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, 2001
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 2,315,109
Common Stock, Class B, par value $.001 per share 3,685,000
2
INDEX
PART I. FINANCIAL INFORMATION Page
ITEM 1. Consolidated Balance Sheets at June 30, 2001
and December 31, 2000 5
Consolidated Statements of Operations for
the six and three months ended June 30, 2001 and 2000 6
Consolidated Statement of Equity at June 30, 2001 7
Consolidated Statements of Cash Flows for
the six months ended June 30, 2001 and 2000 8
Notes to Consolidated Financial Statements 9
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 21
ITEM 6 . Exhibits and Reports on Form 8-K 21
SIGNATURES 22
3
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
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
HOMETOWN AUTO RETAILERS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
June 30, December 31,
ASSETS 2001 2000
(unaudited)
----------- ------------
Current Assets
Cash and cash equivalents $ 930 $ 586
Accounts receivable, net 8,337 6,149
Inventories 37,254 40,964
Prepaid expenses and other current assets 1,970 1,576
---------- ----------
Total current assets 48,491 49,275
Property and equipment, net 7,477 7,594
Investment in CarDay.com 3,258 3,258
Goodwill, net 24,059 24,793
Other assets 812 879
---------- ----------
Total assets $ 84,097 $ 85,799
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Floor plan notes payable $ 36,940 $ 40,123
Accounts payable and accrued expenses 5,880 5,579
Current maturities of long-term debt 432 431
Other current liabilities 137 --
---------- ----------
Total current liabilities 43,389 46,133
Long-term debt 8,644 8,785
Long-term deferred income taxes 850 399
Other long-term liabilities 489 457
---------- ----------
Total liabilities 53,372 55,774
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, 2,315,109 and 2,301,109 issued and outstanding; 2 2
Common stock, Class B, $.001 par value, 3,760,000 shares
authorized, 3,685,000 and 3,699,000 issued and outstanding 4 4
Additional paid-in capital 28,786 28,786
Retained earnings 1,933 1,233
---------- ----------
Total stockholders' equity 30,725 30,025
---------- ----------
Total liabilities and stockholders' equity $ 84,097 $ 85,799
========== ==========
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
5
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues
New vehicle sales $ 41,602 $ 47,134 $ 76,508 $ 93,284
Used vehicle sales 24,339 19,817 42,656 40,175
Parts and service sales 6,642 6,033 12,590 11,735
Other dealership revenues, net 2,036 1,785 3,755 3,601
----------- ----------- ----------- -----------
Total revenues 74,619 74,769 135,509 148,795
Cost of sales
New vehicle sales 39,381 44,664 72,393 88,410
Used vehicle sales 21,954 17,805 38,326 36,409
Parts and service sales 2,970 2,682 5,821 5,145
----------- ----------- ----------- -----------
Cost of sales 64,305 65,151 116,540 129,964
----------- ----------- ----------- -----------
Gross profit 10,314 9,618 18,969 18,831
Amortization of goodwill 175 164 353 327
Selling, general and administrative
expenses 9,003 8,963 16,681 17,498
----------- ----------- ----------- -----------
Income from operations 1,136 491 1,935 1,006
Other income (expense)
Interest expense, net (478) (562) (1,231) (1,037)
Other income (expense), net 228 (112) 481 (84)
----------- ----------- ----------- -----------
Income (loss) before taxes 886 (183) 1,185 (115)
Provision (benefit) for income taxes 313 (86) 485 (56)
----------- ----------- ----------- -----------
Net income (loss) $ 573 $ (97) $ 700 $ (59)
=========== =========== =========== ===========
Earnings (loss) per share, basic (Note 3) $ 0.10 $ (0.02) $ 0.12 $ (0.01)
Earnings (loss) per share, diluted (Note 3) $ 0.09 $ (0.02) $ 0.10 $ (0.01)
Weighted average shares, basic (Note 3) 6,000,109 5,997,016 6,000,109 5,992,939
Weighted average shares, diluted (Note 3) 6,200,109 6,236,799 7,111,146 6,129,486
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
6
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENT OF EQUITY
(in thousands)
Class A Class B
Common Stock Common Stock Additional Total
--------------------- ---------------------- Paid-in Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
------- ------- ------- ------- ---------- -------- -------------
Balance at
December 31, 2000 2,301 $ 2 3,699 $ 4 $28,786 $ 1,233 $30,025
Conversion of Class B
Common to Class A
Common 14 -- (14) -- -- -- --
Net income -- -- -- -- -- 700 700
------- ------- ------- ------- ------- ------- -------
Balance at
June 30, 2001 2,315 $ 2 3,685 $ 4 $28,786 $ 1,933 $30,725
======= ======= ======= ======= ======= ======= =======
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements
7
HOMETOWN AUTO RETAILERS, INC.
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Three Months ended
June 30,
--------------------------
2001 2000
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 700 $ (59)
Adjustments to reconcile net income
to net cash provided by operating activities -
Depreciation and amortization 644 673
(Gain)/loss on disposal of business unit (254) --
Deferred income taxes 372 (225)
Changes in assets and liabilities:
Accounts receivable, net (2,165) (3,175)
Inventories 3,653 10,547
Prepaid expenses and other current assets (315) 318
Other assets 67 (42)
Floor plan notes payable (3,183) (6,975)
Accounts payable and accrued expenses 301 (165)
Other current liabilities 137 --
Other liabilities 32 190
---------- -----------
Net cash from operating activities (11) 1,087
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (193) (246)
Proceeds from sales of property and equipment -- 57
Acquisition, net of cash acquired -- (757)
Disposal of business unit 688
---------- -----------
Net cash from investing activities 495 (946)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (140) (244)
Issuance of common stock -- 326
---------- -----------
Net cash from financing activities (140) 82
NET CHANGE IN CASH AND CASH EQUIVALENTS 344 223
CASH AND CASH EQUIVALENTS, beginning of period 586 1,635
---------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 930 $ 1,858
========== ===========
Cash paid for - Interest $ 977 $ 1,037
Cash paid for - Taxes 68 108
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
8
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 10 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 June 30, 2001; (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 preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions in determining the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
New Accounting Pronouncements
In June 2001, the FASB approved SFAS Nos. 141 and 142 entitled Business
Combinations and Goodwill and Other Intangible Assets, respectively. The
statement on business combinations, among other things, eliminates the "Pooling
of Interests" method of accounting for business acquisitions entered into after
June 30, 2001. SFAS No. 142, among other things, eliminates the need to amortize
goodwill and requires companies to use a fair-value approach to determine
whether there is an impairment of existing and future goodwill. These statements
are effective for the Company beginning January 1, 2002 and have certain
transition rules that require the Company to obtain independent appraisals of
certain of its operating units, which must be completed within six months from
adoption. The Company is currently evaluating the impact of these
pronouncements.
9
HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. EARNINGS (LOSS) 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 June 30, 2000, the Company
had potentially dilutive securities relating to both stock options and a stock
guarantee issued in connection with an acquisition (Note 7). As of June 30,
2001, the Company had potentially dilutive securities relating to the stock
guarantee only.
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:
6/30/01 12/31/00
(in thousands)
------- --------
New Vehicles $26,596 $31,002
Used Vehicles 8,925 8,038
Parts, accessories and other 1,733 1,924
------- -------
Total Inventories $37,254 $40,964
======= =======
5. FLOOR PLAN NOTES PAYABLE:
On March 15, 2001, the Company completed a refinancing of its revolving
line of credit with GE Capital Corporation to a traditional floor plan line of
credit at each dealership with Ford Motor Credit Corporation ("FMCC"). The new
floor plan loans carry an interest rate of prime less 75 basis points for new
vehicles and prime less 50 basis points for used vehicles. Interest expense on
floor plan notes payable, before manufacturers' interest assistance, totaled
approximately $821,000 for the three months and $1,648,000 for the six months
ended June 30, 2001. Manufacturer interest assistance, which is recorded as a
reduction of net interest expense, totaled $541,000 and $879,000 for the quarter
and year to date, leaving net floor plan interest for the three and six months
of $280,000 and 769,000 respectively.
6. DISPOSAL OF BUSINESS UNIT:
In January 2001, Hometown sold the franchise for its Morristown, NJ store
back to Lincoln Mercury for $0.7 million in cash. During the first six months of
2001, Hometown received the $700,000 purchase price plus $23,000 for parts
returned and paid out a broker's commission of $35,000. Included in accounts
receivable is $23,000 still due for parts returned. The transaction resulted in
Hometown recording a $254,000 gain on the sale, which is included in other
income.
10
HOMETOWN AUTO RETAILERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. STOCK GUARANTEE
In April 1999, the Company issued 100,000 shares of Hometown Class A
Common Stock as part of the purchase price of Newburgh Toyota. The Company had
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, and that additional shares
of the Company's common stock or cash would be issuable if there were a
shortfall. On June 28, 2001, an agreement was signed with the former owners
settling the guarantee whereby the Company will issue 200,000 shares of Hometown
stock and will pay a fixed amount of $240,000, payable in monthly installments
through December 31, 2002 and a monthly profit sharing payment equal to 20% of
Newburgh Toyota's monthly pre-tax income over $57,142 for the period from April
1, 2001 to December 31, 2002.
8. SUBSEQUENT EVENTS:
On July 23, 2001, the Board of Directors voted in favor of raising up to
$1.5 million in a private equity financing through the sale of Units to
accredited investors at a price of $2.00 per Unit. Each Unit consists of two
shares of Class A Common Stock of Hometown plus a warrant to purchase one
additional share at an exercise price of $1.20 per share, exercisable within a
three year period. As of the date of the filing of this Quarterly Report,
Hometown has received commitments for the purchase of 487,498 Units, raising
approximately $1.0 million in proceeds from ten accredited investors including
the Company's Chief Executive Officer, Regional Vice President-North Division,
Regional Vice President-South Division, and one non-executive director.
11
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 10 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 six months
ended June 30, 2001 and June 30, 2000, are as follows:
For the three months ended For the six months ended
June 30, June 30,
(in thousands) (in thousands)
2001 2000 2001 2000
------- ------- -------- --------
New vehicle $41,602 $47,134 $ 76,508 $ 93,284
Used vehicle - retail 20,279 17,083 35,998 33,863
Used vehicle - wholesale 4,060 2,734 6,657 6,312
Parts and service 6,642 6,033 12,590 11,735
Other dealership revenues 2,036 1,785 3,756 3,601
------- ------- -------- --------
Total Revenue $74,619 $74,769 $135,509 $148,795
======= ======= ======== ========
12
The units sold by category for Hometown for the three and six months
ended June 30, 2001 and June 30, 2000, are as follows:
For the three months ended For the six months ended
June 30, June 30,
2001 2000 2001 2000
------- ------- ------- -------
New vehicle 1,540 1,839 2,891 3,643
Used vehicle - retail 1,146 1,123 2,248 2,413
Used vehicle - wholesale 814 819 1,548 1,651
------- ------- ------- -------
Total units sold 3,500 3,781 6,687 7,707
======= ======= ======= =======
The new vehicle revenue by manufacturer for Hometown for the three
and six months ended June 30, 2001 and June 30, 2000, are as follows:
For the three months ended For the six months ended
June 30, June 30,
(in thousands) (in thousands)
2001 2000 2001 2000
------- ------- ------- -------
Ford Motor $16,793 $25,897 $32,401 $50,277
Toyota Motor 17,372 14,063 30,320 27,983
Daimler Chrysler 4,395 4,216 7,946 8,459
GM 2,146 1,439 4,048 3,226
All Other 896 1,519 1,793 3,339
------- ------- ------- -------
Total Revenue $41,602 $47,134 $76,508 $93,284
======= ======= ======= =======
The new vehicle units sold by manufacturer for Hometown for the three
and six months ended June 30, 2001 and June 30, 2000, are as follows:
For the three months ended For the six months ended
June 30, June 30,
2001 2000 2001 2000
------- ------- ------- -------
Ford Motor 573 887 1,113 1,743
Toyota Motor 667 631 1,219 1,246
Daimler Chrysler 167 186 301 353
GM 91 64 173 139
All Other 42 71 85 162
------- ------- ------- -------
Total units sold 1,540 1,839 2,891 3,643
======= ======= ======= =======
13
The gross profit (loss) by category for Hometown for the three and
six months ended June 30, 2001 and June 30, 2000, are as follows:
For the three months ended For the six months ended
June 30, June 30,
(in thousands) (in thousands)
2001 2000 2001 2000
-------- -------- -------- --------
New vehicle $ 2,221 $ 2,470 $ 4,115 $ 4,874
Used vehicle - retail 2,337 2,060 4,193 3,883
Used vehicle - wholesale 47 (48) 136 (117)
Parts and service 3,672 3,351 6,769 6,590
Other dealership revenues 2,037 1,785 3,756 3,601
-------- -------- -------- --------
Total Gross Profit (Loss) $ 10,314 $ 9,618 $ 18,969 $ 18,831
======== ======== ======== ========
The gross profit (loss) percent of revenue by category for Hometown for
the three and six months ended June 30, 2001 and June 30, 2000, are as follows:
For the three months ended For the six months ended
June 30, June 30,
2001 2000 2001 2000
----- ----- ----- -----
New vehicle 5.3% 5.2% 5.4% 5.2%
Used vehicle - retail 11.5% 12.1% 11.6% 11.5%
Used vehicle - wholesale 1.2% (1.8%) 2.0% (1.9%)
Parts and service 55.3% 55.5% 53.8% 56.2%
Other dealership revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Total Gross Profit (Loss) percent 13.8% 12.9% 14.0% 12.7%
===== ===== ===== =====
Three months ended June 30, 2001 compared with three months ended June 30, 2000.
Revenue
Revenue from the sale of new vehicles decreased $5.5 million, or 11.7%
from $47.1 million for the three months ended June 30, 2000 to $41.6 million for
three months ended June 30, 2001. Revenue decreases resulting from a decrease in
new units sold of 299 vehicles were partially offset by an increase in average
revenue per vehicle of $1,384. This is due in part to the loss of revenue from
sales at Morristown Lincoln Mercury, which was sold back to the manufacturer in
January 2001, but most loss of revenue is due to the fact that there was less
new car revenue at the remaining four Lincoln Mercury locations that Hometown
owns. The increase in average revenue per vehicle is due to an average 1.5%
price increase coupled with higher volume of more expensive sport utility
vehicles at our Toyota stores. Lincoln Mercury new car sales in the Northeast
this year compared to last are down as much as 25%, however Hometown did not
experience the
14
same reduction due in large part to our marketing efforts and increased usage of
technology prospecting our existing owner base. In addition, new car sales at
our two Toyota locations, with a large gain in popularity, increased by 19% at
Muller Toyota, and just over 27% at our Toyota of Newburgh.
Revenue from the sale of used vehicles at retail increased $3.2 million,
or 18.7%, from $17.1 million for the quarter ended June 30, 2000, to $20.3
million for the quarter ended June 30, 2001. The increase consisted of a rise in
average revenue per vehicle of $2,485 in addition to an increase in sales of
used vehicles at retail of 23 units. This increase in revenue is due in part to
the acquisition of International Auto which we tucked into our existing location
at Wellesley, Massachusetts, and also due to the increased efforts to sell
certified pre-owned Lincoln Mercury products at our four Lincoln Mercury
locations, which results in selling more expensive units and in general
Hometowns efforts to promote pre-owned cars and trucks. Revenue from the sale of
used vehicles at wholesale increased $1.4 million, or 51.9%, from $2.7 million
for the quarter ended June 30, 2000, to $4.1 million for the quarter ended June
30, 2001. That change consisted of a decrease in sales of used vehicles at
wholesale of 5 units offset by an increase in revenue per vehicle of $1,648.
Parts and service sales revenue increased $0.6 million, or 10.0% from $6.0
million for the three months ended June 30, 2000, to $6.6 million for the three
months ended June 30, 2001. This is due in large part to the expansion of parts
and service sales at our Baystate Lincoln Mercury and Toyota of Newburgh
locations, due to increased emphasis on parts and service sales at retail. In
addition this revenue was increased despite the loss of revenue from the sale of
the Morristown Location.
Finance, Insurance, Extended Service and other dealership revenues
increased $251,000, or 13.9% from $1.8 million for the three months ended June
30, 2000 to $2.0 million for the three months ended June 30, 2001, due in large
part to the fact that a high percentage of pre-owned cars and trucks are
financed at the dealership level. With an increase in used car revenue, F&I
sales would be expected to increase. In addition, Hometown has set goals and
objectives in the F&I departments and has supported those efforts with increased
training.
Gross Profit
Total gross profit increased $0.7 million, or 7.3%, from $9.6 million for
the three months ended June 30, 2000, to $10.3 million for the three months
ended June 30, 2001.
Gross profit on new vehicle sales declined by $249,000, or 10.1%, to $2.2
million for the second quarter of 2001. This decrease was attributable to the
aforementioned decline in units sold partially offset by an increase in gross
profit of $99 per unit. Gross profit on used vehicles sold at retail grew
$277,000, or 13.5%. This was due to an increase of $204 in gross profit per unit
and an increase in units sold of 23 vehicles. Gross profit on parts and service
sales increased $321,000, or 9.6%, to $3.7 million for the quarter ended June
30, 2001. This gross profit increase is due in large part to the concentration
on used cars, parts and service at all Hometown locations that was emphasized
early on in 2001. These types of sales have significantly higher margins than
that of new cars and trucks. In addition Hometown enjoyed a profit on its sales
of cars at wholesale verses a loss same period 2000. This is due in part to
stricter controls on inventory aging.
Amortization of Goodwill
Goodwill amortization increased to $175,000 for the quarter ended June 30,
2001 from $164,000 for the quarter ended June 30, 2000, reflecting the
acquisition of International Auto, our new high line pre-owned car/truck center
that we tucked into our existing Wellesley, Massachusetts location.
15
Selling, General and Administrative Expenses
Selling, general and administrative expenses did not vary significantly
during the period, totaling $9.0 million for the three months ended both June
30, 2000 and June 30, 2001. SG&A expenses as a percentage of sales also remained
unchanged.
Hometown continues to increase efforts to reduce SG&A. Although SG&A was
unchanged for the second quarter 2001, the mixture was more heavily weighted to
performance-based compensation, which would decrease in the event of a slowdown
in sales activity, as opposed to fixed expenses which would stay at current
levels, even if sales decreased.
Net Interest Expense
Net interest expense decreased $84,000 to $478,000 for the second quarter
of 2001. That decrease was primarily attributable to the lower rate on the floor
plan loans resulting from the refinancing with Ford Motor Credit Corporation.
Other Income (Expense)
Other Income for the three months ended June 30, 2001 increased $340,000
from expense of $112,000 to income of $228,000. This was due mainly to our Ford
and Lincoln Mercury stores achieving Ford's Blue Oval Certification, and Lincoln
Mercury's LPE certification. These standards of dealership performance measure
facility appearance, dealership policies and procedures, and customer CSI, to
high Ford Motor Company and Lincoln Mercury standards. When these standards were
achieved the manufacturer paid us an additional sum of money as a percentage of
each car/truck sold at these respective stores.
Provision (benefit) for income tax
The effective income tax rate was 35% in the quarter ended June 30, 2001
and 47% in the same period of 2000. 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.
Earnings Per Share, Basic and Diluted
See Note 7 to the Consolidated Financial Statements for a description of
dilutive and potentially dilutive securities.
Six months ended June 30, 2001 compared with six months ended June 30, 2000
Revenue
Revenue from the sale of new vehicles decreased $16.8 million, or 18.0%
from $93.3 million for the six months ended June 30, 2000 to $76.5 million for
the six months ended June 30, 2001. Revenue decreases resulted from a decrease
in new units sold of 752 vehicles offset by an increase in average revenue per
vehicle of $858. The sale of Morristown accounted for $3.3 million of that
decrease. Same store revenues on new vehicle sales were down $13.5 million, or
15.0%. On a same store basis, the number of units sold decreased by 639 units
and the average revenue per unit increased by $959. The loss in revenue on new
cars/trucks is due in large part to the reduction in volume of the
aforementioned new Lincoln Mercury products.
Revenue from the sale of used vehicles at retail increased $2.1 million,
or 6.2%, from $33.9 million for the six months ended June 30, 2000, to $36.0
million for the six months ended June 30, 2001. The increase consisted of an
increase in average revenue per vehicle of $1,980 offset by a fall in sales of
used
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vehicles at retail of 165 units. This reduction in units at retail was due to
slower sales in January and February 2001, particularly at Lincoln Mercury
franchises. Revenue from the sale of used vehicles at wholesale rose $0.4
million, or 6.4%, from $6.3 million for the six months ended June 30, 2000, to
$6.7 million for the six months ended June 30, 2001. That change consisted of an
increase in revenue per vehicle of $478 offset by a decrease in sales of used
vehicles at wholesale of 103 units.
Parts and service sales revenue increased $0.9 million, or 7.7% from $11.7
million for the six months ended June 30, 2000, to $12.6 million for the six
months ended June 30, 2001. Same store revenues from parts and service sales
increased by $1.3 million or 11.9% from the same six months last year. This is
due in large part to the increase of parts and service sales of our Baystate
Lincoln Mercury and Toyota of Newburgh locations and an overall concentration on
this higher margin profit center in light of anticipated lower new vehicles
sales in 2001.
Finance, Insurance, Extended Service and other dealership revenues
increased $155,000, or 4.3% from $3.6 million for the six months ended June 30,
2000 to $3.8 million for the six months ended June 30, 2001, due in large part
to the fact that a high percentage of pre-owned cars and trucks are financed at
the dealership level. With an increase in used car revenue, F&I sales would be
expected to increase. In addition, Hometown has set goals and objectives in the
F&I departments and has supported those efforts with increased training.
Gross Profit
Total gross profit increased $0.2 million, or 1.1%, from $18.8 million for
the six months ended June 30, 2000, to $19.0 million for the six months ended
June 30, 2001. This is due to the concentration on parts and service sales,
which enjoy significantly higher margins than that of new cars/trucks, and the
increasing of margins on used car and truck sales. These margins increased in
part to the fact that same period last year Hometown had a year to date loss on
used car sales at wholesale and this year there is a gain. Same store gross
profit increased $534,000, or 2.9%.
Gross profit on new vehicles decreased $0.8 million, or 16.3%, from $4.9
million for the six months ended June 30, 2000, compared to $4.1 million for the
same period of 2001. Unit sales decreased by 752 vehicles, while gross profit
per unit rose by $86. Gross profit on same store sales of new vehicles declined
$593,000, or 12.6%. This is due in large part to the aforementioned decrease in
new unit sales.
Gross profit on the sale of used vehicles at retail increased $0.3
million, or 7.7%, from $3.9 million for the first half of 2000 to $4.2 million
for the same period of 2001. Unit sales decreased by 165 units, while gross
profit per unit increased by $256. Same store gross profit on the sale of used
vehicles at retail increased $374,000, or 9.8%. This is due in part to
increasing the margins required of the dealerships on used car sales and in
addition the higher margins on sales of cars and trucks at auction. This is due
in part to stricter aging controls on used cars and to the fact that Hometown
has effectively eliminated guaranteed loan losses at Westwood Lincoln Mercury by
stopping the practice of guaranteeing loans in early 1999.
Gross profit on parts and service increased $0.2 million, or 3.0%, from
$6.6 million for the six months ended June 30, 2000, to $6.8 million for the six
months ended June 30, 2001. Same store gross profit on parts and service
increased by $466,000, or 7.4% due to the increased exphasis on parts and
service sales at retail. Also Hometown dealerships have increased margins on
sales of parts in the service departments while remaining competitive to local
independent service centers.
Amortization of Goodwill
Goodwill amortization increased to $353,000 for the six months ended June
30, 2001 from $327,000 for the six months ended June 30, 2000, reflecting the
acquisition of International Auto, our new high line pre-owned car/truck center
that we tucked into our existing Wellesley, Massachusetts location.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $0.8 million, or
4.6% from $17.5 million for the six months ended June 30, 2000, to $16.7 million
for the six months ended June 30, 2001.
The decrease was due to many factors: In early 2000, Hometown was in a
transition from our outsourced finance team, including our CFO, to our existing
in house finance team. During this time there was an overlap of expenses.
Hometown also was financing its inventory with GE Capital, and paid high monthly
fees. Ford Credit, Hometown's current lender does not assess these fees. Another
advantage of Ford Credit is its ability for the dealerships to have a much
simpler cash management system-allowing Hometown to scale down the number of
people in our corporate office. Hometown also wrote off $345,000 of the sales of
livery vehicles by Westwood Lincoln Mercury to Autotech leasing services during
this period. Additionally, the closing of the Morristown store has cut $485,000
of general and administrative expenses. These decreases were partially offset by
increased commissions due to higher sales at the Newburgh dealership, and the
profit sharing arrangement in place for the high end used car operation at
Baystate Lincoln Mercury.
Net Interest Expense
Net interest expense increased $194,000, from $1.0 million for the six
months ended June 30, 2000 to $1.2 million for the six months ended June 30,
2001. That increase was primarily attributable to the rate increases imposed by
GE Capital for the first quarter of 2001.
Other Income (Expense)
Other Income for the six months ended June 30, 2001 increased $565,000
from an expense of $84,000 to income of $481,000. The change consisted primarily
of increased incentive payments resulting from Blue Oval certification from Ford
(for Family Ford) and LPE certification from Lincoln Mercury (for Baystate and
Westwood Lincoln Mercury) as set forth above. Also included is the gain from the
sale of the Morristown dealership of $254,000.
Provision (benefit) for income tax
The effective income tax rate was 41% in the six months ended June 30,
2000 and 49% in the six months ended June 30, 2001. 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.
Earnings (Loss) Per Share, Basic and Diluted
See Note 7 to the Consolidated Financial Statements for a description of
dilutive and potentially dilutive securities.
Weighted Average Shares
The basic weighted average shares outstanding for the six months ended
June 30, 2001 and 2000 are 6,000,109 shares and 5,992,939 shares, respectively.
Fully diluted shares outstanding were 7,111,146 and 6,129,486, respectively, at
those dates.
Cyclicality
Hometown's operations, like the automotive retailing industry in general,
are affected by a number of factors relating to general economic conditions,
including consumer business cycles, consumer confidence,
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economic conditions, availability of consumer credit and interest rates.
Although the above factors, among others, may affect the Hometown's business,
Hometown believes that the impact on its 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
Hometown'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 June 30, 2001 and December 31, 2000,
were $0.9 million and $0.6 million, respectively, for an increase of $0.3
million in cash and cash equivalents. Operating activities used $11,000 in cash.
The sale of the Morristown, NJ dealership added $0.7 million. $0.2 million of
cash was used to purchase property and equipment, and $0.1 million was used for
principal payments on long-term debt.
Receivables
The Company had $8.3 million in accounts receivable at June 30, 2001
compared to $6.1 million at December 31, 2000. The majority of those receivables
are contracts-in-transit from companies that provide or secure financing for
customer purchases. The higher receivable amounts reflect the higher sales
activity normally expected in June versus December.
Floor Plan Financing
On March 15, 2001, the Company completed a refinancing of its revolving
line of credit with GE Capital Corporation to a traditional floor plan line of
credit at each dealership with Ford Motor Credit Corporation. The new floor plan
loans carry an interest rate of prime less 75 basis points for new vehicles and
prime less 50 basis points for used vehicles. Interest expense on floor plan
notes payable, before manufacturers' interest assistance, totaled approximately
$1.7 million for the six months ended June 30, 2001. Manufacturer interest
assistance, which is recorded as a reduction of net interest expense, totaled
$0.9 million for the same period, leaving net floor plan interest for the half
year of $0.8 million.
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Disposals
In January 2001, Hometown sold the franchise for its Morristown, NJ store
back to Lincoln Mercury for $0.7 million in cash. During the first six months of
2001, Hometown received the purchase price plus $23,000 for parts returned, and
paid out a broker's commission of $35,000. Included in accounts receivable is
$23,000 due for additional parts returned. The transaction resulted in Hometown
recording a $254,000 gain on the sale, which is included in other income.
Subsequent Events:
On July 23, 2001, the Board of Directors voted in favor of raising up to
$1.5 million in a private equity financing through the sale of Units to
accredited investors at a price of $2.00 per Unit. Each Unit consists of two
shares of Class A Common Stock of Hometown plus a warrant to purchase one
additional share at an exercise price of $1.20 per share, exercisable within a
three year period. As of the date of the filing of this Quarterly Report,
Hometown has received commitments for the purchase of 487,498 Units, raising
approximately $1.0 million in proceeds from ten accredited investors including
the Company's Chief Executive Officer, Regional Vice President-North Division,
Regional Vice President-South Division, and one non-executive director.
New Accounting Pronouncements
In June 2001, the FASB approved SFAS Nos. 141 and 142 entitled Business
Combinations and Goodwill and Other Intangible Assets, respectively. The
statement on business combinations, among other things, eliminates the "Pooling
of Interests" method of accounting for business acquisitions entered into after
June 30, 2001. SFAS No. 142, among other things, eliminates the need to amortize
goodwill and requires companies to use a fair-value approach to determine
whether there is an impairment of existing and future goodwill. These statements
are effective for the Company beginning January 1, 2002 and have certain
transition rules that require the Company to obtain independent appraisals of
certain of its operating units, which must be completed within six months from
adoption. The Company is currently evaluating the impact of these
pronouncements.
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 June 21, 2001. The candidates
nominated for election to its Board of Directors are as follows:
Corey E. Shaker
William C. Muller, Jr.
James Christ
Joseph Shaker
Salvatore A. Vergopia
Edward A. Vergopia
Domenic Colasacco
Louis I. Margolis
All eight nominees were elected to the Board. Each nominee received 29,248,208
votes for and 10,006,901 votes abstaining. Those individuals represent the
entire Board of Directors as no other directors had terms continuing after the
meeting. No other matter was submitted to a vote of security holders.
ITEM 6. Exhibits and Reports on Form 8-K
a. Exhibits:
None.
b. Reports on Form 8-K:
On June 28, 2001, Hometown filed a report on Form 8-K with respect to
Items 5 and 7 on such report.
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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.
August 8, 2001 By: /s/ Corey E. Shaker
- -------------- ---------------------------------------
Date Corey E. Shaker, President and Chief
Executive Officer
August 8, 2001 By: /s/ John J. Stavola
- -------------- ---------------------------------------
Date John J. Stavola, Acting Chief Financial
Officer
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