
17
<PAGE>
Selling, General and Administrative Expenses
On a pro forma basis, after adjustment, selling, general and
administrative expenses increased $2.0 million, or 31.7%, from $6.3 million for
the three months ended June 30, 1998, to $8.3 million for the three months ended
June 30, 1999. $1.7 million of the increase is due to the above mentioned
acquisitions and the remainder includes the addition of corporate overhead
expenses related to operation as a public company, increased depreciation
related to real estate acquisitions, and increased advertising and promotion.
The Company has not yet fully realized the savings from the integration of the
dealerships.
Net Interest Expense
After pro forma adjustments were reflected for the quarter ended June 30,
1998 interest expense increased $0.3 million or 150.0%, from $0.2 million for
the quarter ended June 30, 1998 to $0.5 for the quarter ended June 30, 1999.
This increase was the result of increased floor plan liabilities in support of
higher seasonal inventory levels and increased long term debt related to the
purchase of the business of Toyota of Newburgh and the purchase of the real
estate at Baystate Lincoln / Mercury.
Other Income
Other income was insignificant in both quarters presented.
Pre-Tax Income
Income before taxes decreased $0.4 million, or 25.0 %, from $1.6 million
for the three months ended June 30, 1998, to $1.2 million for the three months
ended June 30, 1999. The decrease was primarily due to increased selling,
general and administrative expenses of $2.0 million, increased interest expense
of $0.3 million offset by increased gross profit of $2.0 million. Pre-tax income
as a percent of total revenue is 2.4% for the three months ended June 30, 1998,
and 1.6% for the three months ended June 30, 1999.
Provision (benefit) for income tax
The effective income tax rate was 40% in the three months ended June 30,
1998 and 43% in the three months ended June 30, 1999. The change in the rate was
the result of the impact of current forecasts of income before taxes, and
current forecasts of permanent differences between tax and book income.
Net Income
Net income decreased $0.3 million, or 30.0%, from $1.0 million for the
quarter ended June 30, 1998, to $0.7 million for the quarter ended June 30,
1999. The decrease was primarily due to increased selling, general and
administrative expenses of $2.0 million, increased interest expense of $0.3
million offset by increased gross profit of $2.0 million and a decrease in the
Provision for Income Taxes of $0.1 million.
Earnings Per Share, Basic and Diluted
See Note 5 to the Consolidated Financial Statements for a description of
potentially dilutive securities in 1999.
18
<PAGE>
Six months ended June 30, 1999 compared with pro forma six months ended June 30,
1998
Revenue
Total revenue increased $8.9 million, or 7.0% from $126.9 million for the
six months ended June 30, 1998 to $135.8 million for the six months ended June
30, 1999.
An increase of $20.1 million related to the acquisitions of Toyota of
Newburgh on April 1, 1999 and Morristown Lincoln/Mercury on January 1, 1999 was
offset by reductions in "same store" revenues for the other dealerships of $11.2
million or 8.8%.
Same store revenue from the sale of new vehicles decreased $2.3 million,
or 3.2% from $71.8 million for the six months ended June 30, 1998 to $69.5
million for the six months ended June 30, 1999. The decrease consisted of a
decline in unit sales of new vehicles of 26, and a decrease in average revenue
per vehicle of $604. Same store revenue per unit of Lincoln/Mercury cars (which
is the highest selling brand in the Company) decreased $2,543 reflecting changes
in pricing and a change in mix to lower priced models. This change was
principally caused by reductions in the sales of Lincoln Town Cars to livery
operators related to the introduction of model changes in the 1998 model year.
Livery operators typically replace their fleets in the year of a model change
and therefore sales tend to be reduced in the succeeding year.
Revenue from the sale of used vehicles at retail increased $ 3.0 million,
or 9.9%, from $30.4 million for the six months ended June 30, 1998, to $33.4
million for the six months ended June 30, 1999. The principal reasons for the
increase included acquisition related increases of $4.9 million offset by a
decrease in same store revenues of $1.9 million or 6.3%. A decline in same store
unit sales of used vehicles at retail of 184 vehicles was offset by an increase
in average revenue per vehicle of $320. The reduction in retail used car
revenues reflects the soft market in the northeast caused by reductions of new
car pricing by manufacturers which strengthened demand for lower margin new cars
and reduced sales of higher margin used cars. Unit sales of used vehicles at
wholesale declined 925 units or 43.3% reflecting the implementation of an
inventory management strategy whereby used cars are transferred between
dealerships rather than being sold at wholesale which can result in lost gross
profit.
Same store parts and service sales revenue decreased $1.8 million, or
15.9% from $11.3 million for the six months ended June 30, 1998, to $9.5 million
for the six months ended June 30, 1999. The decrease was primarily attributable
to the decline in warranty work on the corresponding reduced sales of new and
used vehicles.
Same store finance, insurance, extended service and other dealership
revenues decreased $0.3 million, or 9.7% from $3.1 million for the six months
ended June 30, 1998 to $2.8 million for the six months ended June 30, 1999. This
decline is a result of the reduced sales levels referred to above.
Gross Profit
Total gross profit increased $1.4 million, or 8.5%, from $16.4 million for
the six months ended June 30, 1998, to $17.8 million for the six months ended
June 30, 1999. The primary reason for this increase was the effect of the
aforementioned acquisitions.
Same store gross profit decreased $1.3 million, or 7.9%, from $16.4
million for the six months ended June 30, 1998, to $15.1 million for the six
months ended June 30, 1999.
Average gross profit per new vehicle on a same store basis decreased $604
as a result of changes in pricing and mix.
19
<PAGE>
Same store gross profit on the sale of used vehicles at retail decreased
$0.7 million, or 19.4%, from $3.6 million for the six months ended June 30,
1998, to $2.9 million for the six months ended June 30, 1999. The decline was
due to the decrease (184 units) in the sales of used vehicles along with a
decrease of $274 in average gross profit per unit.
Same store parts and service gross profit increased $0.2 million, or 3.8%,
from $5.3 million for the six months ended June 30, 1998, to $5.5 million for
the six months ended June 30, 1999. The increase in gross profit is related to
improved pricing together with increased cost control at the dealerships.
Amortization of Goodwill
Goodwill amortization increased to $286,000 for the six months ended June
30, 1999 from $208,000 for the six months ended June 30, 1998, reflecting the
acquisitions referred to above.
Selling, General and Administrative Expenses
On a pro forma basis, after adjustment, selling, general and
administrative expenses increased $2.7 million, or 21.4%, from $12.6 million for
the six months ended June 30, 1998, to $15.3 million for the six months ended
June 30, 1999. $2.0 million of the increase is due to the above mentioned
acquisitions and the remainder includes the addition of corporate overhead
expenses related to operation as a public company, increased depreciation
related to real estate purchases and increased advertising and promotion. The
Company has not yet fully realized the savings from the integration of the
dealerships.
Net Interest Expense
After pro forma adjustments were reflected for the six months ended June
30, 1998 interest expense increased $0.3 million or 60.0%, from $0.5 million for
the six months ended June 30, 1998 to $0.8 for the six months ended June 30,
1999. This increase was the result, in the most recent quarter, of increased
floor plan liabilities in support of higher seasonal inventory levels and
increased long term debt related to the purchase of the business of Toyota of
Newburgh and the purchase of the real estate at Baystate Lincoln / Mercury.
Other Income
Other income was insignificant in both periods presented.
Pre-Tax Income
Income before taxes decreased $1.6 million, or 51.6 %, from $3.1 million
for the six months ended June 30, 1998, to $1.5 million for the six months ended
June 30, 1999. The decrease was primarily due to increased selling, general and
administrative expenses of $2.7 million, increased amortization of goodwill of
approximately $0.1 million, increased interest expense of $0.3 million offset by
increased gross profit of $1.4 million. Pre-tax income as a percent of total
revenue is 2.4% for the six months ended June 30, 1998, and 1.1% for the six
months ended June 30, 1999.
Provision (benefit) for income tax
The effective income tax rate was 40.0% in the six months ended June 30,
1998 and 42.5% in the six months ended June 30, 1999. The change in the rate was
the result of the impact of current forecasts of income before taxes, and
current forecasts of permanent differences between tax and book income.
20
<PAGE>
Net Income
Net income decreased $1.1 million, or 57.9%, from $1.9 million for the six
months ended June 30, 1998, to $0.8 million for the six months ended June 30,
1999. The decrease was primarily due to increased selling, general and
administrative expenses of $2.7 million, increased amortization of goodwill of
approximately $0.1 million, increased interest expense of $0.3 million offset by
increased gross profit of $1.4 million and a decrease in the Provision for
Income Taxes of $0.6 million.
Earnings Per Share, Basic and Diluted
See Note 5 to the Consolidated Financial Statements for a description of
potentially dilutive securities in 1999.
Acquisitions
The Company has acquired a total of six dealerships located in
Connecticut, Massachusetts, New Jersey, New York and Vermont for an aggregate
price of $10.5 million in cash and 100,000 shares of Common Stock, plus the
assumption of floor plan liabilities of $11.8 million. Acquisitions in the
current six months are as follows.
In January 1999, the Company acquired all of the Common Stock of
Morristown Auto Sales, Inc., a Lincoln/Mercury dealer in New Jersey for
approximately $.5 million in cash. The transaction has been accounted for as a
purchase and the resulting goodwill was approximately $.6 million which will be
amortized over 40 years.
In April 1999, the Company acquired its first dealership in New York,
Newburgh Toyota, for a purchase price of approximately $2.9 million in cash,
100,000 shares of Hometown Class A Common Stock and the assumption of floor plan
liabilities for the fully capitalized operation. The Company has guaranteed that
the stock issued in connection with this transaction will have a value of
$1,000,000 at the end of a two-year period. Additional shares of the Company's
Common stock will be issuable if there is a shortfall. This dealership is
expected to add approximately $50.0 million and $1.0 million, respectively, to
the Company's annualized revenues and income before income taxes for the year
ended December 1999.
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, and Jeep 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. Formerly, Shaker was owned and operated by a third generation of the
Shaker family.
21
<PAGE>
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 sales
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, 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 June 30, 1999 Compared to Three Months Ended June 30, 1998
Revenues
Revenues increased by $62.4 million, or 421.6%, from $14.8 million for the
three months ended June 30, 1998, to $77.2 million for the three months ended
June 30, 1999. Most of the increase was due to the acquisitions made since the
initial public offering completed on July 31, 1998.
New vehicle sales increased by $38.2 million, or 509.3%, from $7.5 million
for the three months ended June 30, 1998, to $45.7 million for the three months
ended June 30, 1999. Of that increase 1.6 million was the result of an increase
of 68 units sold at the Shaker dealerships combined with an increase of $706 in
the average revenue received. The remaining $36.6 million increase was due to
the acquisitions.
Used vehicle sales increased by $18.3 million, or 351.9%, from $5.2
million for the three months ended June 30, 1998, to $23.5 million for the three
months ended June 30, 1998. That increase consisted of a $16.3 million increase
due to the acquisitions combined with an increase of $2.0 million at the Shaker
dealerships. The Shaker dealerships sold 147 more used vehicles with an increase
of $976 in the average revenue received.
Parts and service revenue increased by $4.5 million, or 281.3%, from $1.6
million for the three months ended June 30, 1998, to $6.1 million for the three
months ended June 30, 1999. Parts and service revenue at the Shaker dealerships
were essentially flat and the increase resulted primarily from the acquisitions.
Other dealership revenues increased by $1.3 million, or 260.0%, from $0.5
million for the three months ended June 30, 1998, to $1.8 million for the three
months ended June 30, 1999. Other dealership revenues at the Shaker dealerships
increased $0.1 million and the balance, $1.2 million, of the increase resulted
from the acquisitions.
22
<PAGE>
Gross Profit
Gross profit increased $8.0 million or 363.6%, from $2.2 million for the
three months ended June 30, 1998, to $10.2 million for the three months ended
June 30, 1999. Gross profit at the Shaker dealerships increased by $0.4 million
with gross profit on new cars increasing $0.1 million, gross profit on used cars
increasing $0.1 million and parts and service revenues increasing $0.2 million.
The remainder of the increase ($7.6 million) was due to the acquisitions.
Amortization of Goodwill
Goodwill amortization amounted to $150,000 in the quarter ended June 30,
1999. There was none in the same period of 1998.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased by $6.6 million, or
388.2%, from $1.7 million for the three months ended June 30, 1998, to $8.3
million, for the three months ended June 30, 1999. The increase was
predominately the result of the acquisitions.
Interest Expenses, Net
Net interest expense increased by $439,000, or 1020.9%, from $43,000, for
the three months ended June 30, 1998, to $482,000, for the three months ended
June 30, 1999. The increase was due to increased floor plan interest resulting
from the assumption of additional floor plan debt associated with the
acquisitions, increased floor plan interest related to higher seasonal
inventories and interest on the debt incurred for the acquisition of Toyota of
Newburgh and real estate at Baystate Lincoln/Mercury.
Provision (benefit) for income tax
The effective income tax rate was 40% in the three months ended June 30,
1998 and 43% in the three months ended June 30, 1999. The change in the rate was
the result of the impact of current forecasts of income before taxes, and
current forecasts of permanent differences between tax and book income
Net Income (loss)
Net Income increased $0.4 million or 133.3% from $0.3 million for the
quarter ended June 30, 1998, to $0.7 million for the quarter ended June 30,
1999. The after tax effect of the increased gross profit (primarily from
acquisitions); of increased selling, general and administrative expenses,
goodwill amortization and increased interest expenses were all factors related
to this change.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenues
Revenues increased by $107.2 million, or 374.8%, from $28.6 million for
the six months ended June 30, 1998, to $135.8 million for the six months ended
June 30, 1999. Most of the increase was due to the acquisitions made since the
initial public offering completed on July 31, 1998.
New vehicle sales increased by $67.9 million, or 506.7%, from $13.4
million for the six months ended June 30, 1998, to $81.3 million for the six
months ended June 30, 1999. Of that increase $4.1 million was the result of an
increase of 173 units sold at the Shakers dealerships combined with an increase
of $1,079 in the average revenue received. The remaining $63.8 million increase
was due to the acquisitions.
23
<PAGE>
Used vehicle sales increased by $29.3 million, or 266.4%, from $11.0
million for the six months ended June 30, 1998, to $40.3 million for the six
months ended June 30, 1998. That increase consisted of a $27.0 million increase
due to the acquisitions combined with an increase of $2.3 million at the Shaker
dealerships. The Shaker dealerships sold 63 more used vehicles with an increase
of $1,356 in the average revenue received.
Parts and service revenue increased by $7.8 million, or 243.8%, from $3.2
million for the six months ended June 30, 1998, to $11.0 million for the six
months ended June 30, 1999. Parts and service revenue at the Shaker dealerships
increased $0.1 million or 4.0% while the remainder of the increase ($7.7
million) resulted from the acquisitions.
Other dealership revenues increased by $2.2 million, or 244.4%, from $0.9
million for the six months ended June 30, 1998, to $3.1 million for the six
months ended June 30, 1999. Other dealership revenues at the Shaker dealerships
increased $0.1 million and the balance, $2.1 million, of the increase resulted
from the acquisitions.
Gross Profit
Gross profit increased $13.5 million or 314.0%, from $4.3 million for the
six months ended June 30, 1998, to $17.8 million for the six months ended June
30, 1999. Gross profit at the Shaker dealerships increased by $0.7 million.
Gross profit on new cars increased $0.2 million, gross profit on used remained
approximately the same, parts and service revenues increased $0.4 million and
other dealership revenues increased $0.1 million. The remainder of the increase
($12.8 million) was due to the acquisitions.
Amortization of Goodwill
Goodwill amortization amounted to $286,000 in the six months ended June
30, 1999. There was none in the same period of 1998.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased by $9.4 million, or
159.3%, from $5.9 million for the six months ended June 30, 1998, to $15.3
million, for the six months ended June 30, 1999. The increase was predominately
the result of the acquisitions.
Interest Expenses, Net
Net interest expense increased by $0.7 million, or 700.0%, from $0.1
million, for the six months ended June 30, 1998, to $0.8 million for the six
months ended June 30, 1999. The increase was due to increased floor plan
interest resulting from the assumption of additional floor plan debt associated
with the acquisitions, increased floor plan interest related to higher seasonal
inventories and interest on the debt incurred for the acquisition of Toyota of
Newburgh and real estate at Baystate Lincoln/Mercury.
Provision (benefit) for income tax
The effective income tax rate was 40% in the six months ended June 30,
1998 and 42.5% in the six months ended June 30, 1999. The change in the rate was
the result of the impact of current forecasts of income before taxes, and
current forecasts of permanent differences between tax and book income.
24
<PAGE>
Net Income (loss)
Net Income increased $1.8 million from a loss of $1.0 million for the six
months ended June 30, 1998, to $0.8 million for the six months quarter ended
June 30, 1999. The after tax effect of the increased gross profit (primarily
from acquisitions); of increased selling, general and administrative expenses;
increased goodwill amortization; and increased interest expenses were all
factors related to this change.
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
Inflation did not have a significant effect on the results of operations.
Liquidity and Capital Resources
The principal sources of liquidity include cash on hand, cash from
operations, floor plan financing, additional debt and stock.
Cash and Cash Equivalents
Total cash and cash equivalents at June 30, 1999 and December 31, 1998,
were $0.7 million and $5.5 million, respectively for a decrease of $4.8 million
in cash and cash equivalents. Operating activities used $0.7 million in cash
(inclusive of $5.3 million supporting an increase in seasonal inventory). $8.3
million in cash flow from investing activities was used primarily to acquire two
dealerships in Morristown, New Jersey; and Newburgh, New York and real estate at
Baystate Lincoln / Mercury and Toyota of Newburgh. Financing activities resulted
in net cash flow of $4.1 million (effective with the closing of the GE Capital
Corporation refinancing, excess cash of $2.5 million was used to reduce the
floor plan liability).
25
<PAGE>
Floor Plan Financing
On January 6, 1999, the Company completed the refinancing of its floor
plan lines of credit into one floor plan line of credit with GE Capital
Corporation. The new floor plan line of credit carries an interest rate of LIBOR
plus 160 basis points (as of June 30, 1999 the interest rate was 6.54375%).
Acquisitions
The Company has acquired a total of six dealerships located in
Connecticut, Massachusetts, New Jersey, New York and Vermont for an aggregate
price of $10.5 million in cash and 100,000 shares of Common Stock, plus the
assumption of floor plan liabilities of $11.8 million. Acquisitions in the
current six months are as follows.
In January 1999, the Company acquired all of the Common Stock of
Morristown Auto Sales, Inc., a Lincoln/Mercury dealer in New Jersey for
approximately $.5 million in cash. The transaction has been accounted for as a
purchase and the resulting goodwill was approximately $.6 million which will be
amortized over 40 years.
In April 1999, the Company acquired its first dealership in New York,
Newburgh Toyota, for a purchase price of approximately $2.9 million in cash,
100,000 shares of Hometown Class A Common Stock and the assumption of floor plan
liabilities for the fully capitalized operation. The Company has guaranteed that
the stock issued in connection with this transaction will have a value of
$1,000,000 at the end of a two-year period. Additional shares of the Company's
Common stock may be issuable if there is a shortfall. This dealership is
expected to add approximately $50.0 million and $1.0 million, respectively, to
the Company's annualized revenues and income before income taxes for the year
ended December 1999.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS 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. The Company considers
its business to be a single segment entity and therefore the adoption has had no
impact on the Company's consolidated financial position, results of operations
or cash flows.
In June 1998, the Financial Accounting Standards Board issued SFAS 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, 2000. The Company does not believe that adoption of
this statement will have a material impact on its financial statements.
26
<PAGE>
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 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.
27
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities and Use of proceeds
f. Use of Proceeds:
Effective July 31, 1998, the Company registered (Commission file No.
000-24669) 1,800,000 shares of Class A Common Stock. The offering terminated
with the sale of the securities offered. The managing underwriters were: Paulson
Investment Company, Inc. and EBI Securities Corporation. The following is a
summary of the Use of Proceeds:
Per
Registration
Actual Statement
------------ ------------
Total amount (1,800,000
shares at $9) $ 16,200,000 $ 16,200,000
Amounts paid to underwriters (1,498,500) (1,498,500)
Amounts paid for legal
and accounting fees (1,449,332) (750,000)
Amounts paid for other expenses (342,221) (150,000)
------------ ------------
Total expenses (3,290,053) (2,398,500)
------------ ------------
Net Proceeds available 12,909,947 13,801,500
Proceeds used to acquire
dealerships (including costs) (7,775,170) (6,400,000)(1)(2)
Proceeds used to retire debt (1,004,000) (760,000)
Proceeds used for working
capital and general
corporate purposes (4,130,777) (6,641,500)(3)
------------ ------------
Proceeds remaining at
June 30, 1999 -- --
============ ============
(1) $500,000 was paid to Salvatore A. Vergopia, an Executive Officer and
Director, to acquire Morristown Lincoln/Mercury.
(2) $1,100,000 was used to acquire Morristown Lincoln/Mercury and Regan and
Stapleton, Inc. (a Lincoln/Mercury dealership), which were not
specifically identified in the Registration Statement. However, the
Registration Statement reads, in part, "........including possible use in
additional acquisitions of dealerships...."
(3) The reduction represents reallocation based on amounts available after
other uses.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
1. 27.1 Financial Data Schedule
b. Reports on Form 8-K:
None.
28
<PAGE>
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.
August 16, 1999 By: /s/ Joseph Shaker
- ------------------------ -------------------------------------
Date Joseph Shaker, President and Chief
Operating Officer
August 16, 1999 By: /s/ John Rudy
- ------------------------ -------------------------------------
Date John Rudy, Chief Financial and
Accounting Officer
29
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<FISCAL-YEAR-END> DEC-31-1999
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<PERIOD-END> JUN-30-1999
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