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 March 31, 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 2,294,016
Common Stock, Class B, par value $.001 per share 3,703,000
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. Financial Statements
HOMETOWN AUTO RETAILERS, INC.
BASIS OF PRESENTATION
The accompanying historical balance sheets as of March 31, 2000 and
December 31, 1999, the statements of operations and the statement of cash flows
for the three months ended March 31, 2000 and March 31, 1999, present the
consolidated operations of Hometown Auto Retailers, Inc.
The Company believes that; (i) the accompanying financial information
contains all the material adjustments necessary to fairly present its financial
position as of March 31, 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) 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.
4
<PAGE>
HOMETOWN AUTO RETAILERS, INC,
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
(Note 2) (Note 2)
------------- -------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,132 $ 1,635
Accounts receivable, net 8,501 6,101
Inventories 44,256 51,455
Prepaid expenses and other current assets 2,647 2,618
------- -------
Total current assets 56,536 61,809
Property and equipment, net 7,653 8,415
Equity investment in e-commerce company 2,863 --
Goodwill, net 25,116 24,578
Other assets 1,314 2,505
------- -------
Total Assets $93,482 $97,307
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Floor plan notes payable $43,673 $48,986
Accounts payable and accrued expenses 4,499 4,787
Current maturities of long-term debt 677 708
Other current bank borrowings -- 2,200
------- -------
Total current liabilities 48,849 56,681
Long-term debt 8,958 9,051
Long-term deferred income taxes 1,698 200
Other long-term liabilities 338 360
------- -------
Total liabilities 59,843 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, 24,000,000
shares authorized, 2,294,016 and 2,040,000 issued and outstanding; 2 2
Common stock, Class B, $.001 par value, 3,760,000
shares authorized, 3,703,000 and 3,760,000 issued and outstanding 4 4
Additional paid-in capital 28,780 26,194
Retained earnings 4,853 4,815
------- -------
Total stockholders' equity 33,639 31,015
------- -------
Total liabilities and stockholders' equity $93,482 $97,307
======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
5
<PAGE>
HOMETOWN AUTO RETAILERS, INC,
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Revenues
New vehicle sales $ 46,150 $ 35,599
Used vehicle sales 20,358 16,776
Parts and service sales 5,702 4,908
Other dealership revenues, net 1,816 1,347
--------- ---------
Total revenues 74,026 58,630
Cost of sales
New vehicle sales 43,746 33,663
Used vehicle sales 18,604 15,270
Parts and service sales 2,463 2,091
--------- ---------
Cost of sales 64,813 51,024
--------- ---------
Gross profit 9,213 7,606
Amortization of goodwill 163 136
Selling, general and administrative
expenses 8,535 6,925
--------- ---------
Income from operations 515 545
Other expense
Interest expense, net (475) (293)
Other income (expense), net 28 (1)
--------- ---------
Income before taxes 68 251
Provision for income taxes 30 100
--------- ---------
Net income $ 38 $ 151
========= =========
Earnings per share, basic (Note 3) $ 0.01 $ 0.03
Earnings per share, diluted (Note 3) $ 0.01 $ 0.03
Weighted average shares outstanding, basic (Note 3) 5,988,861 5,800,000
Weighted average shares outstanding, diluted (Note 3) 6,022,194 5,800,000
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
6
<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>
Baiance 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 50 -- (50) -- -- -- --
Issuance of Class A
Common Stock 97 -- -- -- 326 -- 326
Valuation adjustment
to e-Commerce
Subsidiary -- -- -- -- 2,260 -- 2.260
Net income -- -- -- -- -- 38 38
----- ------- ----- ------- ------- ------- -------
Balance at
March 31, 2000 2,294 $ 2 3,703 $ 4 $28,780 $ 4,853 $33,639
===== ======= ===== ======= ======= ======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
7
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Three Months ended
March 31,
-----------------------------------
2000 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38 $ 151
Adjustments to reconcile net income
to net cash provided by operating activities -
Depreciation and amortization 360 238
Deferred income taxes (87) --
Changes in assets and liabilities:
Accounts receivable, net (2,400) (724)
Inventories 7,199 2,984
Prepaid expenses and other current assets 259 (481)
Other assets (60) (34)
Floor plan notes payable (5,313) (143)
Accounts payable and accrued expenses 111 (1,278)
Other liabilities (24) --
------- -------
Net cash provided by operating activities 83 713
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (55) (113)
Proceeds from sales of property and equipment 24 25
Acquisition, net of cash acquired (757) (423)
------- -------
Net cash used in investing activities (788) (511)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings -- 34
Principal payments of long-term debt (124) (621)
Payments of floor plan notes -- (2,538)
Other current bank borrowings, net of repayments -- (1,200)
Due from/to related parties -- 290
Issuance of common stock 326 --
------- -------
Net cash provided by (used in) financing activities 202 (4,035)
NET DECREASE IN CASH AND CASH EQUIVALENTS (503) (3,833)
CASH AND CASH EQUIVALENTS, beginning of period 1,635 5,514
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,132 $ 1,681
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for - Interest $ 442 $ 554
Cash paid for - Taxes 113 390
</TABLE>
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 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 accompanying historical balance sheets as of March 31, 2000 and
December 31, 1999, the statements of operations and the statement of cash flows
for the three months ended March 31, 2000 and March 31, 1999, present the
consolidated operations of Hometown Auto Retailers, Inc. The Company believes
that; (i) the accompanying financial information contains all the material
adjustments necessary to fairly present its financial position as of March 31,
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) 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.
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
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective date of SFAS No.
133." This statement defers for one year the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", issued in June
1998. 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.
9
<PAGE>
HOMETOWN AUTO RETAILERS, INC. NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
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 change in the fair value of the
investment during the quarter ended March 31, 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 as an increase in additional paid
in capital. The Company believes that any similar transactions are unlikely.
3. EARNINGS PER SHARE:
"Basic earnings per share" represents net income divided by the weighted
average shares outstanding. "Diluted earnings per share" represents net income
divided by weighted average shares outstanding adjusted for the incremental
dilution of potentially dilutive securities. As of March 31, 2000, the Company
had potentially dilutive securities relating to both stock options and a stock
guarantee issued in connection with an acquisition (Note 8). As of March 31,
1999, the Company did not have any potentially dilutive securities.
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, but is unable to estimate the ultimate level of recovery at
this time. Hometown has reversed the profit on these transactions, but has not
made any provision against the receivables (pursuant to FASB 5) in the
consolidated financial statements as of March 31, 2000. Hometown is not
currently entering into any new contracts with this company.
10
<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:
3/31/00 12/31/99
---------- ----------
(in thousands)
New Vehicles $ 33,990 $ 39,760
Used Vehicles 8,867 10,566
Parts, accessories and other 1,399 1,129
-------- --------
Total Inventories $ 44,256 $ 51,455
======== ========
6. INVESTMENT IN E-COMMERCE SUBSIDIARY:
The Company invested in an e-commerce subsidiary, CarDay, Inc.
("CarDay.com"), which operates within the retail automotive sales industry. One
current officer, one previous officer and one outside director of the Company
have personal investments in this venture and additional shares and options have
been issued to officers of the subsidiary. As of December 31, 1999, the Company
had an 82% ownership interest in the subsidiary. CarDay.com provides both buyers
and sellers of used cars with a more effective and efficient way to buy and sell
used cars on the Internet, including a mechanism through which to complete a
transaction, as well as offering car owners an array of financing, insurance,
warranty, and other related products and services.
On January 20, 2000, CarDay.com obtained $25 million in equity financing.
As a result, Hometown's ownership interest in CarDay was reduced from 82% to
approximately 15% (11.7% on a fully diluted basis). In accordance with the
Securities and Exchange Commission Staff Accounting Bulletin No. 51, "Accounting
for Sales of Stock by a Subsidiary", the Company has treated the resulting
increase in the value of the investment as an increase in Additional Paid-in
Capital, net of deferred taxes.
7. 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 March 31, 2000, the Company had $43.7 million of floor
plan notes payable outstanding, bearing interest of LIBOR plus 160 basis points.
Interest expense on floor plan notes payable, before manufacturers' interest
assistance, totaled approximately $640,000 for the quarter ended March 31, 2000.
Manufacturer interest assistance, which is recorded as a reduction of net
interest expense, totaled $445,000 for the quarter, leaving net floor plan
interest for the quarter of $195,000.
11
<PAGE>
HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hometown failed to comply with three covenants in its loan agreement with
GE as of March 31, 2000. Those covenants were the current ratio for the
"specified borrowers" loan (1.05 compared to 1.10 required), the interest
coverage ratio for the "borrowers" loan (1.64 compared to 2.00 required) and the
debt service ratio for the "borrowers" loan (2.21 compared to 2.50 required). GE
waived these events of default as of March 31, 2000, although, there can be no
assurance that the Company will not be in violation of these or any other
covenants at June 30, 2000 or any time thereafter. There can be no assurance
that GE will grant any waiver if an event of default occurs in the future. Upon
the occurrence of an event of default under its loan agreement with GE, not
cured by the Company, it may be forced to pay the outstanding balance under its
loan agreement, seek alternative sources of financing to the extent available,
and/or substantially curtail operations. GE did not assess any fees for granting
this waiver.
8. BUSINESS COMBINATIONS:
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.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis are based on the historical
financial statements of Hometown Auto Retailers, Inc.
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. Adminsitratively, Hometown standardizes and
centralizes many functions in order to simplify operations and utilize scale
economies. The Company also implements best practices that have been successful
at other franchises and in other retail segments throughout its dealer network.
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 ended March
31, 2000 and March 31, 1999, are as follows:
For the three months ended
March 31,
2000 1999
--------- ---------
(in thousands)
New vehicle $ 46,150 $ 35,599
Used vehicle - retail 16,780 14,410
Used vehicle - wholesale 3,578 2,366
Parts and service 5,702 4,908
F&I and other 1,816 1,347
--------- ---------
Total Revenue $ 74,026 $ 58,630
========= =========
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<PAGE>
The units sold by category for Hometown for the quarters ended March 31,
2000 and March 31, 1999, are as follows:
For the three months ended
March 31,
2000 1999
--------- ---------
New vehicle 1,804 1,361
Used vehicle - retail 1,290 1,036
Used vehicle - wholesale 832 625
--------- ---------
Total units sold 3,926 3,022
========= =========
The new vehicle revenue by manufacturer for Hometown for the quarters
ended March 31, 2000 and March 31, 1999, are as follows:
For the three months ended
March 31,
2000 1999
--------- --------
(in thousands)
Ford Motor $ 24,380 $ 22,852
Toyota Motor 13,920 6,181
Daimler Chrysler 4,243 4,657
GM 1,772 1,450
All Other 1,835 459
--------- ---------
Total Revenue $ 46,150 $ 35,599
========= =========
The new vehicle units sold by manufacturer for Hometown for the quarters
ended March 31, 2000 and March 31, 1999, are as follows:
For the three months ended
March 31,
2000 1999
--------- --------
Ford Motor 856 828
Toyota Motor 615 268
Daimler Chrysler 167 181
GM 74 60
All Other 92 24
--------- ---------
Total units sold 1,804 1,361
========= =========
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<PAGE>
The gross profit by category for Hometown for the quarters ended March 31,
2000 and March 31, 1999, are as follows:
For the three months ended
March 31,
2000 1999
--------- --------
(in thousands)
New vehicle $ 2,404 $ 1,936
Used vehicle - retail 1,823 1,543
Used vehicle - wholesale (69) (37)
Parts and service 3,239 2,817
F&I and other 1,816 1,347
--------- ---------
Total Gross Profit $ 9,213 $ 7,606
========= =========
The gross profit percent of revenue by category for Hometown for the
quarters ended March 31, 2000 and March 31, 1999, are as follows:
For the three months ended
March 31,
2000 1999
--------- ---------
New vehicle 5.2% 5.4%
Used vehicle - retail 10.9% 10.7%
Used vehicle - wholesale (1.9)% (1.6)%
Parts and service 56.8% 57.4%
F&I and other 100.0% 100.0%
--------- ---------
Total Gross Profit percent 12.4% 13.0%
========= =========
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<PAGE>
Three months ended March 31, 2000 compared with three months ended March 31,
1999.
Revenue
Total Revenue increased $15.4 million, or 26.3% from $58.6 million for
three months ended March 31, 1999 to $74.0 million for three months ended March
31, 2000. This increase was primarily due to the acquisition of a Toyota
franchise in New York State ("Toyota of Newburgh"), which added $11.8 million to
revenues in the first quarter of 2000. Same store revenues were up $3.7 million,
or 6.3% over the prior year. The remaining increase can be attributed to the
benefits of Hometown's sales training program and to marketing efforts designed
to increase sales and reduce inventory from the high level at December 31, 1999.
Revenue from the sale of new vehicles increased $10.6 million, or 29.6%
from $35.6 million for the three months ended March 31, 1999 to $46.2 million
for three months ended March 31, 2000. Revenue increases resulting from an
increase in new units sold of 443 vehicles were partially offset by a decrease
in average revenue per vehicle of $574. The decrease in revenue per vehicle can
be attributed to a change in product mix that resulted from the acquisition of
Toyota of Newburgh. Same store revenues on new vehicle sales were up $4.2
million, or 11.9%. On a same store basis, the number of units sold increased by
155 units and the average revenue per unit increased by $115.
Revenue from the sale of used vehicles at retail increased $2.4 million,
or 16.4%, from $14.4 million for the quarter ended March 31, 1999, to $16.8
million for the quarter ended March 31, 2000. The increase consisted of a rise
in sales of used vehicles at retail of 254 units offset by an decrease in
average revenue per vehicle of $901. Revenue from the sale of used vehicles at
wholesale increased $1.2 million, or 51.2%, from $2.4 million for the quarter
ended March 31, 1999, to $3.6 million for the quarter ended March 31, 2000. That
change consisted of a increase in sales of used vehicles at wholesale of 207
units along with an increase in revenue per vehicle of $515. Much of the
increase in used vehicle revenue can be attributed to a deliberate reduction in
used vehicle inventory during the first quarter of 2000.
Parts and service sales revenue increased $0.8 million, or 16.2% from $4.9
million for the three months ended March 31, 1999, to $5.7 million for the three
months ended March 31, 2000. The increase was attributable to the addition of
the Toyota of Newburgh franchise. Same store revenues from parts and service
sales declined by $164,000 or 3.4% from the same quarter last year.
Finance, Insurance, Extended Service and other dealership revenues
increased $0.5 million, or 34.8% from $1.3 million for the three months ended
March 31, 1999 to $1.8 million for the three months ended March 31, 2000. This
increase was primarily attributable to the increase in unit sales of new and
used vehicles at retail of 697 units, or 29.1%.
Gross Profit
Total gross profit increased $1.6 million, or 21.1%, from $7.6 million for
the three months ended March 31, 1999, to $9.2 million for the three months
ended March 31, 2000. This increase was primarily attributable to the
acquisition of Toyota of Newburgh, which was responsible for $1.4 million of the
increase in sales. Same store sales increased $0.2 million, or 2.7% compared
with the same quarter of 1999.
Gross profit on the sale of new vehicles increased $0.5 million, or
24.2%, from $1.9 million for the three months ended March 31, 1999, to $2.4
million for the three months ended March 31, 2000. Gross profit on sales of new
vehicles at Toyota of Newburgh totaled $361,000 in the first quarter of 2000.
The remaining increase is due to an increase in new units sold of 155 vehicles.
16
<PAGE>
Gross profit on the sale of used vehicles at retail increased $0.3
million, or 18.0%, from $1.5 million for the three months ended March 31, 1999,
to $1.8 million for the three months ended March 31, 2000. Retail used vehicle
gross profit at Toyota of Newburgh totaled $302,000, accounting for the entire
increase in such profit.
Parts and service gross profit increased $0.4 million, due entirely to the
acquisition of Toyota of Newburgh, which recorded gross profit on parts and
service sales of $468,000. Gross profit on same store sales of parts and service
declined $45,000 in the first quarter of 2000 compared to the same quarter in
1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.6 million, or
23.2%, from $6.9 million for the three months ended March 31, 1999, to $8.5
million for the three months ended March 31, 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. No such fee was assessed for the March 31, 2000
covenant waiver. Costs for the sales training program were approximately $50,000
in the first quarter 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.
Net Interest Expense
Net interest expense increased $182,000 to $475,000 for the first quarter
of 2000. That increase was primarily attributable to the Falcon Financial
mortgages that were entered into in the second quarter of 1999. Such mortgage
interest totaled $232,000 in the quarter ended March 31,2000.
Other Income
Other income was insignificant in both quarters presented.
Pre-Tax Income
Income before taxes decreased $183,000, or 72.9%, from $251,000 for the
three months ended March 31, 1999, to $68,000 for the three months ended March
31, 2000. The decline can be attributed to the loan covenant waiver fee relating
to the December 31, 1999 waiver and the increase in mortgage interest as income
from operations declined only $30,000 from the prior year. That decrease
represents the net impact of an increase in gross profit of $1.6 million offset
by an increase of $1.6 million in selling, general, and administrative expenses.
As discussed above, the acquisition of Toyota of Newburgh is the major factor
affecting those two increases.
Provision for income tax
The effective income tax rate was 44% in the quarter ended March 31, 2000
and 40% in the same period of 1999. The rates were based on current forecasts of
income before taxes, and current forecasts of permanent differences between tax
and book income. The main factor affecting the effective tax rate differential
is the amortization of non-deductible goodwill.
Net Income
Net income decreased $113,000, from $151,000 for the quarter ended March
31, 1999, to $38,000 for the quarter ended March 31, 2000.
17
<PAGE>
Earnings Per Share, Basic and Diluted
The earnings per share for the three months ended March 31, 2000 and 1999
are $.01 and $.03, respectively. As of March 31, 2000, the Company had
potentially dilutive securities relating to both stock options and a stock
guarantee issued in connection with an acquisition (Note 3). As of March 31,
1999, the Company did not have any potentially dilutive securities.
Weighted Average Shares
The weighted average shares outstanding for the three months ended March
31, 2000 and 1999 are 5,988,861 shares and 5,800,000 shares, respectively. Fully
diluted shares outstanding were 6,022,194 and 5,800,000, 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 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.
18
<PAGE>
Liquidity and Capital Resources
The principal sources of liquidity are cash on hand, cash from operations
and floor plan financing.
Cash and Cash Equivalents
Total cash and cash equivalents at March 31, 2000 and December 31, 1999,
were $1.1 million and $1.6 million, respectively, for a decrease of $0.5 million
in cash and cash equivalents. The issuance of stock provided $0.3 million while
operating activities provided $83,000 in cash. Those funds were used to acquire
a Jeep franchise that was tucked into our existing Brattleboro, Vermont location
($0.75 million); to purchase equipment ($0.1 million), and to repay long term
debt ($0.1 million). The resulting $0.5 million cash shortfall was funded from
working capital.
Receivables
The Company had $8.5 million in accounts receivable at March 31, 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 March 31, 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, but is unable to estimate the ultimate
level of recovery at this time. Hometown has reversed the profit on these
transactions, but has not made any provision against the receivables (pursuant
to FASB 5) in the consolidated financial statements as of March 31, 2000.
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 March 31, 2000, the Company had $43.7 million of floor plan
financing outstanding, bearing interest of LIBOR plus 160 basis points. Interest
expense on floor plan notes payable, before manufacturers' interest assistance,
totaled approximately $640,000 for the quarter ended March 31, 2000.
Manufacturer interest assistance, which is recorded as a reduction of net
interest expense, totaled $445,000 for the quarter, leaving net floor plan
interest for the quarter of $195,000.
Hometown failed to comply with three covenants in its loan agreement with
GE as of March 31, 2000. GE waived these events of default as of March 31, 2000,
although, there can be no assurance that the Company will not be in violation of
these or any other covenants at June 30, 2000 or any time thereafter. There can
be no assurance that GE will grant any waiver if an event of default occurs in
the future. Upon the occurrence of an event of default under its loan agreement
with GE, not cured by the Company, it may be forced to pay the outstanding
balance under its loan agreement, seek alternative sources of financing to the
extent available, and/or substantially curtail operations. GE did not assess any
fees for granting this waiver.
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.
19
<PAGE>
New Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the effective date of SFAS No.
133." This statement defers for one year the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", issued in June
1998. 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.
Sale of Stock by Subsidiary
The Company has invested in an e-commerce subsidiary, CarDay.com, which
operates within the retail automotive sales industry. One current officer, one
previous officer and one outside director of the Company have personal
investments in this venture and additional shares and options have been issued
to officers of the subsidiary. As of December 31, 1999, the Company had an 82%
ownership interest in the subsidiary. CarDay.com provides both buyers and
sellers of used cars with a more effective and efficient way to buy and sell
used cars on the Internet, including a mechanism through which to complete a
transaction, as well as offering car owners an array of financing, insurance,
warranty, and other related products and services.
On January 20, 2000, CarDay.com obtained $25 million in equity financing.
As a result, Hometown's ownership interest in CarDay was reduced from 82% to
approximately 15% (11.7% on a fully diluted basis). In accordance with the
Securities and Exchange Commission Staff Accounting Bulletin No. 51, "Accounting
for Sales of Stock by a Subsidiary". The Company has treated the resulting
increase in the value of the investment as an increase in Additional Paid-in
Capital.
20
<PAGE>
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.
21
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
1. 27.1 Financial Data Schedule
b. Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Hometown Auto Retailers, Inc.
May 19, 2000 By: /s/ Corey E. Shaker
------------------------ --------------------------------------
Date Corey E. Shaker, President and Chief
Operating Officer
May 19, 2000 By: /s/ Michael J. Shonborn
------------------------ --------------------------------------
Date Michael J. Shonborn
Chief Financial Officer and Secretary
22
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
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