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, 2000
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.)
774 Straits Turnpike
Watertown, CT 06795
(Address of principal executive offices) (Zip code)
(860) 945-6900
(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 2,299,109
Common Stock, Class B, par value $.001 per share 3,701,000
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Consolidated Balance Sheets at September 30, 2000
and December 31, 1999 4
Consolidated Statements of Operations for
the nine and three months ended September 30, 2000 and 1999 5
Consolidated Statement of Equity at September 30, 2000 6
Consolidated Statements of Cash Flows for
the nine months ended September 30, 2000 and 1999 7
Notes to Consolidated Financial Statements 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders 20
ITEM 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
<PAGE>
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."
3
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
HOMETOWN AUTO RETAILERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 2000 1999
(unaudited)
----------- ------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 936 $ 1,635
Accounts receivable, net 8,156 6,101
Inventories 37,474 51,455
Prepaid expenses and other current assets 2,774 2,618
------- -------
Total current assets 49,340 61,809
Property and equipment, net 7,621 8,415
Investment in e-commerce company 3,258 --
Goodwill, net 24,789 24,578
Other assets 1,357 2,505
------- -------
Total assets $86,365 $97,307
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Floor plan notes payable $36,499 $48,986
Accounts payable and accrued expenses 4,292 4,787
Current maturities of long-term debt 675 708
Other current bank borrowings -- 2,200
------- -------
Total current liabilities 41,466 56,681
Long-term debt 8,734 9,051
Long-term deferred income taxes 2,282 200
Other long-term liabilities 519 360
------- -------
Total liabilities 53,001 66,292
Stockholders' Equity
Preferred stock, $.001 par value, 2,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, Class A, $.001 par value, 12,000,000 shares
authorized, 2,299,109 and 2,147,000 issued and outstanding; 2 2
Common stock, Class B, $.001 par value, 3,760,000 shares
authorized, 3,701,000 and 3,753,000 issued and outstanding 4 4
Additional paid-in capital 28,786 26,194
Retained earnings 4,572 4,815
------- -------
Total stockholders' equity 33,364 31,015
------- -------
Total liabilities and stockholders' equity $86,365 $97,307
======= =======
</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 share and per share data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------------- --------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
New vehicle sales $ 44,422 $ 48,184 $ 137,706 $ 129,485
Used vehicle sales 17,430 23,828 57,605 64,134
Parts and service sales 6,092 6,267 17,827 17,301
Other dealership revenues, net 1,899 1,875 5,500 5,024
----------- ----------- ----------- -----------
Total revenues 69,843 80,154 218,638 215,944
Cost of sales
New vehicle sales 42,102 45,375 130,512 122,043
Used vehicle sales 15,661 21,929 52,070 58,537
Parts and service sales 2,657 2,676 7,802 7,360
----------- ----------- ----------- -----------
Total cost of sales 60,420 69,980 190,384 187,940
----------- ----------- ----------- -----------
Gross profit 9,423 10,174 28,254 28,004
Amortization of goodwill 163 150 490 436
Selling, general and administrative
expenses 8,857 8,562 26,355 23,830
----------- ----------- ----------- -----------
Income from operations 403 1,462 1,409 3,738
Other income (expense)
Interest expense, net (553) (574) (1,590) (1,349)
Other income (expense), net 3 (5) (81) (48)
----------- ----------- ----------- -----------
Income (loss) before taxes (147) 883 (262) 2,341
Provision (benefit) for income taxes 37 376 (19) 995
----------- ----------- ----------- -----------
Net income (loss) $ (184) $ 507 $ (243) $ 1,346
=========== =========== =========== ===========
Earnings (loss) per share, basic (Note 3) $ (0.03) $ 0.09 $ (0.04) $ 0.23
Earnings (loss) per share, diluted (Note 3) $ (0.03) $ 0.08 $ (0.04) $ 0.23
Weighted average shares, basic (Note 3) 5,998,529 5,900,000 5,994,816 5,867,033
Weighted average shares, diluted (Note 3) 6,740,634 6,066,667 6,334,689 5,978,755
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF EQUITY
(in thousands)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock Additional Total
----------------- ------------------ Paid-in Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
------ -------- ------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1999 2,147 $ 2 3,753 $ 4 $ 26,194 $ 4,815 $ 31,015
Conversion of Class B
Common to Class A
Common 52 -- (52) -- -- -- --
Issuance of Class A
Common Stock 100 -- -- -- 332 -- 332
Valuation adjustment
to e-Commerce
Subsidiary -- -- -- -- 2,260 -- 2,260
Net income -- -- -- -- -- (243) (243)
------ -------- ------ -------- -------- -------- --------
Balance at
September 30, 2000 2,299 $ 2 3,701 $ 4 $ 28,786 $ 4,572 $ 33,364
====== ======== ====== ======== ======== ======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
6
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months ended
September 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (243) $ 1,346
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities -
Depreciation and amortization 925 814
Deferred income taxes (159) 647
Changes in assets and liabilities:
Accounts receivable, net (2,055) (2,432)
Inventories 13,981 (3,582)
Prepaid expenses and other current assets 393 (1,989)
Other assets (103) (628)
Floor plan notes payable (12,487) 5,379
Accounts payable and accrued expenses (92) (581)
Income taxes payable (368)
Other liabilities 165 --
-------- --------
Net cash provided by (used in) operating activities 325 (1,394)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (364) (5,348)
Proceeds from sales of property and equipment 65 56
Acquisition, net of cash acquired (701) (3,171)
-------- --------
Net cash used in investing activities (1,000) (8,463)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings -- 10,389
Principal payments of long-term debt (350) (1,325)
Payments of floor plan notes -- (2,538)
Other current bank borrowings, net of repayments -- (1,700)
Due from/to related parties -- 361
Issuance of common stock 326 --
-------- --------
Net cash provided by financing activities (24) 5,187
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (699) (4,670)
CASH AND CASH EQUIVALENTS, beginning of period 1,635 5,514
-------- --------
CASH AND CASH EQUIVALENTS, end of period $ 936 $ 844
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for - Interest $ 1,590 $ 1,342
Cash paid for - Taxes 174 819
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
7
<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 sells new and used cars and light trucks, provides maintenance
and repair services, sells replacement parts and provides related financing,
insurance and service contracts through 11 franchised dealerships located in New
Jersey, New York, Connecticut, Massachusetts and Vermont. The company's
dealerships offer 13 American and Asian automotive brands; Chevrolet, Chrysler,
Daewoo, Dodge, Ford, Isuzu, Jeep, Lincoln, Mazda, Mercury, Oldsmobile, Plymouth
and Toyota. Hometown's purpose is to consolidate and operate automobile
dealerships in the Northeast, primarily in New Jersey and New England.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
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, 2000; (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 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) 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.
Use of estimates
The financial statements and related disclosures have been prepared in
conformity with generally accepted accounting principles and, accordingly,
include amounts based on estimates and judgments of management. Actual results
could differ from those estimates.
New Accounting Pronouncements
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, "Revenue Recognition", in December 1999. SAB No. 101 expresses
the views of the SEC staff in applying generally accepted accounting principles
to certain revenue recognition issues. In June 2000, the SEC issued SAB No. 101B
to defer the effective date of the implementation of SAB No. 101 until the
fourth quarter of fiscal 2000. Management has concluded that the implementation
of this SAB will not have a material impact on its financial position or its
results of operations.
8
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivatives and Hedging Activities," which establishes accounting and reporting
standards of derivative instruments. In July 1999, the FASB approved SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," and in June 2000 approved SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an Amendment of FASB Statement No. 133," both of which amend SFAS
No. 133. The Company will be required to adopt SFAS No. 133 in fiscal 2001 in
accordance with SFAS No. 137. The adoption of this pronouncement is expected to
have no material impact on its financial position, results of operations or cash
flows.
Investments
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", requires that the Company account for its equity investment in an
e-commerce company, CarDay.com, as an available-for-sale security, reported at
fair value and adjusted for other-than-temporary declines in value. Unrealized
gains and losses are excluded from earnings and reported in a separate component
of shareholders' equity (net of the effect of income taxes) until sold. The
Company does not believe there has been a material change in the fair value of
the investment during the nine months ended September 30, 2000.
Sale of Subsidiary Stock
In January 2000, a majority owned subsidiary of the Company, CarDay.com,
obtained equity financing, which reduced the Company's ownership percentage to
approximately 15% (11.7% on a fully diluted basis). The Company has treated the
resulting increase in value of the investment net of related deferred taxes as
an increase in additional paid in capital. The Company believes that any similar
transactions are unlikely.
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 nine months ended September 30, 2000 and 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 7).
4. RECEIVABLES:
One company, which represents approximately $800,000 of outstanding
receivables, has ceased payment on its obligation to Hometown. Hometown obtained
and docketed a judgment against that company for the amount due plus interest on
May 10, 2000. On May 12, 2000, a petition for bankruptcy under Chapter 7 was
filed against such company by certain of its other creditors. Management is
pursuing recovery by executing on the judgment obtained and investigating
insurance coverage. Hometown has recorded an estimated reserve for bad debts in
the amount of $345,000 in the consolidated financial statements as of September
30, 2000. Management continues to believe that no further material adjustments
will be required, however, depending on the success of its current recovery
efforts, the company may be required to provide additional reserves in future
periods. Hometown is not currently entering into any new contracts with this
company.
9
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. 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:
9/30/00 12/31/99
(in thousands)
-------- ---------
New Vehicles $ 26,814 $ 39,760
Used Vehicles 8,990 10,566
Parts, accessories and other 1,670 1,129
-------- --------
Total Inventories $ 37,474 $ 51,455
======== ========
6. FLOOR PLAN NOTES PAYABLE:
The Company funds its working capital needs with a revolving line of
credit (herein referred to as the "floor plan notes payable") from GE Capital
Corporation ("GE"). As of September 30, 2000, the Company had $36.5 million of
floor plan notes payable outstanding, bearing interest of 30 day LIBOR plus 185
basis points. Interest expense on floor plan notes payable, before
manufacturers' interest assistance, totaled approximately $807,000 for the three
months and $2,527,000 for the nine months ended September 30, 2000. Manufacturer
interest assistance, which is recorded as a reduction of net interest expense,
totaled $529,000 for the quarter and $1,778,000 for the nine-month period,
leaving net floor plan interest of $278,000 and $749,000 for the quarter and
year to date, respectively.
The Company and GE Capital Corporation agreed to modify the terms of the
lending agreement with respect to the financial covenants required of Hometown.
The covenants for the quarter ended September 30, 2000 are: (i) interest
coverage ratio - minimum of 1.30; (ii) debt service ratio - minimum of 1.10;
(iii) leverage ratio - maximum of 2.00; current ratio - minimum of 1.12; (iv)
tangible net worth - minimum of $6,000,000. Additionally, Hometown must have
EBITDA of $4,250,000 for the year ended December 31, 2000. Some of these
covenant requirements are scheduled to increase in future periods.
At September 30, 2000 Hometown was not in compliance with the debt
service, interest coverage and leverage ratio covenants of its floor plan
lending and acquisition line of credit agreement with GE Capital Corporation.
Hometown's ratios were .83 to 1, 1.01 to 1 and 2.58 to 1, respectively, instead
of the required 1.1 to 1, 1.3 to 1 and a maximum of 2.0 to 1. As a result of
these covenant violations, Hometown and GE have entered into an amendment to the
credit agreement in which GE has agreed that it will not take any action on
these covenant violations through March 31, 2001 and its commitment to make
floor plan advances will end on that date, the acquisition line of credit has
been terminated, the floor plan line reduced to $50 million and the interest
rate increased by 75 basis points on advances through December 31, 2000 and an
additional 75 basis points on advances thereafter. GE has charged a fee of
$60,000 for granting the forbearance, but has agreed to waive any prepayment
penalties.
Hometown is seeking to refinance its floor plan line of credit and
believes that alternate sources will be available. Two institutions have
expressed preliminary interest in providing funds for this purpose. However no
assurances can be given that financing will be available or that terms will be
as favorable to Hometown as under its existing credit agreement. The company has
been advised by its independent public accountants that should this situation
remain unresolved at year-end, the auditors' report on those financial
statements may be modified.
10
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. BUSINESS COMBINATIONS:
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.
On January 12, 2000, Hometown purchased a Jeep franchise, special tools
and signage for $0.75 million. This franchise was tucked into the Company's
existing Brattleboro, Vermont dealership. This acquisition was accounted for
using the purchase method of accounting, resulting in goodwill of approximately
$0.75 million
8. SUBSEQUENT EVENTS:
In November, 2000 Daewoo Motor Company was placed in bankruptcy.
Currently, two of the Company's dealerships have Daewoo franchises. For the
nine months ended September 30, 2000, Daewoo vehicles accounted for 92 units, or
1.7% of new cars sold. Related revenues were $1.3 million, or 0.9% of the
Company's new car sales dollars. Total Inventory of new Daewoo vehicles held at
September 30, 2000 was $523,000, and receivables from Daewoo totaled $12,000. At
this time, management cannot determine what, if any, impact this will have on
future operating results.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Hometown sells new and used cars and light trucks, provides maintenance
and repair services, sells replacement parts and provides related financing,
insurance and service contracts through 11 franchised dealerships located in New
Jersey, New York, Connecticut, Massachusetts and Vermont. The company's
dealerships offer 13 American and Asian automotive brands; Chevrolet, Chrysler,
Daewoo, Dodge, Ford, Isuzu, Jeep, Lincoln, Mazda, Mercury, Oldsmobile, Plymouth
and Toyota. Hometown's purpose is to consolidate and operate automobile
dealerships in the Northeast, primarily in New Jersey and New England.
Operating Strategy
The Company operates its dealerships as local businesses, responsive to
the communities they serve. Administratively, Hometown standardizes and
centralizes many functions in order to simplify operations and utilize scale
economies. 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 three and nine months
ended September 30, 2000 and September 30, 1999, are as follows:
For the three months For the nine months
ended ended
September 30, September 30,
(in thousands) (in thousands)
2000 1999 2000 1999
-------- -------- -------- --------
New vehicle $ 44,422 $ 48,184 $137,706 $129,485
Used vehicle - retail 15,378 18,999 49,240 52,376
Used vehicle - wholesale 2,052 4,829 8,365 11,758
Parts and service 6,092 6,267 17,827 17,301
F&I and other 1,899 1,875 5,500 5,024
-------- -------- -------- --------
Total Revenue $ 69,843 $ 80,154 $218,638 $215,944
======== ======== ======== ========
12
<PAGE>
The units sold by category for Hometown for the three and nine months
ended September 30, 2000 and September 30, 1999, are as follows:
<TABLE>
<CAPTION>
For the three months ended For the nine months ended
September 30, September 30,
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
New vehicle 1,748 1,947 5,391 5,196
Used vehicle - retail 1,135 1,331 3,548 3,718
Used vehicle - wholesale 740 1,058 2,391 2,525
------ ------ ------ ------
Total units sold 3,623 4,336 11,330 11,439
====== ====== ====== ======
</TABLE>
The new vehicle revenue by manufacturer for Hometown for the three and
nine months ended September 30, 2000 and September 30, 1999, is as follows:
For the three months ended For the nine months ended
September 30, September 30,
(in thousands) (in thousands)
2000 1999 2000 1999
-------- -------- -------- --------
Ford Motor $ 21,920 $ 27,032 $ 72,197 $ 74,348
Toyota Motor 15,154 14,776 43,137 35,227
Daimler Chrysler 4,431 3,956 12,890 13,887
GM 1,643 2,018 4,870 4,927
All Other 1,274 402 4,612 1,096
-------- -------- -------- --------
Total Revenue $ 44,422 $ 48,184 $137,706 $129,485
======== ======== ======== ========
The new vehicle units sold by manufacturer for Hometown for the three and
nine months ended September 30, 2000 and September 30, 1999, are as follows:
For the three months ended For the nine months ended
September 30, September 30,
2000 1999 2000 1999
----- ----- ----- -----
Ford Motor 766 990 2,509 2,751
Toyota Motor 670 688 1,916 1,612
Daimler Chrysler 177 159 530 565
GM 72 87 211 207
All Other 63 23 225 61
----- ----- ----- -----
Total units sold 1,748 1,947 5,391 5,196
===== ===== ===== =====
13
<PAGE>
The gross profit (loss) by category for Hometown for the three and nine
months ended September 30, 2000 and September 30, 1999, are as follows:
For the three months For the nine months
ended September 30, ended September 30,
(in thousands) (in thousands)
2000 1999 2000 1999
------- ------- -------- -------
New vehicle $ 2,320 $ 2,808 $ 7,194 $ 7,441
Used vehicle - retail 1,783 1,879 5,666 5,523
Used vehicle - wholesale (13) 21 (131) 75
Parts and service 3,435 3,591 10,025 9,941
F&I and other 1,899 1,875 5,500 5,024
------- ------- -------- -------
Total Gross Profit (Loss) $ 9,424 $10,174 $ 28,254 $28,004
======= ======= ======== =======
The gross profit (loss) percent of revenue by category for Hometown for
the three and nine months ended September 30, 2000 and September 30, 1999, are
as follows:
For the three months For the nine months
ended September 30, ended September 30,
2000 1999 2000 1999
------- ------- -------- -------
New vehicle 5.2% 5.8% 5.2% 5.7%
Used vehicle - retail 11.6% 9.9% 11.5% 10.5%
Used vehicle - wholesale (0.7%) 0.4% (1.6%) 0.6%
Parts and service 56.4% 57.3% 56.2% 57.5%
F&I and other 100.0% 100.0% 100.0% 100.0%
------- ------- -------- -------
Total Gross Profit (Loss) percent 13.5% 12.7% 12.9% 13.0%
======= ======= ======== =======
Three months ended September 30, 2000 compared with three months ended September
30, 1999.
Revenue
Total Revenue decreased $10.3 million, or 12.9% from $80.1 million for
three months ended September 30, 1999 to $69.8 million for three months ended
September 30, 2000.
Revenue from the sale of new vehicles decreased $3.8 million, or 7.8% from
$48.2 million for the three months ended September 30, 1999 to $44.4 million for
three months ended September 30, 2000. Revenue decreases resulting from a
decrease in new units sold of 199 vehicles were partially offset by an increase
in average revenue per vehicle of $664.
Revenue from the sale of used vehicles at retail decreased $3.6 million,
or 19.1%, from $19.0 million for the quarter ended September 30, 1999, to $15.4
million for the quarter ended September 30, 2000. The decrease consisted of a
drop in average revenue per vehicle of $726 coupled with a decrease in sales of
used vehicles
14
<PAGE>
at retail of 196 units. Revenue from the sale of used vehicles at wholesale
decreased $2.7 million, or 57.5%, from $4.8 million for the quarter ended
September 30, 1999, to $2.1 million for the quarter ended September 30, 2000.
That change consisted of a decrease in sales of used vehicles at wholesale of
318 units along with a decrease in revenue per vehicle of $1,791. The decrease
in wholesale sales resulted from the deliberate reductions in inventory in the
first quarter of 2000. Since the level of aged inventory was significantly
reduced, most of the wholesale sales in the third quarter reflected the disposal
of low value vehicles taken in trade. The Company's policy is to take such low
value vehicles to auction immediately.
Parts and service sales revenue decreased $0.2 million, or 2.8%, from $6.3
million for the three months ended September 30, 1999, to $6.1 million for the
three months ended September 30, 2000.
Gross Profit
Total gross profit decreased $0.8 million, or 7.4%, from $10.2 million for
the three months ended September 30, 1999, to $9.4 million for the three months
ended September 30, 2000.
Gross profit on new vehicle sales declined by $488,000, or 17.4%, to $2.3
million for the third quarter of 2000. This decrease was attributable to the
aforementioned decline in units sold and a decrease in gross profit of $115 per
unit. Gross profit on used vehicles sold at retail declined $96,000, or 5.1%. An
increase of $159 in gross profit per unit was offset by the decline in units
sold. Gross profit on parts and service sales declined by $155,000, or 4.3%, to
$3.4 million for the quarter ended September 30, 2000 due to a decrease in the
gross profit percentage from 57.3% in third quarter of 1999 to 56.4% in the same
period in 2000.
Amortization of Goodwill
Goodwill amortization increased to $163,000 for the quarter ended
September 30, 2000 from $150,000 for the quarter ended September 30, 1999,
reflecting the acquisitions referred to in Note 7 of the Notes to Consolidated
Financial Statements.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $295,000, or 3.4%,
from $8.6 million for the three months ended September 30, 1999, to $8.9 million
for the three months ended September 30, 2000. The results for the third quarter
of 2000 include $33,000 of sales training expenses and a $30,000 accrual of 401K
expenses relating to the plan adopted in October 1999.
Net Interest Expense
Net interest expense decreased $21,000 to $553,000 for the third quarter
of 2000. The decrease was primarily attributable to the lower floor plan loan
balance due to lower inventory levels.
Pre-Tax Income (Loss)
Income before taxes decreased from $883,000 for the three months ended
September 30, 1999, to a loss of $147,000 for the three months ended September
30, 2000. The decrease was due to a reduction in gross profit of $751,000, an
increase in selling, general and administrative expenses of $295,000, a decrease
in interest expense of $21,000 and a decrease in net other expenses of $8,000.
Provision (Benefit) for Income Tax
The effective income tax rate was 43% in the three months ended September
30, 1999. The third quarter of 2000 shows a tax provision on a pretax loss due
to the effect of non-deductible expenses and the impact of current forecasts of
income before taxes, and current forecasts of permanent differences between tax
and book income.
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Net Income(Loss)
Net income decreased from $507,000 for the quarter ended September 30,
1999, to a loss of $184,000 for the quarter ended September 30, 2000.
Earnings Per Share, Basic and Diluted
See Note 7 to the Consolidated Financial Statements for a description of
potentially dilutive securities.
Nine months ended September 30, 2000 compared with nine months ended September
30, 1999
Revenue
Total Revenue increased $2.7 million, or 1.2% from $215.9 million for the
nine months ended September 30, 1999 to $218.6 million for the nine months ended
September 30, 2000. The majority of that increase is attributable to the
acquisition of Toyota of Newburgh in April 1999. Same store revenues were down
$5.9 million, or 3.1% over the prior year.
Revenue from the sale of new vehicles increased $8.2 million, or 6.3% from
$129.5 million for the nine months ended September 30, 1999 to $137.7 million
for the nine months ended September 30, 2000. Revenue increases resulting from
an increase in new units sold of 195 vehicles coupled with an increase in
average revenue per vehicle of $623. The acquisition of Toyota of Newburgh
contributed $5.1 million of that increase. Same store revenues on new vehicle
sales were up $3.1 million, or 2.7%. On a same store basis, the number of units
sold decreased by 15 units while the average revenue per unit increased by $789.
Revenue from the sale of used vehicles at retail decreased $3.2 million,
or 6.0%, from $52.4 million for the nine months ended September 30, 1999, to
$49.2 million for the nine months ended September 30, 2000. The decrease
consisted of a drop in sales of used vehicles at retail of 170 units coupled
with a decrease in average revenue per vehicle of $209. Revenue from the sale of
used vehicles at wholesale declined $3.4 million, or 28.9%, from $11.8 million
for the nine months ended September 30, 1999, to $8.4 million for the nine
months ended September 30, 2000. That change consisted of a decrease in sales of
used vehicles at wholesale of 134 units in addition to a decrease in revenue
per vehicle of $1,159.
Parts and service sales revenue increased $526,000, or 3.0% from $17.3
million for the nine months ended September 30, 1999, to $17.8 million for the
nine months ended September 30, 2000. The increase was attributable to the
addition of the Toyota of Newburgh franchise. Same store revenues from parts and
service sales declined by $390,000 or 2.5% from the same nine months of last
year.
Finance, Insurance, Extended Service and other dealership revenues
increased $476,000, or 9.5% from $5.0 million for the nine months ended
September 30, 1999 to $5.5 million for the nine months ended September 30, 2000.
Gross Profit
Total gross profit increased $250,000, or 0.9%, from $28.0 million for the
nine months ended September 30, 1999, to $28.3 million for the nine months ended
September 30, 2000. The primary reason for this increase was the effect of the
aforementioned acquisitions. Same store gross profit decreased $722,000, or
3.0%.
Gross profit on new vehicles decreased $247,000, or 3.3%, from $7.4
million for the nine months ended September 30, 1999, compared to $7.2 million
for the same period of 2000. Unit sales increased by 195 vehicles, while gross
profit per unit declined by $98. Same store sales of new vehicles declined
$523,000, or 8.0%.
Gross profit on the sale of used vehicles at retail increased $143,000, or
2.6%, from $5.5 million for the first nine months of 1999 to $5.7 million for
the same period of 2000. Unit sales decreased by 170 units, while gross profit
per unit increased by $111. Same store gross profit on the sale of used vehicles
at retail increased $110,000, or 2.4%, due primarily to an increase in gross
profit per unit of $194.
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Gross profit on parts and service increased $83,000, or 0.8%, from $9.9
million for the nine months ended September 30, 1999, to $10.0 million for the
nine months ended September 30, 2000. The increase in gross profit is
attributable to the acquisition of Toyota of Newburgh. Same store gross profit
on parts and service declined by $252,000, or 2.8%.
Amortization of Goodwill
Goodwill amortization increased to $490,000 for the nine months ended
September 30, 2000 from $436,000 for the nine months ended September 30, 1999,
reflecting the acquisitions referred to in Note 7 of the Notes to Consolidated
Financial Statements.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.6 million, or
10.6%, from $23.8 million for the nine months ended September 30, 1999, to $26.4
million for the nine months ended September 30, 2000. Toyota of Newburgh
accounted for $1.2 million of that increase. In the first quarter of 2000,
Hometown paid and expensed a $100,000 fee for its waiver of covenants on the GE
floor plan loan for December 31, 1999. Bad debt expense of $345,000 was
recognized in the second quarter of 2000. Costs for the sales training program
were approximately $133,000 in the first nine months of 2000. Investor relations
expenses increased by $82,000 for the nine months ended September 30, 2000
compared to the prior year. 401K expenses totaled $90,000 in the first three
quarters of 2000. Additionally, the Company incurred costs in connection with
the occupancy and staffing of its new Headquarters in Watertown, Connecticut and
the installation of information systems during 2000.
Net Interest Expense
Net interest expense increased $241,000 to $1.6 million for the nine
months ended September 30, 2000. That increase was primarily attributable to the
Falcon Financial mortgages that were entered into in May 1999 partially offset
by lower floor plan loan interest due to lower inventories.
Pre-Tax Income (Loss)
Income before taxes decreased $2.6 million from $2.3 million for the nine
months ended September 30, 1999, to a loss of $262,000 for the nine months ended
September 30, 2000. The decrease was primarily due to increased selling, general
and administrative expenses of $2.6 million, increased interest expense of $0.2
million offset by increased gross profit of $0.2 million.
Provision (Benefit) for Income Tax
The effective income tax rate was 43% in the nine months ended September
30, 1999 and 7% in the nine months ended September 30, 2000. The change in the
rate was mainly the result of the company providing valuation allowances against
current NOL carryforwards, the impact of current forecasts of income before
taxes, and current permanent differences between tax and book income.
Net Income (Loss)
Net income decreased from $1.3 million for the nine months ended September
30, 1999 to a loss of $243,000 for the nine months ended September 30, 2000.
Earnings (Loss) Per Share, Basic and Diluted
See Note 7 to the Consolidated Financial Statements for a description of
potentially dilutive securities.
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Weighted Average Shares
The weighted average shares outstanding for the nine months ended September 30,
2000 and 1999 are 5,994,816 shares and 5,867,033 shares, respectively. Fully
diluted shares outstanding were 6,334,689 and 5,978,144, respectively, at those
dates.
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 buying 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, and floor plan financing.
Cash and Cash Equivalents
Total cash and cash equivalents at September 30, 2000 and December 31,
1999, were $0.9 million and $1.6 million, respectively, representing a decrease
of $0.7 million in cash and cash equivalents. Operating activities provided $0.3
million in cash and cash equivalents. The issuance of stock provided $0.3
million. Those funds were used to acquire a Jeep franchise that was tucked into
our existing Brattleboro, Vermont location ($0.7 million); to purchase equipment
($0.4 million), and to repay long-term debt ($0.3 million).
Receivables
The Company had $8.2 million in accounts receivable at September 30, 2000
compared to $6.1 million at December 31, 1999. The majority of those receivables
are from companies that provide or secure financing for customer purchases.
At September 30, 2000, one such company, which represents approximately
$800,000 of those receivables, has ceased payment on its obligation to Hometown.
Hometown obtained and docketed a judgment against that company for the amount
due plus interest on May 10, 2000. On May 12, 2000, a petition for bankruptcy
under Chapter 7 was filed against such company by certain of its other
creditors. Management is pursuing recovery by executing on the judgment obtained
and investigating insurance coverage. Hometown has recorded an estimated reserve
for bad debts in the amount of $345,000 in the consolidated financial statements
as of September 30, 2000. Management continues to believe that no further
material adjustments will be required, however, depending on the
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success of its current recovery efforts, the company may be required to provide
additional reserves in future periods. Hometown is not currently entering into
any new contracts with this company.
Floor Plan Financing
The Company funds its working capital needs with a revolving line of
credit from GE Capital Corporation (herein referred to as the "floor plan notes
payable"). As of September 30, 2000, the Company had $36.5 million of floor plan
financing outstanding, bearing interest of LIBOR plus 185 basis points. Interest
expense on floor plan notes payable, before manufacturers' interest assistance,
totaled approximately $2.5 million for the nine months ended September 30, 2000.
Manufacturer interest assistance, which is recorded as a reduction of net
interest expense, totaled $1.8 million for the period, leaving net floor plan
interest for the nine months of $750,000.
The Company and GE Capital Corporation agreed to modify the terms of the
lending agreement with respect to the financial covenants required of Hometown.
The covenants for the quarter ended September 30, 2000 are: (i) interest
coverage ratio - minimum of 1.30; (ii) debt service ratio - minimum of 1.10;
(iii) leverage ratio - maximum of 2.00; current ratio - minimum of 1.12; (iv)
tangible net worth - minimum of $6,000,000. Additionally, Hometown must have
EBITDA of $4,250,000 for the year ended December 31, 2000. Some of these
covenant requirements are scheduled to increase in future periods.
At September 30, 2000 Hometown was not in compliance with the debt
service, interest coverage and leverage ratio covenants of its floor plan
lending and acquisition line of credit agreement with GE Capital Corporation.
Hometown's ratios were .83 to 1, 1.01 to 1 and 2.58 to 1, respectively, instead
of the required 1.1 to 1, 1.3 to 1 and a maximum of 2.0 to 1. As a result of
these covenant violations, Hometown and GE have entered into an amendment to the
credit agreement in which GE has agreed that it will not take any action on
these covenant violations through March 31, 2001 and its commitment to make
floor plan advances will end on that date, the acqusition line of credit has
been terminated, the floor plan line reduced to $50 million and the interest
rate increased by 75 basis points on advances through December 31, 2000 and an
additional 75 basis points on advances thereafter. GE has charged a fee of
$60,000 for granting the forbearance, but has agreed to waive any prepayment
penalties.
Hometown is seeking to refinance its floor plan line of credit and
believes that alternate sources will be available. Two institutions have
expressed preliminary interest in providing funds for this purpose. However no
assurances can be given that financing will be available or that terms will be
as favorable to Hometown as under its existing credit agreement. The company has
been advised by its independent public accountants that should this situation
remain unresolved at year-end, the auditors' report on those financial
statements may be modified.
Acquisitions
On January 12, 2000, Hometown purchased a Jeep franchise, special tools
and signage for $0.75 million. This franchise was tucked into the Company's
existing Brattleboro, Vermont dealership. This acquisition was accounted for
using the purchase method of accounting, resulting in goodwill of approximately
$0.75 million.
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.
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PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
Hometown held its Annual Shareholders Meeting on August 29, 2000. Management
nominated nine candidates for its Board of Directors as follows:
Salvatore A. Vergopia
Corey E. Shaker
William C. Muller, Jr.
Edward A. Vergopia
James Christ
Joseph Shaker
Domenic Colasacco
Louis I. Margolis
C. Michael Jacobi
All nine nominees were elected to the Board. Each nominee received 32,054,040
votes for and 7,650 votes abstaining. Those individuals represent the entire
Board of Directors as no other directors had terms continuing after the meeting.
The shareholders approved Arthur Andersen, LLP as the Company's auditors with
32,054,265 votes for, 2,800 votes against and 4,625 votes abstaining. Also, the
authorized number of shares of Class A common stock, par value $.001 per share,
was reduced from 24,000,000 to 12,000,000 with 31,995,065 votes for, 11,200
votes against and 55,425 votes abstaining.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
1. 27.1 Financial Data Schedule
b. Reports on Form 8-K:
None.
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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 20, 2000 By: /s/ Corey E. Shaker
------------------------ --------------------------------------
Date Corey E. Shaker, President and Chief
Executive Officer
November 20, 2000 By: /s/ Michael J. Shonborn
------------------------ --------------------------------------
Date Michael J. Shonborn, Chief Financial
Officer and Secretary
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