As filed with the Securities and Exchange Commission on
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
HOMETOWN AUTO RETAILERS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 5511 06-150-1703
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or 831 Straits Turnpike
Organization) Watertown, CT 06795
(860) 945-4900
(860) 945-4909 Facsimile
(Address, including zip code, and telephone number, including area code, of
registrant's executive offices)
-------------------------
Joseph Shaker
President and Chief Operating Officer
Hometown Auto Retailers, Inc.
831 Straits Turnpike
Watertown, CT 06795
(860) 945-4900
(860) 945-4909 Facsimile
(Name, address, including zip code, and telephone number, including area
code, of agent for service)
-------------------------
Copies to:
Stephen A. Zelnick, Esq. Stephen A. Weiss, Esq,
Morse, Zelnick, Rose & Lander, LLP Andrew J. Cosentino, Esq.
450 Park Avenue Greenberg Traurig Hoffman
New York, New York 10022 Lipoff Rosen & Quentel
(212) 838-8040 200 Park Avenue, 15th Floor
(212) 838-9190 (Facsimile) New York, New York 10166
(212) 801-9200
(212) 801-6400 (Facsimile)
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Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended (the "Securities Act") check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Proposed
Maximum Proposed
Offering Maximum
Price Aggregate Amount of
Title of Each Class of Amount To Be Per Share Offering Registration
Securities to be Registered Registered (1) Price(1) Fee
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Common Stock, par value $.001 per
share................................ 2,300,000 $11.00 $25,300,000 $2,403.50
shs.(2)
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Representative's Warrants............ 200,000 wts. (3) (3) (3)
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Common Stock issuable upon exercise
of Representative's Warrants....... 200,000(3) $13.20 $ 2,640,000 $ 250.80
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Total Registration Fee .............. $2,654.30
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(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933, as amended (the "Securities
Act").
(2) Includes 300,000 shares issuable upon exercise of the Underwriters'
over-allotment option.
(3) No registration fee required pursuant to Rule 457 under the Securities
Act.
(4) Pursuant to Rule 416 under the Securities Act, there are also being
registered hereby such additional indeterminate number of shares as may
become issuable pursuant to the anti-dilution provisions of the
Representative's Warrants.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
HOMETOWN AUTO RETAILERS, INC.
Cross Reference Sheet
Showing Location in Prospectus of Information Required by
Items of Part I of Form S-1
Item and Caption in Form S-1 Location in Prospectus
- ---------------------------- ----------------------
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus................................. Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................... Inside Front and Outside Back
Cover of Prospectus
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.......... Prospectus Summary -The
Company; Risk Factors
4. Use of Proceeds............................. Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price............. Outside Front Cover Page of
Prospectus; Risk Factors;
Underwriting
6. Dilution.................................... Dilution
7. Selling Security - Holders.................. Not Applicable
8. Plan of Distribution........................ Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to be
Registered.................................. Description of Securities;
Underwriting
10. Interests of Named Experts and Counsel...... Legal Matters; Experts
11. Information with Respect to the Registrant
(a) Description of Business............... Business
(b) Description of Property............... Business - Properties and
Facilities
(c) Legal Proceedings..................... Not Applicable
(d) Market Price of and Dividends on the
Registrant's Common Equity and
Related Stockholder Matters........... Front Cover Page; Dividend
Policy; Description of Capital
Stock; Shares Eligible for
Future Sale; Management - 1998
Stock Option Plan
(e) Financial Statements.................. Consolidated Financial
Statements; Capitalization
(f) Selected Financial Data............... Selected Consolidated Financial
Information and Operating Data
(g) Supplementary Financial Information... Not Applicable
(h) Management's Discussion and Analysis
of Financial Condition and Results
of Operations......................... Management's Discussion and
Analysis of Financial Condition
and Results of Operations
(i) Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure.................. Not Applicable
(j) Directors, Executive Officers,
Promoters and Control Persons......... Management - Directors and
Executive Officers
(k) Executive Compensation................ Management - Executive
Compensation; and Management -
Stock Option Plan;
(l) Security Ownership of Certain
Beneficial Owners and Management...... Principal Stockholders
(m) Certain Relationships and Related
Transactions.......................... Management - Certain
Transactions
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................. Not Applicable
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PROSPECTUS
2,000,000 Shares
HOMETOWN AUTO RETAILERS, INC.
CLASS A COMMON STOCK
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All of the shares of Class A Common Stock, par value $.001 per share (the
"Class A Common Stock"), offered hereby are being sold by Hometown Auto
Retailers, Inc. (the "Company" or "Hometown").
Prior to this offering (the "Offering"), there has been no public market
for the Class A Common Stock of the Company. It is expected that the initial
public offering price will be between $9.00 and $11.00 per share. For
information that was considered in determining the initial public offering
price, see "Underwriting." Application has been made for quotation of the Class
A Common Stock on the Nasdaq National Market under the symbol "HCAR."
The Company has two classes of authorized Common Stock, the Class A Common
Stock, which is offered hereby, and the Class B Common Stock, par value $.001
per share (the "Class B Common Stock"). Holders of Class A Common Stock are
entitled to one vote per share and holders of Class B Common Stock are entitled
to ten votes per share. Both Class A Common Stock and Class B Common Stock vote
together as a single class on all matters to be voted on by stockholders of the
Company. Class A Common Stock is not convertible, while Class B Common Stock is
convertible, on a share for share basis, either at the option of the holder
thereof or automatically upon either public or private sale by the holder. All
of the authorized and outstanding shares of Class B Common Stock, which will
represent approximately 94.4% of the aggregate voting power of the Company upon
completion of this Offering, are beneficially owned by the existing stockholders
of the Company. See "Risk Factors - Concentration of Voting Power;" "Description
of Capital Stock" and "Principal Stockholders."
--------------------
For a discussion of certain factors that should be considered by
prospective purchasers of the Class A Common Stock offered hereby, see "Risk
Factors" beginning on page 10 .
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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Price to Underwriting Proceeds
Public Discounts and to
Commissions(1) Company(2)
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Per Share....... $ $ $
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Total(3)........ $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. The Company has also agreed to issue to Paulson Investment
Company, Inc., as representative of the several Underwriters (the
"Representative"), warrants (the "Representative's Warrants") to purchase
up to 200,000 shares of Class A Common Stock for $ per share [120%
of the initial offering price].
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted to the Underwriters a 45-day option to purchase up
to 300,000 additional shares of Class A Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts Commissions and Proceeds to
Company will be $ , $ and $ , respectively. See
"Underwriting."
The shares of Class A Common Stock are being offered by the several
Underwriters when, as and if delivered to and accepted by the Underwriters and
subject to various prior conditions, including the right to reject orders in
whole or in part. It is expected that delivery of the certificates representing
the shares will be made against payment therefor at the offices of __________ in
New York, New York on or about ______________, 1998.
Paulson Investment Company, Inc.
The date of this Prospectus is ____________, 1998
This Prospectus includes statistical data regarding the retail automobile
industry. Unless otherwise indicated herein, such data is taken or derived from
information published by the Industry Analysis Division of the National
Automobile Dealers Association ("NADA") in its Industry Analysis and Outlook and
Automotive Executive Magazine publications and Crain Communications, Inc. in the
Automotive News - 1997 Market Data Book. This Prospectus includes trademarks of
companies other than Hometown Auto Retailers, Inc., which trademarks are the
property of their respective holders.
--------------------------
Neither Ford Motor Company ("Ford Motor"), General Motors Corporation
("GM"), Toyota Motor Corp. and its United States affiliate, Toyota Motor Sales,
U.S.A., Inc. (collectively, "Toyota Motor"), Chrysler Corporation ("Chrysler")
and American Isuzu Motors, Inc. ("American Isuzu"), nor any other automotive
manufacturer (a "Manufacturer") has been involved, directly or indirectly, in
the preparation of this Prospectus or in the Offering being made hereby. No
Manufacturer has made any statements or representations in connection with the
Offering or provided any information or materials that were used in connection
with the Offering, and no Manufacturer has any responsibility for the accuracy
or completeness of this Prospectus. The Company has agreed to indemnify each
Manufacturer with which it has a franchise agreement against certain liabilities
that may be incurred in connection with the Offering, including liabilities
under the Securities Act of 1933, as amended.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK, INCLUDING OVERALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
THE CLASS A COMMON STOCK AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH
THE OFFERING.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information contained in this Prospectus gives retroactive effect
to the consummation of (i) the Company's issuance of 3,760,000 shares of Class B
Common Stock in exchange for the capital stock of four corporations operating
six dealerships, a collision repair center and a factory auto-service center
(the "Exchange") and (ii) the cash acquisition of two additional dealerships
(the "Acquisitions"), all of which transactions shall be consummated on the
closing of this Offering. References herein to the "Company" or "Hometown" mean
Hometown Auto Retailers, Inc., its predecessor companies and subsidiaries after
giving effect to the foregoing transactions. Unless otherwise indicated, all
share, per share and financial information set forth herein has been adjusted
retroactively to give effect to (i) a 12,000-for-1 stock split resulting in the
issuance of 240,000 shares of Class A Common Stock, (ii) the issuance of
3,760,000 shares of Class B Common Stock in the Exchange, and (iii) the
amendment to the Certificate of Incorporation reducing the authorized capital
stock to 29,760,000 shares and the Class B Common Stock to 3,760,000 shares and
assumes that the Underwriters' over-allotment option and the Representative's
Warrants are not exercised. See "Underwriting."
The Company
The Company is engaged in the business of selling new and used cars and
light trucks, providing maintenance and repair services, selling replacement
parts and providing related financing, insurance and service contracts through 8
franchised dealerships located in New Jersey, Connecticut, Massachusetts and
Vermont. The Company's dealerships offer 12 American and Asian automotive
brands, including Chevrolet, Chrysler, Dodge, Eagle, Ford, Isuzu, Jeep, Lincoln,
Mercury, Oldsmobile, Plymouth and Toyota. The Company also operates a collision
repair center and is active in two "niche" segments of the automotive market,
the sale of Lincoln town cars and limousines to livery car and livery fleet
operators and the maintenance and repair of cars and trucks at a Ford and
Lincoln Mercury factory authorized free-standing service center. The Company
believes, based on available 1996 industry data, that it is one of the five
largest automotive dealers in New England and a leading dealer in the State of
New Jersey. The Company's growth strategy is to participate in the recent
consolidation trend in the automotive sales and service industry and, through
strategic acquisitions, become the largest dealer group in New England and parts
of the Mid-Atlantic region and to expand its two "niche" businesses: livery
sales and maintenance and light repair in free-standing neighborhood factory
authorized service centers.
The Company believes that it is the nation's largest seller of Lincoln
town cars and limousines to livery car and livery fleet operators. The Company
has achieved its market position in livery car sales through innovative sales,
financing and maintenance programs creating a high level of repeat business
under which livery car operators trade in their vehicles for new models every 18
to 24 months. The Company believes that it will be able to expand its livery
sales business throughout the New England and Mid-Atlantic regions by adding
additional sales locations and maintenance and repair facilities.
The Company's "Lincoln Mercury Autocare" center located in Connecticut was
the pilot facility for Ford's authorized free-standing neighborhood service
center concept for the maintenance and light repair of cars and trucks.
Free-standing neighborhood service centers are an innovative attempt by the
automobile retail industry to recapture repair and maintenance business which
has been lost in recent decades to chain and independent service businesses.
These services centers are designed to enhance customer convenience by operating
during extended hours, servicing vehicles without prior
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appointment and offering quick turnaround. The Company intends to establish
additional neighborhood service centers in locations in which they develop a
concentration of dealerships.
Operating Strategy
The Company will seek to consolidate operations and increase the
profitability of its existing dealerships by using a strategy that combines its
"best in class" operating practices with the advantages of its established
customer base, local presence and name recognition. Upon completion of the
Exchange and the Acquisition, each of the Company's dealerships will use a core
operating strategy specifically designed to produce a high shop absorption rate
(i.e., that portion of total dealership fixed costs borne by the gross profit
generated by the parts and service departments), a high rate of service
retention and a high ratio of retail used to new car sales, all in order to
maximize profitability and provide insulation from the cyclicality of new car
sales. Each dealership has a general manager who is highly-trained and
ultimately responsible for the operation, personnel and financial performance of
that dealership. The Company's established operating practices and procedures,
including the management and pricing of inventories of new and used vehicles,
are continually reviewed and updated by the general managers and members of the
Company's operating committee, consisting of its six senior executive officers,
each of whom is, or has been, the chief operating officer of a franchised
dealership. The executive officers of the Company have over 130 years of
combined experience in the automotive retailing industry and are members of
families who have owned dealerships since 1947. They are recognized leaders in
the automotive retailing industry and serve at various times in leadership
positions in state and national industry organizations. The Company has also
received numerous awards based on high customer satisfaction index ("CSI")
ratings and other performance measures regularly compiled or monitored by the
automobile Manufacturers.
The Company believes that the following factors, coupled with its
established organizational structure, will help it achieve its operating
strategy:
o an established customer base and name recognition for each of its
existing dealerships;
o a high ratio of retail used car to new car sales;
o a strong regional focus permitting cross-marketing of used and same
brand new vehicles;
o management and control efficiencies;
o strong presence in higher profit margin automotive "niche"
businesses: (i) sale, financing and maintenance of livery vehicles;
and (ii) operation of free-standing neighborhood factory authorized
service centers in locations with a concentration of Hometown
dealerships;
o brand diversity;
o potential cost savings from centralized financing and administrative
functions; and
o the ability to source high quality used vehicles cost-effectively
through coordinated auction buying, trade-ins and off-lease
programs.
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4
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Growth Strategy
The Company's goals are to become, through selected acquisitions, the
leading consolidator and the largest dealer group in New England, to increase
the number of its dealerships in New Jersey and other portions of the
Mid-Atlantic region, to add additional sales locations and maintenance and
repair facilities for its livery sales business and to establish additional
factory authorized free-standing neighborhood service centers in parts of both
New England and the Mid-Atlantic region with a concentration of Hometown
dealerships. Its acquisition strategy will focus on small to mid-sized
dealerships, having annual revenues of between $20 million and $60 million per
location (some of which may be part of larger groups), which are located in
urban fringe or suburban areas. By the nature of their customer base and
"neighborhood" location, the Company believes that these small to mid-sized
dealerships are more compatible with its core operating strategy than larger
regional dealerships, as they are able to provide customers with convenient
access for the higher margin products and services, such as used vehicle retail
sales, light repair and maintenance services and sale of replacement parts.
The Industry
Over the past three decades, there has been a trend toward fewer, but
larger, automotive dealerships. In 1996, each of the largest 100 dealer groups
had more than $200 million in revenues. Although significant consolidation has
taken place since its inception, the industry today remains highly fragmented,
with only the largest 100 dealer groups generating less than 10% of total sales
revenues and controlling approximately 5% of all franchised dealerships. The
Company believes that the recent industry trend of consolidating larger
dealerships which has taken place in other parts of the country, can also be
applied to the small and mid-sized dealerships located in the densely populated
Northeastern region. Factors within the industry favoring the Company's
consolidation strategy include:
* Customer Convenience. Because they are able to provide their customers
with more convenient access for maintenance and repair, customers tend to
favor a large number of small to mid-size dealerships and service centers,
rather than one remotely-located large regional center.
* Economies of Scale. Small and mid-sized dealerships can most often
benefit from the synergies created by being a member of a larger
automotive group, including cross-utilization of same brand new and used
car inventories, lower cost financing, more effective auction positioning
and integration of computer systems.
* Consolidation is favored by Manufacturers. The Company believes that the
principal Manufacturers are seeking to reduce the number of dealerships
holding their franchises and to retain or establish higher quality dealers
with enhanced financial stability who can better foster the Manufacturer's
brand image.
Corporate History; Founders
The Company was founded in March 1997 to consolidate and operate
automobile dealerships in the Northeast, primarily New Jersey and New England.
On the closing of the Offering, the stockholders of four corporations operating
six franchised dealerships, one collision repair center and one factory
authorized free-standing neighborhood auto-service center in New Jersey and
Connecticut (collectively, the "Core Operating Companies") will exchange all of
their stock in such corporations for
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3,760,000 shares of Class B Common Stock (the "Exchange"). In 1997, the Core
Operating Companies had pro forma combined revenues and income before income
taxes of $178,433,000 and $2,760,000, respectively. In addition, the Company has
entered into agreements to acquire two operating dealerships in Massachusetts
and Vermont for an aggregate consideration of $5.7 million (the "Acquisitions")
which added $49,300,000 and $1,688,000, respectively, to 1997 pro forma revenues
and income before income taxes. See "Exchange and Acquisitions," "Use of
Proceeds" and "Description of Securities."
Consummation of the Offering is conditioned upon the consummation of the
transactions contemplated by the Exchange and the Acquisitions.
The Offering
Common Stock offered by the Company 2,000,000 shares of Class A Common
Stock
Common Stock to be outstanding after the 2,240,000 shares of Class A Common
offering Stock (1) 3,760,000 shares of Class B
Common Stock
Use of proceeds Finance the acquisition of two
automobile dealerships; repay certain
indebtedness; working capital and
general corporate purposes, including
additional acquisitions. See "Use of
Proceeds."
Nasdaq National Market symbol HCAR
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(1) Does not include: (a) an aggregate of 480,000 shares reserved for issuance
under the Company's Stock Option Plan, 240,000 of which are subject to
outstanding options exercisable at the initial public offering price per
share; and (b) 300,000 shares subject to the over-allotment option. See
"Management Stock Options" and "Underwriting."
Certain Risk Factors
The Company's acquisition program may be limited to some extent by general
policies adopted by the Manufacturers and by specific conditions imposed by the
Manufacturers in connection with approval of the Exchange and the Acquisitions.
See "Risk Factors--"Manufacturers' Control over Dealerships," Risks Relating to
Failure to Meet Manufacturer CSI Scores," "Dependence on Acquisitions for
Growth," and "Manufacturers' Restrictions on Acquisitions."
See "Risk Factors" beginning on page 10 for a description of the above and
certain other risks relevant to an investment in the Class A Common Stock.
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Summary Pro Forma Financial Data
The following summary pro forma financial data presents, for the year
ended December 31, 1997, certain historical pro forma financial data and
combined pro forma data for the Core Operating Companies and the Acquisitions as
if those transactions had occurred as of January 1, 1997. See "Selected
Financial Data" and the Unaudited Pro Forma Financial Statements and the notes
thereto included elsewhere in this Prospectus.
For the Year Ended December 31, 1997
---------------------------------------------------------------------------------
Core Operating Companies(2) Consolidated
--------------------------------------- Core-Operating Acquisitions Pro Forma
Shaker(3) Westwood Muller Companies (2) (3)(4)
Unaudited Pro Forma ----------- --------- -------- ------------- ------------ ----------
Income Statement Data (1): (in thousands, except per share data)
Revenues
New vehicle sales ........................ $ 29,345 $ 45,470 $ 33,308 $ 108,123 $ 18,928 $ 127,051
Used vehicle sales ....................... 21,800 8,396 19,996 50,192 25,387 75,579
Parts and service sales .................. 6,727 4,352 4,907 15,986 4,090 20,076
Other dealership revenues, net ........... 1,624 731 1,777 4,132 895 5,027
----------- -------- -------- --------- -------- ----------
Total revenues ........................ 59,496 58,949 59,988 178,433 49,300 227,733
Cost of sales ............................... 51,226 52,770 51,641 155,637 42,488 198,125
----------- -------- -------- --------- -------- ----------
Gross profit .......................... 8,270 6,179 8,347 22,796 6,812 29,608
Amortization of excess of purchase
price over net tangible
assets acquired ......................... -- -- -- -- -- 399 (5)
Selling, general and administrative
expenses (2) ............................. 7,077 4,931 6,936 18,943 4,731 23,675 (5)
----------- -------- -------- --------- -------- ----------
Income from operations ................ 1,193 1,248 1,411 3,853 2,081 5,534
Other income (expense)
Interest expense, net (2) ................ (427) (295) (420) (1,142) (361) (192)(5)
Other income (expense), net .............. 116 (39) (27) 50 (32) 18
----------- -------- -------- --------- -------- ----------
Income before taxes ................... $ 882 $ 914 $ 964 $ 2,761 $ 1,688 5,360
=========== ======== ======== ========= ========
Provision for income taxes ......................................................................................... 2,144 (5)
----------
Net income ................................................................................................... $ 3,216
==========
Earnings per share, basic and diluted .............................................................................. $ 0.54
Weighted average shares ............................................................................................ 6,000,000
Unaudited Pro Forma Other Data (1):
Gross margin ................................ 13.9% 10.5% 13.9% 12.8% 13.8% 13.0%
Operating margin ............................ 2.0% 2.1% 2.4% 2.2% 4.2% 2.4%
Pre-tax margin .............................. 1.5% 1.6% 1.6% 1.5% 3.4% 2.4%
Retail new vehicles sold .................... 1,297 1,473 1,511 4,281 819 5,100
Retail used vehicles sold ................... 1,256 377 1,301 2,934 1,542 4,476
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As of December 31, 1997
------------------------------------
Core Operating Pro Forma
Shaker Companies As Adjusted
(6) (7)(8)
------- ---------- --------
Unaudited Pro Forma Balance Sheet Data(1): (in thousands)
Working capital (deficit) ............ $ 4,563 $ 4,024 $12,305
Inventories .......................... 7,609 27,295 31,543
Total assets ......................... 14,042 53,746 59,203
Total debt ........................... 8,944 36,429 26,686
Stockholders' equity ................. 5,098 17,317 32,517
Notes:
(1) For financial presentation purposes, the Unaudited Pro Forma Income
Statement Data give effect to the Exchange, the Acquisitions and the
Offering as if they had occurred as of January 1, 1997, the beginning of
the period. The Exchange and the Acquisitions will occur simultaneously
with the Closing of the Offering.
(2) Aggregate pro forma adjustments made to the historical financial
statements of the Core Operating Companies and the Acquisitions are as
follows:
Debit (Credit) Total 1997
--------------
(in thousands)
Selling, general and
administrative expenses .............................. $(2,166)(a)
Other income (expense)
Interest expense, net ............................... 163 (b)
-------
Income before taxes ................................. $(2,003)
=======
(a) Reflects a pro forma reduction to compensation expense, management
fees and rent expense based on contractual arrangements to be
effective immediately following the closing of the Offering as
though, for pro forma financial presentation purposes, such
arrangements had been given effect as of January 1, 1997. Such
reductions are as follows: Shaker $639,000; Westwood $663,000;
Muller $347,000; and Acquisitions $517,000. See Unaudited Pro Forma
Financial Statements and the notes thereto beginning on page F-4 for
a more detailed description of these pro forma adjustments.
(b) Reflects a pro forma reduction to interest income of Shaker of
$238,000 and of the Acquisitions of $50,000 of Cash and Cash
Equivalents not realized as part of the Exchange and the
Acquisitions offset by reductions in interest expense as follows;
(i) $92,000 of long-term debt incurred by Muller prior to the
Exchange will be liquidated out of proceeds of the Offering, and
(ii) $33,000 of leases and debt not assumed as part of the
Acquisitions. See Unaudited Pro Forma Financial Statements and the
notes thereto beginning on page F-4 for a more detailed description
of these pro forma adjustments.
(3) These transactions were accounted for using the purchase method of
accounting. ERR Enterprises, Inc. ("Shaker"), the parent of one of the
Core Operating Companies, was identified as the acquiror for financial
statement presentation purposes in accordance with SAB No. 97 because its
stockholders
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received the largest number of shares of Class B Common Stock in the
Exchange, representing the single largest voting inteest in the Company.
(4) Gives effect to: (i) the Exchange and the Acquisitions, (ii) the
consummation of the Offering and (iii) the pro forma adjustments,
specified in footnotes (1) above and (4) below, to the historical
financial statements.
(5) The combination of Income Statement Data of the Core Operating Companies'
and the Acquisitions does not equal the total set forth in the Pro Forma
Financial Statements because of the following pro forma adjustments which
are made in total only: (i) the amortization of the "excess purchase price
over net tangible assets acquired;" (ii) the decrease in interest expenses
of $998,000 resulting from the repayment of certain floor plan obligations
with proceeds from the Offering, and the decrease in interest of $313,000
resulting from refinancing of the balance of the floor plan obligations
with a commercial lender; (iii) the provision for federal and state income
taxes based on an effective rate of 40% for each of the Core Operating
Companies and Acquisitions and (iv) $1,000 of selling, general and
administrative expenses incurred by Hometown during 1997. See Unaudited
Pro Forma Financial Statements and the notes thereto beginning on page F-4
for a more detailed description of these pro forma adjustments.
(6) Gives effect to the Exchange on an historical basis and the pro forma
balance sheets adjustments on pages F-7 and F-8. See Unaudited Pro Forma
Financial Statements and the notes thereto beginning on page F-4 for a
description of these pro forma balance sheet adjustments.
(7) Gives effect to the Exchange and the Acquisitions on an historical basis
and the pro forma balance sheets adjustments on pages F-7 and F-8. See
Unaudited Pro Forma Financial Statements and the notes thereto beginning
on page F-4 for a description of these pro forma balance sheet
adjustments.
(8) Gives effect to the sales of the shares of Class A Common Stock offered
hereby and the application of the net proceeds therefrom. See "Use of
Proceeds."
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9
RISK FACTORS
An investment in the Class A Common Stock involves various material risks.
Prospective investors should carefully consider the following factors, in
addition to the other information set forth in this Prospectus, in connection
with an investment in the Class A Common Stock.
Certain statements contained in this Prospectus, including the words,
"believes," "may," "will," "expect," "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 of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (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
position. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause the actual results or
performance of the Company, or industry results, to be materially different from
any future results or performance expressed or implied by such forward-looking
statements. Certain of these factors, risks and uncertainties and other factors
are discussed in more detail in the risk factors set forth below and elsewhere
in this Prospectus. Prospective investors are cautioned that any forward-looking
statements are not guarantees of future performance and not to place undue
reliance on such forward-looking statements. The Company disclaims any
obligation to update any such factors or to publicly announce the results of any
revisions to any of the forward-looking statements contained herein to reflect
future events or developments.
Absence of Combined Operating History
The Company has conducted no combined or coordinated operations other than
in connection with the Exchange, the Acquisitions and the Offering. The Core
Operating Companies have been operated and managed as separate independent
entities and the Company's future operating results will depend, in part, on its
ability to integrate operations and manage the combined enterprise. The
management group that will lead the Company has been formed only recently and
there can be no assurance that it will be able to effectively and profitably
integrate the Core Operating Companies, the Acquisitions and any future
acquisitions, or to effectively manage the combined entity. The inability of the
Company to do so could have a material adverse effect on its business, financial
condition and results of operations.
Dependence on Automobile Manufacturers
The Company is significantly dependent upon its relationships with, and
the success of, certain Manufacturers. For the year ended December 31, 1997,
Ford Motor, Toyota Motor and Chrysler accounted for 63%, 17%, and 11% of the new
vehicle sales of the Company, respectively. The Company may become dependent on
additional manufacturers in the future as a result of its acquisition strategy
and changes in the Company's sales mix.
The Company also is dependent upon its Manufacturers to provide it with an
inventory of new vehicles. The most popular vehicles tend to provide the Company
with the highest profit margins and are frequently the most difficult to obtain
from the Manufacturers. In order to obtain sufficient numbers of these vehicles,
the Company may be required to purchase a larger number of less marketable makes
and models than it would otherwise purchase. Sales of less desirable makes and
models may result in lower profit margins than sales of the more popular
vehicles. If the Company were to be unable to
10
obtain sufficient quantities of the most popular makes and models, its
profitability could be adversely affected.
The Company's franchise and dealership agreements with its Manufacturers
do not give the Company the exclusive right to sell any Manufacturer's product
within any given geographical area. Accordingly, a Manufacturer could grant a
franchise to another dealer to start a new dealership in proximity to one or
more of the Company's locations or an existing dealer could move its dealership
to a location which would be directly competitive with the Company. Although
under Connecticut and New Jersey law a manufacturer is prohibited from
establishing a new dealership, or authorizing the relocation of an existing
dealership, to a location within 14 miles (8 miles in New Jersey under certain
circumstances) of a pre-existing dealership holding a franchise to sell the same
brand, depending upon the dealership involved, such an event could have a
material adverse effect on the Company and its operations.
The success of each of the Company's franchises is also dependent to a
great extent on the success of the respective Manufacturer, including its
financial condition, marketing, vehicle demand, production capabilities and
management. Events such as labor strikes or negative publicity concerning a
particular Manufacturer, including safety recalls of a particular vehicle model,
could adversely affect the Company. The Company has attempted to lessen its
dependence on any one Manufacturer by obtaining agreements with a number of
different domestic and foreign automobile manufacturers.
Manufacturers' Control over Dealerships
The dealerships operated by the Company sell cars and light trucks
pursuant to franchise or dealership agreements with Ford Motor, GM, Toyota
Motor, Chrysler and American Isuzu. Through the terms and conditions of these
agreements, such Manufacturers exert considerable influence over the operations
of the Company's dealerships. Each of these agreements includes provisions for
the termination or non-renewal of the manufacturer-dealer relationship for a
variety of causes including any unapproved change of ownership or management and
other material breaches of the franchise agreement.
To its knowledge, the Company has, to date, complied with its dealership
agreements. There can be no assurance, however, that the Company will not from
time to time fail to comply with particular provisions of some or all of these
agreements. Although such agreements generally afford the Company a reasonable
opportunity to cure violations, if a Manufacturer were to terminate or decline
to renew one or more of the Company's significant agreements, such action could
have a material adverse effect on the Company and its business.
Dependence on Acquisitions for Growth
The Company's future growth and financial success will be dependent upon a
number of factors including, among others, the Company's ability to identify
acceptable acquisition candidates, consummate the acquisition of such
dealerships on terms that are favorable to the Company, obtain the consent of
applicable automobile manufacturers, acquire and retain or hire and train
professional management and sales personnel at each such acquired dealership and
promptly and profitably integrate the acquired operations into the Company. The
Company may acquire dealerships with net profit margins which are materially
lower than the Company's historical average net profit margin. No assurance can
be given that the Company will be able to improve the profitability of any such
acquired dealerships. To manage its expansion, the Company intends to evaluate
on an ongoing basis the
11
adequacy of its existing systems and procedures, including, among others, its
financial and reporting control systems, data processing systems and management
structure. However, no assurance can be given that the Company will adequately
anticipate all of the demands its growth will impose on such systems, procedures
and structure. Any failure to adequately anticipate and respond to such demands
could have a material adverse effect on the Company.
Acquisitions of additional dealerships will require substantial capital
investment and could have a significant impact on the Company's financial
position and operating results. Any such acquisitions may involve the use of
cash (including the net proceeds of the Offering) or the issuance of additional
debt or equity securities which could have a dilutive effect on the then
outstanding capital stock of the Company. Acquisitions may also result in the
accumulation of substantial goodwill and intangible assets which would result in
amortization charges to the Company and adversely affect future earnings. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Business -- Growth
Strategy."
Manufacturers' Restrictions on Existing and Future Acquisitions
As a condition to granting their consent to the Exchange and the
Acquisitions, the Manufacturers have imposed certain restrictions on the
Company. These include restrictions on: (i) the acquisition of more than a
specified percentage of the Common Stock (20% in the case of GM and Toyota
Motor, 50% in the case of Ford Motor and - % in the case of Chrysler) by any one
person who in the opinion of the Manufacturer is unqualified to own a dealership
of such Manufacturer or has interests incompatible with the Manufacturer, (ii)
certain material changes in the Company or extraordinary corporate transactions
such as an acquisition, merger or sale of a material amount of assets; (iii) a
change in the general manager of a dealership without the consent of the
applicable Manufacturer; (iv) the use of dealership facilities to sell or
service new vehicles of other Manufacturers; (v) in the case of GM, the
advertising or marketing of non-GM operations with GM operations; (vi) in the
case of GM, any change in control of the Company's Board of Directors; and (vii)
in the case of Ford Motor, any change in greater than 50% of the Company's Board
of Directors or management. If the Company is unable to comply with these
restrictions, the Manufacturer may require the Company to sell the assets of the
dealerships to the Manufacturer or to a third party acceptable to the
Manufacturer, or terminate the dealership agreements with the Manufacturer.
It may be anticipated that obtaining Manufacturer's consent will also be a
prerequisite to any future acquisitions which the Company will seek to
consummate. Various Manufacturers have set limits on the number of dealerships
carrying their brand which may be owned by one dealer group (or company)
nationally or in specified market areas or which may be acquired within
specified time periods. Certain state laws, however, limit the ability of
automobile manufacturers to reject proposed transfers of dealerships,
notwithstanding the terms of any dealership agreement. See "Business -
Dealership Agreements." The loss of one or more of the Company's dealership
agreements could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks Related to Acquisition Financing; Future Capital Requirements
The Company currently intends to finance future acquisitions by issuing
shares of Class A Common Stock as full or partial consideration for acquired
dealerships. The issuance of additional shares of Class A Common Stock may be
dilutive to the Company's future earnings per share. In addition, the extent to
which the Company will be able or willing to issue Class A Common Stock for
acquisitions will depend on the then current market value of the Class A Common
Stock and the willingness of potential acquisition candidates to accept shares
of that stock as part of the consideration
12
for the sale of their businesses. To the extent that the Company is unable or
unwilling to do so, the Company may be required to use available cash or
proceeds from debt or equity financings. The Company currently expects that the
net proceeds from the Offering and other existing resources will be sufficient
to fund its acquisition program and other cash needs for at least the next 12
months. However, no assurance can be given that the net proceeds from the
Offering and other existing resources will be sufficient to fund the Company's
acquisition program and other cash needs or that the Company will be able to
obtain adequate additional capital from other sources for either such purposes.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Combined Operating Companies Commitments Credit Facility."
Risks Relating to Failure to Meet Manufacturer CSI Scores
Many manufacturers attempt to measure customers' satisfaction with
automobile dealerships through a CSI, or customer satisfaction index, rating
system. These manufacturers may use a dealership's CSI scores as a factor in
evaluating applications for additional dealership acquisitions and participation
by a dealership in incentive programs. The dealerships operated by the Core
Operating Companies have historically exceeded their Manufacturers' CSI
standards. However, there can be no assurance that either the Company
dealerships operated by members of the Core Operating Companies or other
subsequently acquired dealerships will continue to meet such standards.
Moreover, from time to time, the components of the various Manufacturer CSI
scores have been modified and there is no assurance that such components will
not be further modified or replaced by different systems in the future which
make it more difficult for key Company dealerships to meet such standards.
Reliance on Key Personnel
The Company will depend to a large extent upon the abilities and continued
efforts of its senior executive officers including Salvatore A. Vergopia, Joseph
Shaker, Edward A. Vergopia, Corey Shaker, William C. Muller Jr. and James
Christ. Further, the Company may be dependent on the senior management of the
dealerships acquired by means of the Acquisitions and any other businesses
acquired in the future. If any of these persons becomes unavailable to continue
in such capacity, or if the Company were unable to attract and retain other
qualified employees, its business or prospects could be adversely affected.
Although the Company has entered into a five-year employment agreement with each
of its six senior executive officers and directors, there can be no assurance
that any individual will continue in his present capacity for any particular
period of time. The Company has made application for life and disability
insurance on the lives of its senior executive officers as follows: Salvatore A.
Vergopia, $500,000; Joseph Shaker, $1,000,000; Edward A. Vergopia, $250,000;
Corey Shaker, $250,000; William C. Muller Jr., $250,000 and James Christ,
$250,000. No assurance can be given that any such policies will be issued. See
"Management."
Substantial Competition
The automotive retailing industry is highly competitive with respect to
price, service, location and assortment. The Company competes with automobile
dealerships (including public franchised dealership consolidators), private
market buyers and sellers of used vehicles, used vehicle dealerships, service
center chains, independent service and repair shops and financing and insurance
("F&I") operations. In the sale of new vehicles, the Company competes with other
franchised dealers. The Company does not have any cost advantage in purchasing
new vehicles from the Manufacturers, and typically will rely on advertising,
merchandising, sales expertise, service reputation and location of its
dealerships to sell new vehicles. In recent years, the Company has also faced
competition from non-traditional sources such as companies that sell automobiles
on the Internet, automobile rental
13
agencies, independent leasing companies, used-car "superstores" and price clubs
associated with established consumer agencies such as the American Automobile
Association, some of which use non-traditional sales techniques such as
one-price shopping. In addition, Ford Motor has announced that it is exploring
the possibility of going into business with some of its dealers to create
automotive superstores in selected markets. Some of these recent market entrants
may have greater financial, marketing and personnel resources and/or lower
overhead or sales costs than the Company. In the parts and service area, the
Company also competes with a number of regional or national chains which offer
selected parts and services at prices that may be lower than the Company's
prices. In addition, there can be no assurance that the Company's strategy will
be more effective than the strategies of its competitors.
Mature Industry
The United States automobile dealership industry generally is considered a
mature industry in which minimal growth is expected in unit sales of new
vehicles. As a consequence, growth in the Company's revenues and earnings are
likely to be significantly affected by the Company's success in acquiring and
integrating dealerships and the pace and size of such acquisitions. See
"Business - Growth Strategy."
Cyclical Nature of Automobile Sales
Sales of motor vehicles, particularly new vehicles, historically have been
subject to substantial cyclical variation characterized by oversupply and weak
demand. The Company believes that the industry is affected by many factors,
including general economic conditions, consumer confidence, the level of
personal discretionary spending, interest rates and credit availability. There
can be no assurance that the industry will not experience sustained periods of
decline in vehicle sales, particularly new vehicle sales, in the future. Any
such decline could have a material adverse effect on the Company.
Seasonality; Variability of Quarterly Operating Results
The automobile industry is subject to seasonal variations in revenues.
Demand for cars and light trucks is generally lower during the winter months
than in other seasons, particularly in regions of the United States where the
Company is located which are associated with harsh winters. Accordingly, the
Company expects its revenues and operating results to be generally lower in its
first and fourth quarters than in its second and third quarters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Imported Products
A significant portion of the Company's new vehicle business will involve
the sale of vehicles, parts or vehicles composed of parts that are manufactured
outside the United States. As a result, the Company's operations will be subject
to customary risks of importing merchandise, including fluctuations in the value
of currencies, import duties, exchange controls, trade restrictions, work
stoppages and general political and economic conditions in foreign countries.
The United States or the countries from which the Company's products are
imported may, from time to time, impose new quotas, duties, tariffs or other
restrictions, or adjust presently prevailing quotas, duties or tariffs, which
could affect the Company's operations and its ability to purchase imported
vehicles and/or parts.
14
Governmental Regulations and Environmental Matters
The Company will be subject to a wide range of federal, state and local
laws and regulations which are administered by various federal, state and local
regulatory agencies, such as local licensing requirements, consumer protection
laws and environmental requirements governing, among other things, discharges to
the air and water, the storage of petroleum substances and chemicals, the
handling and disposal of wastes, and the remediation of contamination arising
from spills and releases. The violation of these laws and regulations could
result in civil and criminal penalties being levied against the Company or in a
cease and desist order against operations that are not in compliance. Future
acquisitions by the Company may also be subject to governmental regulation,
including antitrust reviews. The Company believes that the Core Operating
Companies substantially comply with all applicable laws and regulations relating
to its business, but future laws and regulations may be more stringent and
require the Company to incur significant additional costs. The failure to
satisfy current or future regulatory requirements could have a material adverse
effect on the operations and financial condition of the Company. See "Business
- -- Governmental Regulations" and "Business -- Environmental Matters."
Concentration of Voting Power; Anti-Takeover Provisions
The former stockholders of the Core Operating Companies own all of the
Class B Common Stock, which entitles them to ten votes for each share held,
while holders of Class A Common Stock, which is the only stock offered hereby,
are entitled to one vote per share held. Consequently, upon completion of the
Offering, such holders of the Class B Common Stock, who will own 62.7% of the
Company's outstanding Common Stock of all classes, will control 94.4% of the
aggregate number of votes eligible to be cast by stockholders for the election
of directors and certain other stockholder actions, and will be in a position to
control the policies and operations of the Company. In addition, the holders of
the Class B Common Stock have entered into a stockholders' agreement obligating
them, for a five-year period, to vote for Salvatore A. Vergopia, Joseph Shaker,
William C. Muller Jr., Corey Shaker, Edward A. Vergopia and James Christ as
members of the Company's Board of Directors. See "Description of Capital
Stock-Stockholders' Agreement." The executive officers and directors of the
Company will control 54.5% of the aggregate number of votes eligible to be cast
by stockholders for the election of directors and certain other stockholder
actions, and will be in a position to control the policies and operations of the
Company. Accordingly, absent a significant increase in the number of shares of
Class A Common Stock outstanding or conversion of Class B Common Stock into
Class A Common Stock, the holders of shares of Class B Common Stock will be
entitled, for the foreseeable future, to elect all members of the Board of
Directors and control all matters subject to stockholder approval.
The Delaware General Corporation Law requires super-majority voting
thresholds to approve certain "business combinations" between interested
stockholders and the Company which may render more difficult or tend to
discourage attempts to acquire the Company. In addition, the Company's Board of
Directors has the authority to issue shares of preferred stock ("Preferred
Stock"), of which 2,000,000 are currently authorized, in one or more series and
to fix the rights and preferences of the shares of any such series without
stockholder approval. Any series of Preferred Stock is likely to be senior to
all classes of Common Stock of the Company with respect to dividends,
liquidation rights and, possibly, voting rights. The ability to issue Preferred
Stock could also have the effect of discouraging unsolicited acquisition
proposals, thus affecting the market price of the Common Stock and preventing
stockholders from obtaining any premium which might otherwise be offered by a
potential buyer. In addition, certain of the Company's dealer agreements will
prohibit the acquisition of
15
more than a specified percentage of the Common Stock without the consent of the
relevant Manufacturers. See "Management -- Executive Officers and Directors,"
"Principal Stockholders" and "Description of Capital Stock."
Broad Discretion by Management in Use of Proceeds
The Company intends to use approximately $10.7 million or 62.2%, ($13.4
million or 67.3% if the Underwriter's over-allotment option is exercised in
full) of the estimated net proceeds of the Offering for general corporate
purposes and working capital, including the making of additional acquisitions.
Accordingly, the Company's management will retain broad discretion as to the use
of a substantial portion of the net proceeds of the Offering. See "Use of
Proceeds."
Potential Effect of Shares Eligible for Future Sale on Price of Common Stock
Sales of substantial amounts of Class A Common Stock in the public market
subsequent to the Offering could adversely affect the market price of the Class
A Common Stock. Upon consummation of the Offering, the Company will have
2,240,000 shares of Class A Common Stock outstanding (2,540,000 shares if the
Underwriters' over-allotment option is exercised in full). Of these shares, the
2,000,000 shares of Class A Common Stock offered hereby (2,300,000 shares if the
Underwriter's over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act
except for shares held by persons deemed to be "affiliates" of the Company or
acting as "underwriters" as those terms are defined in the Securities Act. The
remaining 240,000 of shares Class A and 3,760,000 shares of Class B Common Stock
outstanding will be "restricted securities" within the meaning of Rule 144 under
the Securities Act and will be eligible for resale subject to the volume, manner
of sale, holding period and other limitations of Rule 144. Currently, 240,000
shares of Class A Common Stock are issuable under existing stock options granted
to executive officers and employees under the Company's Stock Option Plan. See
"Management -Stock Options," "Description of Capital Stock" and "Shares Eligible
for Future Sale."
Pursuant to the Underwriting Agreement between the Company and the
Underwriters, the Company and its executive officers and directors have agreed
not to offer, sell or otherwise dispose of any shares of Common Stock for a
period of 180 days from the date of this Prospectus without the consent of the
representatives of the Underwriters other than: (i) pursuant to the Company's
Stock Option Plan, or (ii) in connection with and as consideration for
acquisitions of automobile dealerships, provided that the proposed transferees
agree in writing for the benefit of the Underwriters to be bound by the
foregoing provisions. See "Shares Eligible for Future Sale" and "Underwriting."
No Prior Public Market; Determination of Offering Price
Prior to this Offering, there has been no public market for the Class A
Common Stock. The Class A Common Stock has been approved for listing, subject to
notice of issuance, on the Nasdaq National Market under the symbol "HCAR."
However, there can be no assurance that an active trading market will develop
subsequent to this Offering or, if developed, that it will be sustained. The
initial public offering price of the Class A Common Stock was determined through
negotiations between the Company and the Representative and may bear no
relationship to the price at which the Class A Common Stock will trade after the
Offering. For information relating to the factors considered in determining the
initial public offering price, see "Underwriting." Prices for the Class A Common
Stock after the Offering may be influenced by a number of factors, including the
liquidity of the market for the Class A Common Stock, investor perceptions of
the Company and the automotive retailing industry and general economic and other
conditions. Sales of substantial amounts of Class A Common Stock in
16
the public market subsequent to the Offering could adversely affect the market
price of the Class A Common Stock.
Possible Volatility of Price
The market price of the Class A Common Stock could be subject to wide
fluctuations in response to a number of factors, including quarterly variations
of operating results, investor perceptions of the Company and automotive
retailing industry and general economic and other conditions.
THE COMPANY
Corporate History; Founders
Hometown was organized under the laws of the State of Delaware in June
1997 as the successor to a corporation organized under the laws of the State of
New York in March 1997 by four persons: Morse, Zelnick, Rose & Lander, LLP, a
New York City law firm which is counsel to the Company in connection with this
Offering; Joseph Lauria, Esq., a lawyer practicing in New Jersey; Matthew J.
Visconti, Jr., a Vice President of the Company and an automobile retail industry
executive for more than twenty years; and AutoInfo, Inc., a non-prime automobile
finance company, who each received 60,000 shares of Class A Common Stock. These
four organizers identified the Core Operating Companies, consisting of the
Shaker Group, the Muller Group and Westwood.
The Company's corporate headquarters are located at 831 Straits Turnpike,
Watertown, CT 06795 and its telephone number is (860) 945-4900.
The Exchange
In May 1997, the Core Operating Companies agreed, in principle, to combine
their dealerships in the Company. Effective, as of July 1, 1997, the
stockholders of the Core Operating Companies entered into an Exchange Agreement
pursuant to which they agreed to exchange all of the outstanding shares of four
corporations for an aggregate of 3,760,000 shares of the Company's Class B
Common Stock.
Consummation of the Exchange will occur simultaneously with the closing of
this Offering. As a result, the Company will succeed to the ownership of, and
operate, six franchised dealerships, one factory authorized free-standing
neighborhood auto service center and one collision repair center located in
Connecticut and New Jersey offering a choice of nine American and Asian brands,
including Chevrolet, Eagle, Ford, Isuzu, Jeep, Lincoln, Mercury, Oldsmobile and
Toyota.
Acquisitions
On July 2, 1997, the Company entered into an agreement to purchase the
business and certain assets of Brattleboro Chrysler Plymouth Dodge, Inc.
("Brattleboro") for a purchase price of $2.7 million and the assumption of
certain of Brattleboro's liabilities. On the closing of this Acquisition, the
Company will acquire the Brattleboro dealership in Vermont which holds
franchises to sell the Chrysler, Dodge and Plymouth brands. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations -
Acquisitions."
17
On August 14, 1997, the Company entered into an agreement to purchase the
business and certain assets of Leominster Lincoln Mercury, Inc., also doing
business as Bay State Lincoln Mercury ("Bay State"), for a purchase price of
$3.0 million and the assumption of certain of Bay State's liabilities. On the
closing of this Acquisition, the Company will acquire the Bay State dealership
in Framingham, Massachusetts which holds franchises to sell the Lincoln and
Mercury brands.
Each of the Acquisitions is subject to satisfaction of various conditions
precedent, including the achievement by each of the Sellers of certain levels of
income and the receipt of factory consents from all Manufacturers whose
franchises are held by each of the Sellers. The closing of each Acquisition is
to occur simultaneously with the closing of the Offering and with the closing of
the Exchange, but not later than July 15, 1998. Consummation of the Offering is
subject to consummation of the transactions contemplated by the Exchange and the
Acquisitions.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 2,000,000 shares of
Common Stock offered hereby, based upon an assumed initial public offering price
of $10.00 per share, are estimated to be $17.2 million ($19.9 million if the
Underwriters' over-allotment option for an additional 300,000 shares is
exercised in full) after deducting the underwriting discount and estimated
expenses of this Offering. Of the net proceeds, $5.7 million will be used to pay
the cash portion of the purchase price for the Acquisitions. In addition,
approximately $760,000 will be used to repay indebtedness with maturities of
less than one year with a weighted average interest rate of approximately 10.1%.
The remainder of the net proceeds, approximately $10.7 million or 62.2% ($13.4
million or 67.3% if the Underwriter's over-allotment option is exercised in
full) will be used for working capital and general corporate purposes, including
possible use in additional acquisitions of dealerships and for expansion of the
livery sales and factory authorized free-standing neighborhood service center
businesses. Pending application for these purposes, approximately $10.5 million
($13.2 million if the Underwriter's over-allotment option is exercised in full)
of the net proceeds will be used to pay down a portion of the Company's "floor
plan" indebtedness (i.e., revolving credit arrangements to finance inventory
purchases). The Company, from time to time, may draw down funds under its floor
plan financing arrangements with respect to its unencumbered vehicle inventory
as needed for acquisitions and other corporate purposes.
The Company intends to pursue acquisitions in the future which will be
financed with cash, Class A Common Stock or a combination of both cash and Class
A Common Stock. Although the Company has identified and has held preliminary
discussions with several potential acquisition candidates, no discussions have
resulted in definitive agreements or understandings or otherwise reached the
stage where it is probable that any such acquisition will occur. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Core Operating Companies Commitments -- Credit Facility."
DIVIDEND POLICY
The Company intends to retain all of its earnings to finance the growth
and development of its business, including future acquisitions, and does not
anticipate paying any cash dividends on its Common Stock for the foreseeable
future. Any future change in the Company's dividend policy will be made at the
discretion of its Board of Directors and will depend upon the Company's
operating results, financial condition, capital requirements, general business
conditions and such other factors as the Board of Directors deems relevant. Any
dividends will apply to both Class A Shares and Class B Shares as a group
without any distinction, See "Description of Capital Stock."
18
DILUTION
The pro forma net tangible book value of Shaker as of December 31, 1997,
after giving effect to the receipt by Shaker stockholders in the Exchange of
1,880,000 shares of Class B Common Stock of Hometown, was $2.71 per share of
Common Stock. Pro forma net tangible book value per share is determined by
dividing the pro forma tangible net worth (pro forma tangible assets less pro
forma total liabilities) by the total number of outstanding shares of Common
Stock. After giving effect to the Exchange for the remaining Core Operating
Companies, Westwood and Muller, and to the issuance to the founders of Hometown
of 240,000 shares of Class A Common Stock, the net tangible book value of Shaker
was diluted by $1.06 per share to $1.65 After giving effect to the sale by
Hometown of the 2,000,000 shares of Class A Common Stock offered hereby and the
receipt of an estimated $17.2 million of net proceeds from the Offering (based
on an assumed initial public offering price of $10.00 per share), the
application of $5.7 million to complete the Acquisitions and after deducting the
underwriting discount and estimated expenses of the Offering), pro forma net
tangible book value of the Company at December 31, 1997 would have been $2.72
per share. This represents an immediate increase in pro forma net tangible book
value of $1.07 per share to existing stockholders and an immediate dilution of
$7.28 per share to the new investors purchasing Common Stock in the Offering.
The following table illustrates the per share dilution:
Assumed initial public offering price per share .............. $10.00
Pro forma net tangible book value of Shaker ............ $2.71
Decrease in pro forma net tangible book value per share
attributable to balance of Exchange ................ ($1.06)
Increase in pro forma net tangible book value per share
attributable to the Offering and the Acquisitions..... 1.07
Pro forma net tangible book value per share after giving
effect to the Offering ............................... 2.72
------
Dilution per share to new investors .......................... $ 7.28
======
The following table sets forth, on a pro forma basis as of December 31,
1997, the number of shares of Common Stock purchased from the Company, after
giving effect to the Exchange, the total consideration paid to the Company and
the average price per share paid by existing stockholders and
19
new investors purchasing shares in the Offering (before deducting underwriting
discounts and commissions and estimated offering expenses):
Shares purchased Total Consideration Average
----------------------- ---------------------- Price Per
Number Percent Amount Percent Share
--------- ------- ----------- ------- ---------
Shaker Stockholders...... 1,880,000 31.3% $ 5,098,000 19.2% $ 2.71
Westwood, Muller and
Other Stockholders.... 2,120,000 35.3% $ 1,493,000 5.6% $ 0.70
--------- ---- ----------- -----
New Investors............ 2,000,000 33.3% $20,000,000 75.2% $10.00
--------- ---- ----------- -----
Total 6,000,000(1) 100.0% $26,591,000 100.0%
========= ==== =========== =====
- --------------
(1) Assumes no exercise of 240,000 outstanding stock options granted under the
Company's Stock Option Plan, all of which will be exercisable at the
initial public offering price per share. In addition, 240,000 additional
shares of Common Stock are reserved for future issuance under the Stock
Option Plan. See "Management -- Stock Options."
In the event the Underwriters exercise the over-allotment option in full,
the number of shares of Common Stock held by new investors will increase to
2,300,000 or 36.5% of the total number of shares of Common Stock outstanding
after the Offering.
20
CAPITALIZATION
The following table sets forth, as of December 31, 1997, (i) the pro forma
capitalization of Shaker after giving effect to the receipt by Shaker
stockholders in the Exchange of 1,880,000 shares of Class B Common Stock of
Hometown, (ii) the pro forma capitalization of the Core Operating Companies
after giving effect to the Exchange, and (iii) the pro forma capitalization of
the Company after giving effect to the Exchange, the Acquisitions and the
Offering of the 2,000,000 shares of Class A Common Stock at an assumed initial
public offering price of $10.00 per share, after deducting the underwriting
discount and estimated expenses of the Offering and the application of a portion
of the estimated net proceeds therefrom to pay certain existing indebtedness.
See "Use of Proceeds." This table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Unaudited Pro Forma Financial Statements of the Company and
the related notes thereto included elsewhere in this Prospectus.
As of December 31, 1997
--------------------------------------
Core Operating Pro Forma
Shaker Companies As Adjusted
(unaudited) (unaudited)
(1) (2) (3)
----------- ------------ -------
Short-term debt (including current portion of long-term debt) ........................... $ 363 $ 2,009 $ 1,842
====== ======= =======
Long-term debt, less current maturities ................................................. 107 1,034 441
Stockholders' equity:
Preferred Stock, par value $001 per share, 2,000,000 shares
authorized; no shares issued and outstanding (1)(2)(3) ........................ -- -- --
Common Stock, Class A, par value $001 per share, 24,000,000
shares authorized; no shares issued and outstanding (1); 240,000
issued and outstanding (2); 2,240,000 issued and outstanding (3) .............. -- -- 2
Common Stock, Class B, par value $001 per share, 3,760,000
shares authorized; 1,880,000 issued and outstanding (1);
3,760,000 issued and outstanding (2)(3) ....................................... 2 4 4
Additional paid-in capital ......................................................... 67 12,285 29,483
Retained earnings .................................................................. 5,029 5,028 3,028
------ ------- -------
Total stockholders' equity .............................................................. 5,098 17,317 32,517
------ ------- -------
Total capitalization .................................................................... $5,205 $18,351 $32,958
====== ======= =======
- ------------
(1) Reflects the pro forma capitalization of Shaker after giving effect to the
receipt by Shaker stockholders in the Exchange of 1,880,000 shares of
Class B Common Stock of Hometown.
(2) Reflects the pro forma historical capitalization of the Company after
giving effect to the Exchange.
(3) Reflects the pro forma as adjusted capitalization of the Company after
giving effect to the Exchange, the Acquisitions, the net proceeds from the
sale of 2,000,000 shares of Class A Common Stock, and the payment of
certain existing indebtedness. Excludes (i) an aggregate of
21
480,000 shares of Class A Common Stock reserved for issuance under the
Company's Stock Option Plan, of which options to purchase 240,000 shares
are outstanding and (ii) 300,000 shares of Class A Common Stock subject to
the Underwriters' over-allotment option.
22
SELECTED FINANCIAL DATA
The Company will acquire the Core Operating Companies and the Acquisitions
simultaneously with the closing of the Offering, which transactions will be
accounted for using the purchase method of accounting. E.R.R. Enterprises, Inc.
("Shaker"), the parent of one of the Core Operating Companies, has been
identified as the acquiror for financial statement presentation purposes in
accordance with SAB No. 97 because its stockholders will hold the single largest
voting interest subsequent to the Exchange. The following selected historical
financial data for Shaker for the years ended December 31, 1993 and 1994 have
been derived from the unaudited financial statements of Shaker, which have been
prepared on the same basis as the audited financial statements and, in the
opinion of Shaker, reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of such data. The following
selected historical financial data for Shaker as of December 31, 1996 and 1997
and for the years ended December 31, 1995, 1996 and 1997 have been derived from
the audited financial statements of Shaker included elsewhere in this
Prospectus.
For the Years Ended December 31,
-----------------------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
Income Statement Data: (in thousands, except per share data)
Revenues ...................................... $ 43,492 $ 52,644 $ 52,020 $ 62,222 $ 59,496
Cost of sales ................................. 37,418 45,778 44,189 53,076 51,226
-------- -------- -------- -------- --------
Gross profit ............................ 6,074 6,866 7,831 9,146 8,270
Selling, general and administrative
expenses ................................... 5,836 6,433 6,961 8,049 7,715
-------- -------- -------- -------- --------
Income from operations .................. 238 433 870 1,097 555
Other income (expense)
Interest income (expense), net ............. (131) (204) (555) (384) (189)
Other income (expense), net ................ 189 73 16 1 116
-------- -------- -------- -------- --------
Income before taxes ..................... 296 302 331 714 482
Provision for income taxes .................... 102 136 118 321 166
-------- -------- -------- -------- --------
Net income .............................. $ 194 $ 166 $ 213 $ 393 $ 316
======== ======== ======== ======== ========
Earnings per share ............................ $ 7.68 $ 6.57 $ 8.43 $ 15.56 $ 12.51
Weighted average shares ....................... 25,263 25,263 25,263 25,263 25,263
As of December 31,
----------------------
1996 1997
Balance Sheet Data: (in thousands)
Working capital (deficit) ................... $ 4,138 $4,563
Inventories ................................. 8,504 7,609
Total assets ................................ 14,798 14,042
Total debt .................................. 10,016 8,944
Stockholders' equity ........................ 4,782 5,098
25
UNAUDITED PRO FORMA FINANCIAL DATA
The Company will acquire the Core Operating Companies and Acquisitions
simultaneously with the closing of the Offering. However, for pro forma
financial presentation purposes, these transactions will be given effect as of
January 1, 1997. The various transactions will be accounted for using the
purchase method of accounting. E.R.R. Enterprises, Inc. ("Shaker"), the parent
of one of the Core Operating Companies, has been identified as the acquiror for
financial statement presentation purposes in accordance with SAB No. 97 because
its stockholders received the largest number of shares of Class B Common Stock
in the Exchange, which shares represent the single largest voting interest in
the Company. The following summary financial data presents, for the year ended
December 31, 1997 certain historical and pro forma data for the Core Operating
Companies and the Acquisitions. See "Selected Financial Data" and the Pro Forma
Financial Statements and the notes thereto
For the Year Ended December 31, 1997
----------------------------------------------------------------------------
Core Operating Companies(2) Acquisitions(2) Pro Forma
------------------------------------ ----------------------- ---------
Shaker(3) Westwood Muller Bay State Brattleboro (3)(4)
--------- -------- ------ --------- ----------- ------
Unaudited Pro Forma
Income Statement Data (1): (in thousands, except per share data)
Revenues
New vehicle sales ......................... $ 29,345 $ 45,470 $ 33,308 $ 9,890 $ 9,038 $ 127,051
Used vehicle sales ........................ 21,800 8,396 19,996 12,459 12,928 75,579
Parts and service sales ................... 6,727 4,352 4,907 2,066 2,024 20,076
Other dealership revenues, net ............ 1,624 731 1,777 301 594 5,027
-------- -------- -------- -------- -------- ----------
Total revenues ......................... 59,496 58,949 59,988 24,716 24,584 227,733
Cost of sales ................................ 51,226 52,770 51,641 21,502 20,986 198,125
-------- -------- -------- -------- -------- ----------
Gross profit ........................... 8,270 6,179 8,347 3,214 3,598 29,608
Amortization of excess of purchase
price over net tangible assets acquired .. -- -- -- -- -- 399 (5)
Selling, general and administrative
expenses (2) .............................. 7,077 4,931 6,936 1,966 2,765 23,675 (5)
-------- -------- -------- -------- -------- ----------
Income from operations ................. 1,193 1,248 1,411 1,248 833 5,534
Other income (expense)
Interest expense, net (2) ................. (427) (295) (420) (322) (39) (192)(5)
Other income (expense), net ............... 116 (39) (27) 9 (41) 18
-------- -------- -------- -------- -------- ----------
Income before taxes .................... $ 882 $ 914 $ 964 $ 935 $ 753 5,360
======== ======== ======== ======== ========
Provision for income taxes ..................................................................................... 2,144 (5)
----------
Net income ............................................................................................... $ 3,216
==========
Earnings per share, basic and diluted .......................................................................... $ 0.54
Weighted average shares ........................................................................................ 6,000,000
Unaudited Pro Forma Other Data (1):
Gross margin ................................. 13.9% 10.5% 13.9% 13.0% 14.6% 13.0%
Operating margin ............................. 2.0% 2.1% 2.4% 5.0% 3.4% 2.4%
Pre tax margin ............................... 1.5% 1.6% 1.6% 3.8% 3.1% 2.4%
Retail new vehicles sold ..................... 1,297 1,473 1,511 370 449 5,100
Retail used vehicles sold .................... 1,256 377 1,301 748 794 4,476
26
As of December 31, 1997
------------------------------------
Core Operating Pro Forma
Shaker Companies As Adjusted
(6) (7)(8)
-------- --------- ----------
Unaudited Pro Forma Balance Sheet Data (1): (in thousands)
Working capital (deficit) ............ $ 4,563 $ 4,024 $12,305
Inventories .......................... 7,609 27,295 31,543
Total assets ......................... 14,042 53,746 59,203
Total debt ........................... 8,944 36,429 26,686
Stockholders' equity ................. 5,098 17,317 32,517
Notes to Pro Forma Financial Data:
(1) For financial presentation purposes, the Unaudited Pro Forma Income
Statement Data give effect to the Exchange, the Acquisitions and the
Offering as if they had occurred as of January 1, 1997, the beginning of
the period.
(2) Aggregate pro forma adjustments made to the historical financial
statements of the Core Operating Companies and the Acquisitions are as
follows:
Debit (Credit) Total 1997
--------------
(in thousands)
Selling, general and
administrative expenses .............................. $(2,166)(a)
Other income (expense)
Interest expense, net ............................... 163 (b)
-------
Income before taxes ................................. $(2,003)
=======
(a) Reflects a reduction to compensation expense, management fees and
rent expenses based on contractual arrangements to be effective
simultaneously with the closing of the Offering as follows: Shaker,
$639,000; Westwood, $663,000; Muller $347,000; Bay State increase
$32,000; and Brattleboro $549,000. See Unaudited Pro Forma Financial
Statements and the notes thereto beginning on page F-4 for a more
detailed description of these pro forma adjustments.
(b) Reflects a reduction to interest income of Shaker of $238,000 and of
Bay State of $50,000 of Cash and Cash Equivalents not realized as
part of the Exchange and the Acquisitions offset by reductions in
interest expense as follows: certain long-term debt incurred by
Muller prior to the Closing will be liquidated out of proceeds of
the Offering - $92,000; leases and debt not assumed as part of the
Brattleboro - $33,000. See Unaudited Pro Forma Financial Statements
and the notes thereto beginning on page F-4 for a more detailed
description of these pro forma adjustments.
(3) These transactions were accounted for using the purchase method of
accounting. ERR Enterprises, Inc. ("Shaker"), the parent of one of the
Core Operating Companies, was identified as the acquiror for financial
statement presentation purposes in accordance with SAB No. 97 because its
stockholders
27
received the largest number of shares of Class B Common Stock in the
Exchange, representing the single largest voting interest in the Company.
(4) Gives effect to: (i) the Exchange and the Acquisitions, (ii) the
consummation of the Offering and (iii) the pro forma adjustments,
specified in footnotes (1) above and (5) below, to the historical
financial statements.
(5) The combination of Income Statement Data of the Core Operating Companies'
and the Acquisitions does not equal the total set forth on the Pro Forma
Financial Statements because of the following pro forma adjustments which
are made in total only: (i) the amortization of the "excess purchase price
over net tangible assets acquired;" (ii) the decrease in interest expenses
of $998,000 resulting from the repayment of certain floor plan obligations
with proceeds from the Offering, and the decrease in interest of $313,000
resulting from refinancing of the balance of the floor plan obligations
with a commercial lender; (iii) the provision for federal and state income
taxes based on an effective rate of 40% for each of the Core Operating
Companies and Acquisitions and (iv) $1,000 of selling, general and
administrative expenses incurred by Hometown during 1997. See Unaudited
Pro Forma Financial Statements and the notes thereto beginning on page F-4
for a more detailed description of these pro forma adjustments.
(6) Gives effect to the Exchange on an historical basis and the pro forma
balance sheets adjustments on pages F-7 and F-8. See Unaudited Pro Forma
Financial Statements and the notes thereto beginning on page F-4 for a
description of these pro forma balance sheet adjustments.
(7) Gives effect to the Exchange and the Acquisitions on an historical basis
and the pro forma balance sheets adjustments on pages F-7 and F-8. See
Unaudited Pro Forma Financial Statements and the notes thereto beginning
on page F-4 for a description of these pro forma balance sheet
adjustments.
(8) Gives effect to the sales of the shares of Class A Common Stock offered
hereby and the application of the net proceeds therefrom. See "Use of
Proceeds."
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Financial
Statements and related notes thereto, the "Selected Financial Data" for ERR
Enterprises, Inc. (Shaker), the "Summary Pro Forma Financial Data," and the
unaudited "Pro Forma Financial Data" appearing elsewhere in this Prospectus.
The Company - Pro Forma Information
Overview
Hometown Auto Retailers, Inc. will acquire the Core Operating Companies
and the Acquisitions simultaneously with the closing of the Offering. The
Exchange and the Acquisitions will be accounted for using the purchase method of
accounting. E.R.R. Enterprises, Inc. (Shaker), one of the Core Operating
Companies, was identified as the acquiror for pro forma financial statement
presentation purposes in accordance with SAB No. 97 because its stockholders
will receive the largest number of shares of Class B Common Stock in the
Exchange, which shares represent the single largest voting interest in the
Company.
Operating Strategy
The Company, which has conducted no operations to date other than in
connection with the Acquisitions and the Offering, intends to integrate certain
functions following the Offering and to implement practices that have been
successful at other franchises, including those of the Core Operating Companies,
and in other retail segments ("best practices"). This integration and
implementation of best practices may present opportunities to increase revenues
and reduce costs but may also necessitate additional costs and expenditures for
corporate administration, including expenses necessary to implement the
Company's acquisition strategy. These various costs and possible cost-savings
and revenue enhancements may make historical operating results not comparable
to, or indicative of, future performance.
Pro Forma Combined Revenues and Gross Profit
On a pro forma combined basis, the revenue categories as a percent of
total revenue and the gross profit percent of sales by revenue category for
Hometown for 1997 was as follows:
% of Total Gross Profit
Revenue category Revenue % of Sales
New vehicle sales 55.8% 6.3%
Used vehicle sales 33.2% 9.3%
Parts and service sales 8.8% 47.8%
Other dealership revenues, net 2.2% 100.0%
Unit Sales
For the year ended December 31, 1997, the Company sold 5,100 new vehicles
for an average sales price and gross profit per vehicle of approximately $24,900
and $1,600, respectively. Retail used vehicle units sold for 1997 were 4,476.
Average sales price and gross profit per retail used vehicle were approximately
$13,000 and $1,500, respectively.
29
Liquidity and Capital Resources.
The Company's primary source for financing its vehicle inventory is "floor
plan" financing arrangements with the Manufacturers. The floor plan arrangements
permit the Company to finance its new and used vehicle inventory and the
resulting liability is secured by the related inventory.
Each dealership maintains a floor plan financing line with its respective
Manufacturer, with the exception of Muller Chevrolet which has a floor plan line
financed through a bank. Interest rates on these lines vary from a low of 8.9%
to a high of 10.5%. The combined interest expense on floor plan notes payable,
before Manufacturers' interest assistance, totaled approximately $2.5 million
for the year ended December 31, 1997. Manufacturer interest assistance, which is
recorded as a reduction of interest expense, totaled approximately $1.2 million
for the year ended December 31, 1997. The pro forma balance of the Company's
floor plan lines at December 31, 1997 was $30,984,000 before the temporary
pay-down of floor plan obligations. It is anticipated that $10,500,000 of the
proceeds from the Offering will temporarily be applied to the floor plan
liability accounts until the funds are needed for future acquisitions.
Acquisitions
Shortly after the Company was organized, in June 1997, it entered into two
acquisition agreements providing for the purchase, at an aggregate price of $5.7
million, of two dealerships located in Massachusetts and Vermont, respectively.
These two acquisitions add $49,300,000 and $1,688,000 respectively, to the
Company's pro forma revenues and income before income taxes for the year ended
December 31, 1997.
Each of the Acquisitions is subject to satisfaction of various conditions
precedent, including the achievement by each of the Sellers of certain levels of
income, the receipt of factory consents from all Manufacturers whose franchises
are held by each of the Sellers and the Closing of the Offering on or prior to
July 15, 1998. The closing of each Acquisition is to occur simultaneously with
the closing of the Offering and with the closing of the Exchange.
Brattleboro. On July 2, 1997, the Company entered into an agreement to
purchase the business and assets of Brattleboro Chrysler Plymouth Dodge, Inc.
("Brattleboro") for a purchase price of $2.7 million and the assumption of all
of Brattleboro's liabilities. On the closing of this Acquisition, the Company
will own Brattleboro a dealership in Vermont which holds franchises to sell the
Chrysler, Dodge and Plymouth brands.
The Company also agreed to enter into a five-year lease for property owned
by an affiliate of Brattleboro at a monthly rental of $20,000 with a five year
renewal option at the same rental and an option to purchase the premises at its
then fair market value, but not less than $1.5 million.
In addition, the Company agreed to enter into an employment agreement with
Thomas E. Cosenzi ("Cosenzi"), a key employee of Brattleboro, at an annual base
salary of $150,000 plus a bonus, payable monthly, equal to 5% of the income
before income taxes of Brattleboro and any other business managed by Cosenzi for
Hometown up to $800,000 and 10% of the pre-tax income of such business in excess
of $800,000. The employment agreement will also provide that Cosenzi will be
granted a six-year incentive stock option to purchase such number of shares of
Hometown's Common Stock as have an aggregate value of $500,000, based on the per
share price in the Offering.
30
Bay State. On August 14, 1997, the Company entered into an agreement to
purchase the business and certain assets of Leominster Lincoln Mercury, Inc.,
doing business as Baystate Lincoln Mercury ("Baystate"), for a purchase price of
$3.0 million and the assumption of certain of Baystate's liabilities. On the
closing of this Acquisition, the Company will own the Bay State dealership in
Framingham, Massachusetts holding franchises to sell the Lincoln and Mercury
brands.
The Company has entered into fifteen-year lease for property owned by an
affiliate of Leominster at a monthly rental of $30,000 during the first five
years, $35,000 during the second five years and a cost of living adjustment
thereafter.
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 operating profit than the
first and fourth quarters. This seasonality is driven primarily by: (i)
Manufacturer related factors, primarily the historical timing of major
Manufacturer incentive programs and model changeovers, (ii) weather-related
factors, which primarily affect parts and service and (iii) consumer buying
patterns.
Effects of Inflation
Due to the relatively low levels of inflation experienced in fiscal 1995,
1996 and 1997, inflation did not have a significant effect on the results of the
Core Operating Companies during those periods.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued the following
statements. The Company is currently not affected by these statements, however,
when applicable, the Company will adopt the provisions of each statement.
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
SFAS No. 123 defines a fair value based method of accounting for stock based
compensation and encourages adoption of that method. SFAS No. 123, however, also
allows measurement of compensation cost using the intrinsic value based method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". If
the Company elects to use the accounting in Opinion No. 25, it must make pro
forma disclosures of net income and earnings per share, as if the fair value
based method of accounting has been applied.
Statement No. 128 "Earnings Per Share" ("SFAS 128"). SFAS No. 128 requires
the presentation of basic earnings per share and diluted earnings per share.
"Basic earnings per share" represents net income divided by the weighted average
shares outstanding. "Diluted earnings per share" represents net income divided
by weighted average shares outstanding adjusted for the incremental dilution of
outstanding stock options. A
31
reconciliation of weighted average common shares outstanding to weighted average
common shares outstanding assuming dilution is required as disclosure.
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS No.
130, requires the presentation of comprehensive income in an entity's financial
statements. Comprehensive income represents all changes in equity of an entity
during the reporting period, including net income and charges directly to
equity, which are excluded from net income.
Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS No. 131 requires that enterprises report
certain information about operating segments, information about products and
services, the geographic areas in which they operate and their major customers.
Year 2000 Conversion
The Company has assessed the ability of its software and other computer
systems to properly utilize dates beyond December 31, 1999 (the "Year 2000
Conversion"). management believes that the costs of the modifications and
conversions required will not be material. However, if the modifications and
conversions are not made or not completed in a timely fashion, the failure of
its Year 2000 Conversion could have a material adverse effect on the operations
of the Company.
Although management believes it will not have material Year 2000
Conversion issues, its future operations are dependent upon the ability of its
vendors and suppliers to successfully address the Year 2000 Conversion issues.
There can be no assurance that the computer systems of other companies upon
which the Company's own computer system relies or upon which its business is
dependent, will be timely converted, or that failure of another company to
convert will not adversely affect the Company.
Shaker
The following discussion and analysis are based on the historical
financial statements of E.R.R. enterprises, Inc. ("Shaker"). Shaker is one of
the three Core Operating Companies of Hometown .
Overview.
Shaker is a holding company that operates one of the largest dealer groups
in Connecticut, consisting of Shaker's Lincoln Mercury, Inc. in Watertown
Connecticut; Family Ford, Inc. and Family Rental, Inc. in Waterbury,
Connecticut; and Shaker's Jeep/Eagle, Inc. in Waterbury, Connecticut. It also
operates Lincoln Mercury Autocare, Inc., a factory authorized free-standing
neighborhood automobile maintenance and repair center in Naugatuck, Connecticut.
Shaker is a franchised dealer for Lincoln, Mercury, Ford, Jeep, and Eagle cars
and trucks.
Shaker was originally founded as Shaker Auto Service, an automobile repair
shop, in Waterbury, Connecticut in 1930. After World War II, Shaker became an
automobile dealer, ultimately being awarded the Jeep, Lincoln Mercury and Ford
franchises. Currently, Shaker is owned and operated by a third generation of the
Shaker family.
Shaker has diverse sources of automotive revenues, including: new car
sales, new light truck sales, used car sales, used light truck sales, used cars
purchased from the manufacturers, parts sales, service sales, including from
Lincoln Mercury Autocare, Inc., finance fees, insurance commissions, extended
service contract sales, documentary fees and after-market product sales. Sales
revenues include sales to
32
retail customers, other dealers and wholesalers. Other dealership revenue
includes revenue from the sale of financing, insurance and extended service
contracts, all net of a provision for anticipated chargebacks. and related
documentary fees charged to customers.
Shaker's gross profit varies as its automotive merchandise mix (the mix
between new vehicle sales, used vehicle sales, parts and service sales, and
other dealership revenues) changes. The gross margin realized by Shaker on the
sale of its products and services generally varies between approximately 13.9%
and 15.1%, with new vehicle sales generally resulting in the lowest gross margin
and parts and service sales generally resulting in the highest gross margin.
Revenues from related financing, insurance and service contracts contribute a
disproportionate share of gross, operating and pre-tax margins. When Shaker's
new vehicle sales increase or decrease at a rate greater than its other revenue
sources, its gross profit margin responds inversely. Factors such as
seasonality, weather, cyclicality and manufacturers' advertising and incentives
may impact Shaker's merchandise mix and therefore affect its gross profit
margin.
Selling, general and administrative expenses consist primarily of
compensation for sales, administrative, finance and general management
personnel, rent, marketing, insurance and utilities. Interest expense consists
of interest charges on debt, including floor plan inventory financing, net of
interest credits received from certain manufacturers and interest income earned.
33
The following table sets forth certain selected financial data and data as
a percentage of revenues for Shaker for the periods indicated:
For the years ended December 31,
------------------------------------------------------------------
1995 1996 1997
------------------- ------------------ -------------------
Amount % Amount % Amount %
------- ------ -------- ----- -------- -----
(in thousands)
Revenues:
New vehicle sales ........................ $25,713 49.4% $30,511 49.0% $29,345 49.3%
Used vehicle sales ....................... 18,260 35.1% 22,429 36.0% 21,800 36.6%
Parts and service sales .................. 6,565 12.6% 7,406 11.9% 6,727 11.3%
Other dealership revenues, net ........... 1,482 2.8% 1,876 3.0% 1,624 2.7%
------- ----- ------- ----- ------- -----
Total revenues ...................... 52,020 100.0% 62,222 100.0% 59,496 100.0%
Cost of sales ............................... 44,189 84.9% 53,076 85.3% 51,226 86.1%
------- ----- ------- ----- ------- -----
Gross profit ................................ 7,831 15.1% 9,146 14.7% 8,270 13.9%
Selling, general & administrative
expenses ................................ 6,961 13.4% 8,049 12.9% 7,715 13.0%
------- ----- ------- ----- ------- -----
Income from operations ...................... 870 1.7% 1,097 1.8% 555 0.9%
Other income and expense:
Interest expense ........................ 555 1.1% 384 0.6% 189 0.3%
Other income (expense) net .............. 16 0.0% 1 0.0% 116 0.2%
------- ----- ------- ----- ------- -----
Income before income taxes .................. 331 0.6% 714 1.1% 482 0.8%
Provision for income taxes .................. 118 0.2% 321 0.5% 166 0.3%
------- ----- ------- ----- ------- -----
Net income .................................. $ 213 0.4% $ 393 0.6% $ 316 0.5%
======= ===== ======= ===== ======= =====
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Shaker's revenues decreased by $2,726,000, or 4.4%, from $62,222,000 for
the year ended December 31, 1996 to $59,496,000 for the year ended December 31,
1997. Most of the decrease was due to a decline in the sales of new and used
Ford cars and trucks at Family Ford and a decline in manufacturer's warranty
service revenue at Family Ford and Autocare.
Sales of new Ford cars and trucks generally declined in Family Ford's
primary market area in 1997. According to the Ford Dealer Performance Report for
1997, Family Ford's market penetration, i.e. share of its primary market area,
increased from 11.5% in 1996 to 12.7% in 1997 for new cars and from 22.3% in
1996 to 30.8% in 1997 for new trucks even though Family Ford sold 109 fewer new
cars and trucks in 1997 when compared to 1996. The decline in sales of new cars
and trucks at Family Ford reflects this decrease in general market demand for
Fords in its market area. In addition, the mild winter of 1996 to 1997 reduced
the demand
34
for light trucks in its market. As a result, Family Ford experienced a decrease
in sales of new cars and trucks in 1997 of $1,440,000, or 8.3% below sales of
used cars in 1996. This revenue decline was partially offset by an increase of
$274,000 in new car sales at Shaker Lincoln Mercury, an increase of 2.1% over
new car sales in 1996, for a combined decline in revenue for Shaker of
$1,166,000, or 3.8% below revenue in 1996.
Sales of used cars at Family Ford were adversely impacted by a temporary
tightening of credit policy by local banks in the first half of 1997. The Family
Ford credit rejection rate (i.e. the percentage of potential used car buyers
rejected for car loans) increased from an average of 15% to 30%. As a result,
Family Ford sold 87 fewer used cars and trucks in 1997 than in 1996, for a drop
in revenue of $1,151,000, or 10.9% below 1996. In the second half of 1997, the
credit rejection rate returned to the historical average of 15%. Management
believes that the temporary increase in the credit rejection rate was in
response to an unusually high level of used car sales in 1996, and the resulting
increase in the number of used car loans in the portfolios of local banks. The
decline in used car sales at Family Ford was partially offset by an increase in
used car sales at Shaker Lincoln Mercury of $522,000, or 4.4%, over sales in the
prior year, for a combined Shaker used car revenue decrease of $629,000, or
2.8%, compared to sales in 1996.
Parts and service revenue at Family Ford decreased $520,000, or 17.2%, in
1997 when compared to parts and service revenues in 1996. The decrease was due
partly to the decline in sales of new and used cars and partly reflects a
general 25% decline in warranty service revenue on Ford cars and trucks in the
Northeast region. The general decline in warranty service revenue is
attributable to stricter guidelines on dealer warranty work imposed by Ford
Motor Company. Parts and service revenue decreased slightly at Shaker Lincoln
Mercury by $12,000, or 0.4%, below parts and service revenues in 1996 and
decreased at Autocare by $147,000, 14.1% below such revenues in 1996, for a
combined Shaker parts and service revenue decrease of $679,000, or 9.2%, below
parts and service revenues in 1996.
Revenues from financing and the sale of insurance ("F&I") at Family Ford
decreased $248,000, or 19.4%, in 1997 compared to F&I revenues in 1996. This
decrease reflected lower activity in F&I sales due to lower sales of new and
used vehicles. At Shaker Lincoln Mercury, F&I revenue decreased $4,000, a 0.7%
decrease over F&I revenues in 1996, reflecting the change in mix in sales of new
and used vehicles in 1997. The combined F&I revenue in 1997 for Shaker decreased
$252,000, or 13.4%, from total F&I revenues in 1996.
35
Gross Profit
Shaker gross profit decreased $876,000, or 9.6%, from $9,146,000 for the
year ended December 31, 1996 to $8,270,000 for the year ended December 31, 1997.
At Family Ford, gross profit from the sale of new cars and trucks
decreased by $312,000, or 21.8%, from 1996 to 1997. Of the $312,000 decrease,
$118,000, or 37.8%, was due to a decline in sales of new cars and trucks. The
remaining $194,000, or 62.2%, was due to a decline in gross profit as a percent
of sales from 8.2% in 1996 to 7.0% in 1997, which reflects lower pricing
necessary to respond to the lower demand in its market area. At Shaker Lincoln
Mercury, gross profit from the sale of new cars and trucks decreased by $43,000,
or 5.6%, from 1996 to 1997. The decrease of $43,000 consisted of a gross margin
increase of $16,000 due to increased sales of new cars and trucks, offset by a
gross margin decrease of $59,000 due to the decline in gross profit as a percent
of sales from 5.8% in 1996 to 5.4% in 1997.
Gross profit from the sale of used cars at Family Ford in 1997 decreased
by $102,000, a decline of 11.3%, compared to gross profit in 1996. Of the
$102,000 decrease, $98,000, or 96.1%, was due to a decline in sales of used
cars, while $4,000, or 3.9%, was due to the decline in gross profit as a percent
of sales from 8.5% in 1996 to 8.4% in 1997, which reflected the tightened credit
situation in the first half of 1997. When banks tighten their credit policies,
they will often demand a higher down payment than the customer can afford,
forcing dealers to reduce their prices to bring their transactions within the
bank's guidelines in order to avoid losing the sale. At Shaker Lincoln Mercury,
gross profit from the sale of used cars increased by $280,000, or 41.4%, from
1996 to 1997. The increase of $280,000 consists of a gross margin increase of
$30,000 due to increased sales of used cars and $250,000 was due to an increase
in the gross profit as a percent of sales from 5.7% in 1996 to 7.7% in 1997.
Gross profit on parts and service decreased $310,000, or 20.7%, at Family
Ford from 1996 to 1997. Of the $310,000 decrease, $258,000 was due to a lower
volume of business, while $52,000 was due to a decline in gross profit as a
percent of sales from 49.7% of sales in 1996 to 47.6% in 1997. The decline in
gross profit margin reflects less warranty service as a percent of total
revenues. Dealers typically earn a higher gross profit percent on warranty
service than on customer paid work.
There is no cost of sales associated with revenue from F&I resulting in an
effective 100% gross profit.
Selling, General and Administrative Expense
Shaker selling, general and administrative expenses decreased by $334,000,
or 4.1%, from $8,049,000, for the year ended December 31, 1996, to $7,715,000,
for the year ended December 31, 1997. The principal differences were decreases
in commissions, telephone and utility expense, policy work and delivery, offset
by increases in owner's compensation. Commissions decreased $238,000, or 17.5%,
reflecting the lower sales volume in 1997. Telephone and utilities expense
decreased $200,000 or 50%, due to a change in long distance carriers to realize
lower rates and the installation of a waste oil heater in the Shaker Lincoln
Mercury service department that substantially reduced heating costs in 1997.
Policy work consists of repairs on cars prior to sale, the cost of which is not
recovered by the dealer. Policy work expense declined $24,000, or 16.6%,
reflecting the lower sales volume in 1997. Delivery expense declined $40,000, or
93%, in 1997 as a result of the lower sales volume and changes in delivery
policy. Compensation increased by $363,000, or 13.1%, in 1997 mostly due to
increased owner's compensation.
36
Interest Expenses, Net
Shaker net interest expense decreased by $195,000, or 50.8%, from
$384,000, for the year ended December 31, 1996, to $189,000, for the year ended
December 31, 1997. Net floor plan interest, net of floor plan assistance
credits, declined from $566,000 in 1996, to $408,000 in 1997, a decline of
27.9%, primarily reflecting the lower sales volume in 1997. Net floor plan
interest was offset by net interest income which increased 20.3%, from $182,000
in 1996 to $219,000 in 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues
Shaker revenues increased by $10,202,000, or 19.6%, from $52,020,000 for
the year ended December 31, 1995, to $62,222,000 for the year ended December 31,
1996. Most of the increase was due to increased demand for new cars and trucks
as a result of new model introductions and an increase in manufacturers'
rebates, increased sales of used cars due to increased advertising expenditures
and an increase in parts and service revenue resulting from the severe 1996
winter weather.
Sales of new cars and trucks at Family Ford increased $2,824,000, or
19.3%, from 1995 to 1996. In 1996, Family Ford sold 211 Ford Escorts compared to
109 in 1995. New truck sales increased in 1996 at Family Ford due partly to the
introduction of a completely restyled F-150 Ford truck (the first major restyle
since 1977) and the severe 1996 winter weather which increased demand for four
wheel drive vehicles. At Shaker Lincoln Mercury, sales of new cars and trucks
increased $1,974,000, or 17.8%, from 1995 to 1996. The sales increase was due
primarily to the introduction of the Mercury Mountaineer, Mercury's first four
wheel drive sports utility vehicle, prior to mid-year 1996, and increased sales
of Lincoln Town Cars supported by higher factory rebates and improved lease
programs on luxury cars. On a combined basis, sales of new cars and trucks
increased $4,798,000, or 18.7%, in 1996 compared with sales of new cars in 1995.
Sales of used cars and trucks increased by $4,169,000, or 22.8%, from 1995
to 1996. The increase at Family Ford was $2,202,000, or 26.2%, and at Shaker
Lincoln Mercury sales of used cars and trucks increased $1,967,000, or 20.0%, in
1996. The sales increase was due to improved used car inventory turns supported
by increased advertising expenditures.
Parts and service revenue increased $841,000 for Shaker, or 12.8%, from
1995 to 1996. That increase consisted of an increase in parts and service
revenues at Family Ford of $620,000, a 25.8% increase over 1995, an increase at
Shaker Lincoln Mercury of $119,000, a 3.7% increase over 1995, and an increase
at Autocare of $102,000, a 10.8% increase over 1995. The increase in parts and
service revenues is primarily attributable to the severe winter weather in the
winter of 1996. In addition, Family Ford's "Owner Loyalty" program began to show
results by increasing the customer retention rate.
Revenues from F&I at Family Ford increased $284,000, or 28.6%, in 1996
when compared to F&I revenues in 1995. This increase resulted from the increased
sales of new and used vehicles at Family Ford. At Shaker Lincoln Mercury,
finance and insurance revenue increased $110,000, a 22.5% increase over 1995,
reflecting the increased sales of new and used vehicles in 1996. The combined
finance and insurance revenue for Shaker increased $394,000, or 26.6%, in 1996
from 1995.
37
Gross Profit
Shaker gross profit increased $1,315,000, or 16.8%, from $7,831,000 for
the year ended December 31, 1995, to $9,146,000 for the year ended December 31,
1996.
At Family Ford, gross profit from the sale of new cars and trucks
increased by $142,000, or 11%, from 1995 to 1996. Of the $142,000 increase,
$248,000 was due to the increase in sales of new cars and trucks. The remaining
$106,000 decrease was due to a decline in gross profit as a percent of sales
from 8.8% in 1995 to 8.2% in 1996, which reflects lower gross profit on the
increased sales of Ford Escorts compared to those sales in the prior year.. At
Shaker Lincoln Mercury, gross profit from the sale of new cars and trucks
increased by $8,000, or 1.1%, from 1995 to 1996. The increase of $8,000 consists
of a gross margin increase of $134,000 due to increased sales of new cars and
trucks, offset by a gross margin decrease of $126,000 due to the decline in the
gross profit as a percent of sales from 6.8% in 1995 to 5.8% in 1996.
Gross profit from the sale of used cars and trucks at Family Ford in 1996
increased by $226,000, or 11.3%, compared to 1995. Of the $226,000 increase,
$176,000, or 77.9%, was due to an increase in sales of used cars. The remaining
$50,000, or 22.1%, was due to an increase in gross profit as a percent of sales
from 8.0% in 1995 to 8.5% in 1996, which reflects a higher ratio of retail
versus wholesale used cars in 1996. At Shaker Lincoln Mercury, gross profit from
the sale of used cars increased by $56,000, or 9.0%, from 1995 to 1996. The
increase of $56,000 consisted of a gross margin increase of $124,000 from
increased sales of used cars offset by a gross margin decrease of $68,000 due to
the decrease in gross profit as a percent of sales from 6.3% in 1995 to 5.7% in
1996, which reflects the decrease in the gross profit on the sales of used cars
at auctions.
Gross profit on parts and service increased $392,000, or 35.3%, at Family
Ford from 1995 to 1996. Of the $392,000 increase, $286,000 was due to the higher
volume of business, while $106,000 was due to an increase in gross profit as a
percent of sales from 46.2% in 1995 to 49.7% in 1996. The increase in gross
profit as a percent of sales reflects greater cost absorption on the increased
sales volume.
There is no cost of sales associated with revenue from F&I sales resulting
in an effective 100% gross profit.
Selling, General & Administrative Expense
Shaker selling, general and administrative expenses increased by
$1,088,000, or 15.6%, from $6,961,000 for the year ended December 31, 1995 to
$8,049,000 for the year ended December 31, 1996. Expense increases generally
reflected the significant increase in selling activity. The principal increases
in 1996 occurred in commissions, compensation, policy work and demo, loaner
expense, telephone and utilities, and data processing. Commissions increased
$309,000, or 29.3%, from 1995. Compensation increased $411,000, or 17.4%, from
1995 due primarily to increased owner's compensation. Policy work, demo and
loaner expenses increased by $126,000, or 48.9%, from 1995. Policy work consists
of repairs on cars prior to sale, the cost of which is not recovered by the
dealer. Telephone and utilities expense increased $184,000, or 85%, from 1995.
Data processing expense increased $56,000, or 83.9%, from 1995 due to the
purchase of a new computer system.
Interest Expense, Net
Net interest expense decreased by $171,000, or 30.8%, from $555,000 for
the year ended December 31, 1995 to $384,000 for the year ended December 31,
1996. Net floor plan interest, net of floor plan assistance credits, declined
from $715,000, or 20.8%, in 1995 to $566,000 in 1996. The decrease was due
primarily to improved control of automobile inventory, resulting from an
increase in inventory turns and increased floor plan
38
assistance credits. Net floor plan interest was offset by net interest income
which increased 13.8% from $160,000 in 1995 to $182,000 in 1996.
Liquidity and Capital Resources
Shaker's principal sources of liquidity are cash on hand, cash from
operations and floor plan financing.
Cash and Cash Equivalents
Shaker's total cash and cash equivalents at December 31, 1997 were $3.5
million.
Cash Flow from Operations
For the three-year period ended December 31, 1997, Shaker generated $1.7
million in cash from operating activities. Cash flow from operating activities
decreased from $1.0 million in 1996 to $0.3 million in 1997, due primarily to a
smaller decrease in new and used vehicle inventory and timing differences in the
income tax liability accounts.
The following table sets forth historical selected information from the
statements of cash flow:
Floor Plan Financing
For the years ended December 31,
------------------------------------------
1995 1996 1997
------- -------- --------
Amount Amount Amount
------- -------- --------
(in thousands)
Net Cash Provided by Operating Activities $ 389 $ 1,017 $ 334
Net Cash Provided by (Used) in Investing Activities (419) (18) (102)
Net Cash Provided by (Used) in Financing Activities 373 339 226
Net Increase (Decrease) in Cash and
Cash Equivalents $ 343 $ 1,338 $ 458
Shaker obtains floor plan financing for its vehicle inventory from Ford
Motor Credit Corporation. As of December 31, 1997, Shaker had approximately $6.8
million of floor plan financing outstanding, bearing interest at prime rate plus
100 basis points. Interest expense on floor plan notes payable, before
manufacturer's interest assistance, totaled approximately $1.0 million, $0.9
million, and $0.8 million for the years ended December 31, 1995, 1996, and 1997,
respectively. Manufacturer interest assistance, which is recorded as a reduction
of interest expense, totaled approximately $0.3 million, $0.3 million, and $0.4
million for the years ended December 31, 1995, 1996, and 1997, respectively.
Cyclicality
Shaker'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 Shaker's business, Shaker believes that the impact on
the Shaker's operations of future negative trends in such factors will be
somewhat mitigated by its (i) strong parts, service and collision
39
repair services, (ii) variable cost salary structure, (iii) geographic regional
focus, and (iv) product diversity.
Seasonality
Shaker's operations will be subject to seasonal variations, with the
second and third quarters generally contributing more operating profit than the
first and fourth quarters. This seasonality is driven primarily by: (i)
Manufacturer related factors, primarily the historical timing of major
Manufacturer incentive programs and model changeovers, (ii) weather-related
factors, which primarily affect parts and service and (iii) consumer buying
patterns.
Effects of Inflation
Due to the relatively low levels of inflation experienced in fiscal 1995,
1996 and 1997, inflation did not have a significant effect on the results of
Shaker during those periods.
40
BUSINESS
General
The Company is engaged in the business of selling new and used cars and
light trucks, providing maintenance and repair services, selling replacement
parts and providing related financing, insurance and service contracts through 8
franchised dealerships located in New Jersey, Connecticut, Massachusetts and
Vermont. The Company's dealerships offer 12 American and Asian automotive
brands, including Chevrolet, Chrysler, Dodge, Eagle, Ford, Isuzu, Jeep, Lincoln,
Mercury, Oldsmobile, Plymouth and Toyota. The Company also operates a collision
repair center and is active in two "niche" segments of the automotive market,
the sale of Lincoln town cars and limousines to livery car and livery fleet
operators and the maintenance and repair of cars and trucks at its Ford and
Lincoln Mercury factory authorized free-standing neighborhood service center.
The Company believes, based on available industry data, that it is one of the
five largest automotive dealers in New England and a leading dealer in the State
of New Jersey. The Company's growth strategy is to participate in the recent
consolidation trend in the automotive sales and service industry and, through
strategic regional acquisitions, become the largest dealer group in New England
and the Mid-Atlantic states, and to expand its two "niche" businesses: livery
sales and free-standing neighborhood factory authorized maintenance and light
repair centers in locations in which there is a concentration of Hometown
dealerships.
The six senior officers of the Company have over 130 years of combined
experience in the automotive retailing industry and are members of families who
have owned dealerships since 1947. In addition, they have been recognized as
leaders in the automotive retailing industry, serving at various times in
leadership positions in state and national industry organizations. The Core
Operating Companies have also received numerous awards based on high customer
satisfaction index ("CSI") ratings and other performance measures and their
principals, as well as many of the principals of the Acquisitions, will continue
to manage their dealerships. The persons who controlled and operated the Core
Operating Companies prior to the Exchange will play a dominant role in
establishing and implementing the Company's operating and acquisition
strategies.
Industry Overview
Domestic and foreign automobile manufacturers distribute their vehicles
through franchised dealerships. With more than $500 billion in 1996 sales,
automotive retailing is the largest retail trade sector in the United States.
The industry is highly fragmented, particularly in the northeastern United
States where Hometown is concentrated, and largely privately held, with
approximately 22,000 automobile dealership locations representing more than
53,000 franchised dealerships. In 1996, U.S. franchised automobile dealers sold
15.1 million new vehicles and 19.2 million used vehicles for sales of
approximately $328.4 billion and $171.8 billion, respectively, with the balance
attributable to sales of related automotive goods and services.. Since 1992, new
vehicle revenues have grown at a 10.5% compound annual rate. Over the same
period, used vehicle revenues have grown at a 14.6% compound annual rate. Slower
new vehicle unit sales growth over this time period has been offset by the
rising prices associated with new vehicles and, on average, the higher prices
paid for later model high quality used vehicles which now comprise a significant
part of the used vehicle market. Automobile sales are affected by many factors,
including rates of employment, income growth, interest rates, weather patterns
and other national and local economic conditions, automotive innovations and
general consumer sentiment. See "Risk Factors -- Cyclicality" and "Risk Factors
- -- Seasonality."
The following table sets forth new and used vehicle sales by franchised
automobile dealers in the United States for each of the five years ended
December 31, 1996. New vehicles can only be sold at retail
41
by franchised dealerships. The following table excludes sales of used vehicles
by nonfranchised dealerships and casual sales by individuals. Nonfranchised
dealerships and individuals had aggregate sales of $117.3 billion, $133.2
billion, $173.8 billion, $181.3 billion and $172.4 billion, respectively, for
each of the five years ended December 31, 1996.
United States Franchised Dealers' Vehicles Sales
------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
(units in millions; dollars in billions)
New vehicle unit sales................ 12.9 13.9 15.1 14.8 15.1
New vehicle sales..................... $220.6 $253.0 $289.9 $302.7 $328.4
Used vehicle unit sales............... 15.1 16.3 17.8 18.5 19.2
Used vehicle sales.................... $99.5 $115.0 $138.6 $157.0 $171.8
Total vehicle sales................... $320.1 $368.0 $428.5 $459.7 $500.2
Annual growth in total vehicle sales.. --% 15.0% 16.5% 7.3% 8.8%
Manufacturers originally established franchised dealer networks for the
distribution of their vehicles as single-dealership, single-owner operations. In
return for distribution rights within specified territories, Manufacturers
exerted significant influence over such matters as a dealer's location,
inventory size and composition and merchandising programs, as well as the
identity of owners and managers. This strict control contributed to the
proliferation of small dealerships which, at their peak in the late 1940's,
numbered in excess of 46,000 dealership locations. Several manufacturers went
out of business in the 1950's, and the number of dealership locations decreased
to 36,000 by 1960. Significant industry changes took place in the 1970's when
fuel shortages forced dramatic increases in gasoline prices and foreign
manufacturers increased their penetration of the U.S. market with
fuel-efficient, low-cost vehicles. As a result of these competitive pressures,
dealers were able to negotiate significant changes in the traditional
distribution system with manufacturers. Dealers began to add foreign franchises
and the phenomenon of the multi-franchise automobile dealer emerged, prompting
the significant acquisition and consolidation activities of the 1980's. The
easing of restrictions against multi-franchise dealers, competitive pressures on
undercapitalized dealerships and the aging of dealership owners has led to
further consolidation of the industry. Since 1960, the number of dealership
locations has declined 39% to the 1996 level of approximately 22,000.
Over the past three decades, there has been a trend toward fewer, but
larger, automotive dealerships. In 1996, each of the largest 100 dealer groups
had more than $200 million in revenues. Although significant consolidation has
taken place since its inception, the industry today remains highly fragmented,
with the largest 100 dealer groups generating less than 10% of total sales
revenues and controlling approximately 5% of all franchised dealerships.
Hometown believes that these factors, together with increasing capital
requirements for operating automobile dealerships, lack of a viable exit
strategy and the aging of dealership owners provide an attractive environment
for the Company's consolidation strategy.
Due to intense competition, new vehicle sales were the smallest
proportionate contributors to United States dealers' gross profits during 1996,
earning an average gross margin of 6.5%. The typical dealership currently
generates substantially all of its profits from sales of used vehicles, parts
and service and F&I. The average used vehicle gross margin in 1996 was 11%. As
with retailers generally, automobile dealership profitability varies widely and
depends in part on the effective management of inventory, marketing, quality
control and responsiveness to customers. Since 1991, retail automobile
dealerships in the United States have earned, on average, between 12.9% and
14.1% total gross margin on sales.
42
Operating Strategy
Hometown will seek to consolidate operations and increase the
profitability of its existing dealerships by using a strategy that combines its
"best in class" operating practices with the advantages of its established
customer base, local presence and name recognition. Each of the Company's
dealerships will use a core operating strategy specifically designed to produce
a high "shop absorption rate," a high rate of service retention and a high ratio
of retail used to new car sales, all in order to maximize profitability and
provide insulation from the cyclicality of new car sales.
The Company believes that the following factors, coupled with its
established organizational structure, will help it achieve its operating
strategy:
o Strong Regional Focus. The Company's eight franchised dealerships
are located in New Jersey, Connecticut, Massachusetts and Vermont.
Its acquisition program is focused on acquiring additional
dealerships in New England, New Jersey and contiguous portions of
the mid-Atlantic region. The Company believes that proximity of its
dealerships to one another will contribute to ease of management,
more effective control of dealership operations, increased sales
from coordinated marketing of new cars, used cars and livery
vehicles and cost savings from coordinated auction purchasing, car
transport and other activities.
o Established Customer Base. The Company believes that its existing
dealerships have good local reputations and have strong local name
recognition. Through "owner-loyalty" and similar programs, the
Company believes it has established a customer base that looks to
its existing "hometown" dealership as its first choice in buying
replacement vehicles.
o Experienced Management. Hometown's management is comprised of second
and third generation members of dealer families who have been
leaders in the automotive retailing industry. The executive officers
of the Company have over 130 years of combined experience in the
automotive retailing industry and are members of families who have
owned dealerships since 1947. They are recognized leaders in the
automotive retailing industry and have served at various times in
leadership positions in state and national industry organizations.
The Company has also received numerous awards based on high customer
satisfaction index ("CSI") ratings and other performance measures
regularly compiled and monitored by the automobile Manufacturers.
See "Management - Directors and Officers" for additional information
as to the numerous Manufacturer awards and citations earned by
Hometown's senior management and dealerships in recent years.
o Presence In Higher Profit Margin Businesses
o Livery Sales and Service. The Company's Westwood subsidiary is
the nation's largest seller of Lincoln Town Cars and
limousines to livery car and livery fleet operators. The sale
of livery vehicles also tends to generate significant
maintenance and repair business since the primary concern of
livery operators is keeping their cars in use and on the road
for a maximum number of hours per day. A major impediment to
further expansion of livery business has been a lack of
suitable service facilities in areas too distant from
Westwood's existing service location in Emerson, New Jersey to
permit the return of livery cars to that location for
servicing. As a first step in expansion of this livery
business, the Company
43
intends to put in place special financing, sales and prepaid
service programs for livery vehicles, following the Westwood
model, at the Shaker Group's Lincoln Mercury dealership and
Bay State Lincoln Mercury and, in such connection, will modify
the service facilities of these dealerships where necessary to
make them more suitable for the servicing of limousines and
livery cars.
o Maintenance and Repair. The Company's Shaker subsidiary's
"Lincoln Mercury Autocare" facility was the pilot for Ford's
authorized free-standing neighborhood service centers for the
maintenance and light repair of cars and trucks. Free-standing
service centers are an innovative attempt by the automotive
retail industry to recapture repair and maintenance business
which has been lost in recent decades to chain and independent
service businesses. The service center encourages customers to
deal directly with service personnel and permits customers to
watch the progress of work on their cars by entering the shop
on railed walkways. The service center also operates during
extended hours, provides comfortable customer waiting areas
and quickly services vehicles without prior appointment.
o Focus on Higher Margin Operations
o Parts and Service. Hometown's dealerships emphasize sales of
parts and service which typically have a higher profit margin
than vehicle sales. For example, during 1996 maintenance and
light repair work was retained at the Company's Shaker
subsidiaries on approximately 63.6% of the new cars sold
compared to 20.1% at the average dealership selling Ford,
Lincoln and Mercury vehicles.
o Used Car Sales. The sale of used vehicles is emphasized at
each of the Company's dealerships. Typically, used vehicle
sales generate higher gross margins than new vehicle sales.
During 1997, the Company sold 8,484 used vehicles (combined
retail and wholesale) compared to 5,100 new vehicles. The
Company seeks to attract customers and enhance buyer
satisfaction by offering multiple financing options and
extended warranties on used vehicles.
o Ability To Source High Quality Used Vehicles. An important component
in selling used vehicles and maintaining high margins on such sales
is the ability to obtain high quality used vehicles at reasonable
prices. The Company obtains its used vehicles through trade-ins and
off-lease programs as well as regular auction buying. Key executives
at each dealership have developed the skills necessary for making
effective purchases at regularly scheduled auctions. The Company
believes that auction buying activities will be enhanced by its
ability to use common buyers to fill the needs of several
dealerships, handle its own transportation of vehicles from the
auction to the dealership and obtain discounted prices.
o Brand Diversity. Hometown's dealerships offer 12 American and Asian
automotive brands including Chevrolet, Chrysler, Dodge, Eagle, Ford,
Isuzu, Jeep, Lincoln, Mercury, Oldsmobile, Plymouth and Toyota. The
Company believes that brand diversity helps to insulate it from
changes in consumer preferences, short supplies of particular
automotive models and negative publicity concerning a particular
Manufacturer or vehicle model.
o Centralized Financing and Administrative Functions. The Company
believes that it will be able to generate cost savings by centrally
financing its new and used car inventories through bank lines of
credit rather than the "floorplan" financing now provided by
Manufacturers to its individual
44
dealerships. Additional cost savings are believed possible through
centralizing accounting, personnel, employee benefits and other
functions.
o Quality Personnel. The Company employs professional management
practices in all aspects of its operations, including information
technology, employee training, profit-based compensation and cash
management. Each dealership is managed as a profit center by a
trained and experienced general manager who has primary
responsibility for decisions relating to inventory, pricing and
personnel. The Company compensates its general managers and
department managers pursuant to various formulas based upon
dealership or department profitability, rather than on sales volume.
Senior management uses computer-based management information systems
to monitor each dealership's sales, profitability and inventory on a
daily basis and to identify areas requiring improvement and provide
additional training where necessary. The Company believes that the
application of its professional management practices provides it
with an ability to achieve levels of profitability superior to
industry averages.
Growth Strategy
The Company's goals are to become, through selected acquisitions, the
leading consolidator and the largest dealer group in New England, to increase
the number of its dealerships in New Jersey and other portions of the
Mid-Atlantic region, to add additional sales locations and maintenance and
repair facilities for its livery sales business and to establish new factory
authorized free-standing neighborhood maintenance and repair centers in both New
England and the Mid-Atlantic regions.
The Company believes that the Northeast is the most fragmented automotive
retail market in the United States. Though some large dealerships operate in the
area, there are a large number of small to mid-size dealers operating in an area
of heavy population densities. The Company intends to focus its acquisition
strategy on dealerships with annual revenues of $20 million to $60 million per
location (some of which may be part of larger groups), located in urban fringe
or suburban areas. The Company believes that these small to mid-size dealerships
are more likely to provide their customers with convenient access for
maintenance and repair than larger dealerships, as well as being more compatible
with the Company's operating model which requires a high shop absorption and a
high rate of service retention. Also, these dealerships can benefit the most
from the synergies created by being a member of a larger automotive group, such
as cross-utilization of same brand new car inventories, lower cost financing,
swapping of used car inventories, more effective auction positioning and
integration of computer systems. Where dealerships are acquired in close
proximity to other existing Hometown dealerships, the Company may consolidate
their operations to create further efficiencies. Proximity is expected to
facilitate management control of diverse dealerships and make it easier to
implement "best in class" practices.
Upon completion of this Offering, the Company will acquire two dealerships
in Massachusetts and Vermont adding $49,300,000 and $1,688,000, respectively, to
combined pro forma 1997 revenues and income before income taxes for an aggregate
consideration of $5.7 million which will be paid from proceeds of the Offering.
The Company believes that these transactions demonstrate the opportunities for
acquisition of dealerships in New England at attractive prices. However, no
assurance can be given that the Company will be able to make additional
acquisitions in this or other geographic areas or that the prices will be
comparable to those of the existing Acquisitions.
Though many manufacturers have imposed limitations on the acquisition of
dealerships by public corporations, the Company believes that, because of
fragmentation of the market in the Northeast, the principal Manufacturers from
whom it holds franchises, are seeking to reduce the number of dealerships
holding their franchises. Accordingly, the Company believes that these
Manufacturers will be inclined to support further growth by Hometown. High CSI
ratings have been identified by certain of its
45
Manufacturers as factors in their approval of additional acquisitions and each
of the Company's dealers has had historically high ratings.
The Company also believes that its livery sales business can be expanded
throughout the New England and mid-Atlantic regions based on the innovative
sales and marketing practices utilized by its Westwood subsidiary and its
reputation among livery car operators. The major impediment to expansion of this
business had been Westwood's lack of service facilities, which require extended
body lifts, beyond its existing service location in Emerson, New Jersey. Shaker
Lincoln Mercury already has installed such extended car body lifts and the
Company plans to install additional lifts in certain of its other facilities so
that they can service livery vehicles sold. The Company also intends to adopt
Westwood's innovative sales and financing programs to implement sales of livery
vehicles at other locations.
Dealership Operations
The Company's established operating practices and procedures, including
the management and pricing of inventories of new and used vehicles, are
regularly reviewed and updated by the general managers and members of the
Company's operating committee, consisting of its six senior executive officers,
each of whom is, or has been, the chief operating officer of a franchised
dealership. Each of the Company's dealerships will use a management structure,
currently used by the Core Operating Companies, that promotes and rewards the
achievement of benchmarks set by senior management and the Operations Committee.
Each local general manager of a Hometown dealership is ultimately responsible
for the operation, personnel and financial performance of that dealership. Each
general manager is complemented with a management team consisting of a new
vehicle sales manager, a used vehicle sales manager, service and parts managers
and F&I managers. The general manager and the other members of each dealership
management team, as long-time members of their local communities, are typically
best able to judge how to conduct day-to-day operations based on the team's
experience in and familiarity with its local market. Certain members of the
Company's senior management also serve as general managers of particular
dealerships. A similar management structure will be implemented for each
Acquisition, as well as subsequent acquisitions.
Each dealership engages in a number of inter-related businesses: new
vehicle sales; used vehicle sales; service and parts operations; and F&I.
New Vehicle Sales. Hometown's dealerships represent 12 American and Asian
brands of lower, mid and higher priced sport and family cars and light trucks,
including sport utility vehicles. The Company believes that offering numerous
new vehicle brands appeals to a variety of customers, minimizes dependence on
any one Manufacturer and reduces its exposure to supply problems and product
cycles. The following table sets forth for 1997, certain information relating to
the brands of new vehicles sold at retail by the Company:
46
Number of New Vehicles Sold
For the Year Ended December 31, 1997
----------------------------------------------------------------------------
BRANDS Shaker Westwood Muller Bay State Brattleboro Total Percentage
------ -------- ------ --------- ----------- ----- ----------
(Connecticut) (New Jersey) (New Jersey) (Mass.) (Vermont)
LINCOLN/MERCURY 331 1,473 - 370 - 2,174 42.6%
TOYOTA - - 960 - - 960 18.8%
FORD 765 - - - - 765 15.0%
DODGE - - - - 396 396 7.8%
CHEVROLET - - 377 - - 377 7.4%
JEEP 200 - - - 200 3.9%
OLDSMOBILE - - 78 - - 78 1.5%
ISUZU - - 62 - - 62 1.2%
PLYMOUTH - - - - 43 43 0.8%
GEO - - 34 - - 34 0.7%
CHRYSLER - - - - 10 10 0.2%
EAGLE 1 - - - - 1 0.0%
----- ----- ----- --- --- ----- -----
1,297 1,473 1,511 370 449 5,100 100.0%
===== ===== ===== === === ===== =====
The Company's new vehicle unit sales include lease transactions. New vehicle
leases generally have short terms which tend to bring the consumer back to the
market sooner than if the purchase were debt financed. In addition, leases
provide a steady source of late-model, off-lease vehicles for used vehicle
inventory. Leased vehicles generally remain under factory warranty for the term
of the lease which allows the dealerships to provide repair service to the
lessee throughout the lease term.
The Company seeks to provide customer-oriented service designed to meet
the needs of its customers and establish lasting relationships that will result
in repeat and referral business. For example, the Company intends to implement
the strategy of the Core Operating Companies by: (i) engaging in extensive
follow-up after a sale in order to develop long-term relationships with its
customers; (ii) training its sales staffs to be able to meet customer needs;
(iii) employing more efficient, non-confrontational selling systems; and (iv)
using computer technology that decreases the time necessary to purchase a
vehicle. The Company believes that its ability to share "best practices" among
its dealerships gives it an advantage over smaller dealerships.
The Company acquires substantially all of its new vehicle inventory from
the Manufacturers. Manufacturers allocate a limited inventory among their
franchised dealers based primarily on sales volume and input from dealers. The
Company finances its inventory purchases through revolving credit arrangements
known in the industry as "floorplan" financing
Used Vehicle Sales. The Company sells used vehicles at each of its
franchised dealerships. Sales of used vehicles have become an increasingly
significant source of profit for dealerships. Consumer demand for used vehicles
has increased as prices of new vehicles have risen and as more high quality used
vehicles have become available. Furthermore, used vehicles typically generate
higher gross margins than new vehicles because of their limited comparability
and the somewhat subjective nature of their valuation. The Company intends to
emphasize used vehicle sales by maintaining a high quality inventory, providing
competitive prices and extended service contracts for its used vehicles and
continuing to promote used vehicle sales. The Company will also certify that its
used cars meet specified testing and quality standards.
47
The following table shows the growth of used vehicle sales by the Company
from 1994 through 1997 and the pro forma combined used vehicle sales by the
Company in those years:
Number of Used and New Vehicles Sold
1994 1995 1996 1997
------ ------ ------ ------
Shaker (Connecticut)
Used Vehicles - Retail 851 1097 1,318 1,256
Used Vehicles - Wholesale 951 996 1,144 1,153
New Vehicles 1,537 1,216 1,405 1,297
------ ------ ------ ------
Total Sales 2,339 2,309 3,867 3,706
Westwood (New Jersey)
Used Vehicles - Retail 258 263 325 377
Used Vehicles - Wholesale 382 365 346 265
New Vehicles 1,448 1,391 1,438 1,473
------ ------ ------ ------
Total Sales 2,088 2,019 2,109 2,115
Muller (New Jersey)
Used Vehicles - Retail 1,557 1,204 1,421 1,301
Used Vehicles - Wholesale 586 807 829 1,260
New Vehicles 1,682 1,457 1,524 1,511
------ ------ ------ ------
Total Sales 3,825 3,468 3,774 4,072
Bay State (Mass.)
Used Vehicles - Retail 552 835 793 748
Used Vehicles - Wholesale 443 482 383 395
New Vehicles 283 199 389 370
------ ------ ------ ------
Total Sales 1,278 1,516 1,565 1,513
Brattleboro (Vermont)
Used Vehicles - Retail 577 898 1,001 794
Used Vehicles - Wholesale 528 799 1,011 935
New Vehicles 378 281 332 449
------ ------ ------ ------
Total Sales 1,483 1,978 2,344 2,178
Total Hometown
Used Vehicles - Retail 3,795 4,297 4,858 4,476
Used Vehicles - Wholesale 2,890 3,449 3,713 4,008
New Vehicles 5,328 4,544 5,088 5,100
------ ------ ------ ------
Total Sales 12,013 12,290 13,659 13,584
Sales of used vehicles are dependent on the ability of the dealerships to
obtain a supply of high quality used vehicles and effectively manage that
inventory. New vehicle operations provide a supply of such vehicles through
trade-ins and off-lease vehicles. Hometown supplements its used vehicle
inventory with used vehicles purchased at auctions where manufacturers re-market
lease return, rental buy back and manufacturer demonstration cars. To maintain a
broad selection of high quality used vehicles and to meet
48
local preferences, the Company acquires used vehicles from trade-ins and a
variety of sources nationwide, including direct purchases and manufacturers' and
independent auctions.
The Company follows an inventory management strategy pursuant to which
used vehicles are offered at progressively lower gross profit margins the longer
they stay in inventory and if not sold at retail by the end of 10 weeks are sold
to another dealer or sold at auction. Pursuant to this strategy the Company
generally maintains only a 30 to 45 day supply of used vehicles. Unsold, excess
or unsuitable vehicles received as trade-ins are sold at auctions or sold
directly to other dealers and wholesalers. Trade-ins may be transferred among
Hometown dealerships to provide balanced inventories of used vehicles at each
location. The Company believes that the Acquisitions and acquisitions of
additional dealerships will expand its market for transfers of used vehicles
among its dealerships and, therefore, increase the ability of each dealership to
maintain a balanced inventory of used vehicles. The Company intends to develop
integrated computer inventory systems that will allow it to coordinate vehicle
transfers between its dealerships.
The Company has taken steps to build customer confidence in its used
vehicle inventory, including participation in the Manufacturers' certification
processes to make used vehicles eligible for new vehicle benefits such as new
vehicle finance rates and extended Manufacturer warranties.
Hometown believes that franchised dealership strengths in offering used
vehicles include: (i) access on new vehicle purchase to trade-ins which are
typically lower mileage and higher quality relative to trade-ins on used car
purchases, (ii) access to late-model, low mileage off-lease vehicles, rental
returns and Manufacturer demos, and (iii) the availability of Manufacturer
certification and extended Manufacturer warranties for higher quality used
vehicles. The Company believes that a well-managed used vehicle operation at
each location affords it an opportunity to: (i) generate additional customer
traffic from a wide variety of prospective buyers, (ii) increase new and used
vehicle sales by aggressively pursuing customer trade-ins, (iii) generate
incremental revenues from customers financially unable or unwilling to purchase
a new vehicle, and (iv) increase ancillary product sales, particularly F&I, to
improve overall profitability.
Parts and Service. The Company regards service and repair activities as an
integral part of its overall approach to customer service, providing an
opportunity to foster ongoing relationships with its customers and deepen
customer loyalty. Hometown provides parts and service at each of its franchised
dealerships for the vehicle brands sold by these dealerships. Maintenance and
repair services are provided at 8 locations) one factory authorized neighborhood
service center and one collision repair center, using approximately 85 service
bays. Hometown provides both warranty and non-warranty service work.
The Company intends to implement an "owner loyalty program" similar to
programs used by the Core Operating Companies to encourage customers to return
to the dealership for all maintenance and light repair work. The program
provides customers with information as to recommended intervals of service and
details all charges for a wide range of maintenance activities and expected
replacements at such intervals. Customers who maintain their vehicles in
accordance with the owner loyalty program recommendations receive various items
of maintenance, such as oil changes, without charge and also receive specified
rebates against new or used vehicle purchases for money spent in Hometown's
service departments. The owner loyalty program is designed to combat the recent
trend for increasing percentages of repair and maintenance work to be performed
at service stations and other independent repair shops, chains of specialized
repair, maintenance and part replacement shops, such as muffler shops, brake
shops, and tire shops. Manufacturers' policies that require warranty work to be
performed at franchised dealerships support the Company's strategy of retaining
maintenance and light repair work.
49
The parts and service business is less cyclical than new vehicle sales and
provides an important recurring revenue stream to the Company's dealerships. The
Company will use systems, already in place at the Core Operating Companies, that
track its customers' maintenance records and notify owners of vehicles purchased
at the dealerships when their vehicles are due for periodic services. The
Company believes that this practice encourages preventive maintenance rather
than post-breakdown repairs.
Each dealership sells factory-approved parts for vehicle brands and models
sold by that dealership. These parts are either used in repairs made by the
dealership or sold at retail to its customers or at wholesale to independent
repair shops. Each dealership employs its own parts manager and independently
controls its parts inventory and sales. Hometown dealerships which sell the same
new vehicle brands will have access to each other's computerized inventories.
Further, certain Manufacturers have begun to offer discounts on volume purchases
of certain parts and components.
Finance, Insurance and Other Revenue. Hometown dealerships arrange financing for
their customers' vehicle purchases, sell vehicle service contracts and arrange
selected types of credit insurance in connection with the financing of vehicle
sales. The dealerships place heavy emphasis on F&I and offer advanced F&I
training to their F&I managers. Typically, the dealerships forward proposed
financing contracts to finance companies owned and operated by the Manufacturers
or to selected commercial banks or other financing parties. The dealerships
receive a finance fee from the lender for arranging the financing and may be
assessed a charge-back against a portion of the finance fee if the contract is
terminated prior to its scheduled maturity for any reason, including early
repayment or default. However, under existing agreements no charge-backs are
permitted after 90, or in some cases 120, days except for certain sales to
livery car operations. In addition, Hometown has guaranteed certain automobile
financing loans made by financial institutions to its livery customers for the
purchase new and used limousines. At December 31, 1997 contingent liability on
these guarantees to Ford Motor Credit Co. and two other financial institutions
aggregated $9,732,000, of which guarantees for $800,000 were limited to a
12-month period from the inception of the loan and guarantees of $754,000
covered loans to customers with below average credit ratings. Loan guarantees
for $935,000 were with a financial institution in which an officer, director and
principal stockholder of Hometown is a stockholder. The collectability of such
loans to customers in the livery business can be adversely affected by a decline
in economic conditions. The Company has established reserves for potential
liability arising from such guarantees, which it believes are adequate but not
excessive.
At the time of a new vehicle sale, the Company offers extended service
contracts to supplement the Manufacturer's warranty. Additionally, the Company
sells primary service contracts for used vehicles, as well as service contracts
of third party vendors.
Franchise Agreements
Each Hometown dealership operates pursuant to a franchise agreement
between the applicable Manufacturer and the dealership. The typical automotive
franchise agreement specifies the locations at which the dealer has the right
and the obligation to sell motor vehicles and related parts and products and to
perform certain approved services in order to serve a specified market area. The
designation of such areas and the allocation of new vehicles among dealerships
are subject to the discretion of the Manufacturer which generally does not
guarantee exclusivity with a specified territory. In addition, a franchise
agreement may impose requirements on the dealer concerning such matters as
showrooms, facilities and equipment for servicing vehicles, maintenance of
inventories of vehicles and parts, maintenance of minimum net working capital
and training of personnel. Compliance with each of these requirements is closely
monitored by the Manufacturer. In addition, Manufacturers require each
dealership to submit a
50
financial statement of operations on a monthly and annual basis. The franchise
agreement also grants the dealer the non-exclusive right to use and display the
Manufacturer's trademarks, service marks and design in the form and manner
approved by the Manufacturer.
Each franchise agreement sets forth the name of the person approved by the
Manufacturer to exercise full managerial authority over the dealership's
operations and the names and ownership percentages of the approved owners of the
dealership and contains provisions requiring the Manufacturer's prior approval
of changes in management or transfers of ownership of the dealership. A number
of Manufacturers prohibit the acquisition of a substantial ownership interest in
the franchised dealer or transactions that may affect management control of the
franchised dealer, in each case without the approval of the Manufacturer. In
connection with approving the Exchange, the Manufacturers will require Hometown
to execute new franchise agreements which may contain different provisions from
the current agreements. For a description of these and other restrictions and
other material terms imposed by the Manufacturers in the franchise agreements,
see "Risk Factors - Manufacturers' Control Over Dealerships" and "Risk Factors -
Dependence on Acquisitions for Growth; Manufacturers' Restrictions on
Acquisitions."
Most franchise agreements expire within one to five years. The Company
expects to renew any expiring agreements in the ordinary course of business. The
typical franchise agreement provides for early termination or non-renewal by the
Manufacturer under certain circumstance such as change of management or
ownership without Manufacturer approval, insolvency or bankruptcy of the
dealership, death or incapacity of the dealer manager, conviction of a dealer
manager or owner of certain crimes, misrepresentation of certain information by
the dealership or dealer manager or owner to the Manufacturer, failure to
adequately operate the dealership, failure to maintain any license, permit or
authorization required for the conduct of business or material breach of other
provisions of the franchise agreement. The dealership is typically entitled to
terminate the franchise agreement at any time without cause.
The automobile franchise relationship is also governed by various federal
and state laws established to protect dealerships from the generally unequal
bargaining power between the parties. The state statutes generally provide that
it is a violation for a manufacturer to terminate, or to fail to renew, a
franchise without good cause. Most statutes also provide that the manufacturer
is prohibited from unreasonably withholding approval for a proposed change in
ownership of the dealership. Generally, in order to withhold approval, the
manufacturer must have material reasons relating to the character, financial
ability or business experience of the proposed transferee. Moreover, certain
states including Connecticut, New Jersey, Massachusetts and Vermont have laws
which grant to pre-existing dealers a right to contest, in court or before an
administrative agency, if a manufacturer establishes a new dealership, or
authorizes the relocation of an existing dealership, to a location within a
defined market area of a pre-existing dealership holding a franchise to sell the
same brand. Accordingly, the relationship between the Manufacturer and the
dealer, particularly as it relates to a manufacturer's rights to terminate, or
to fail to renew, the franchise, is the subject of a substantial body of case
law based upon specific facts in each instance. The above discussion of state
court and administrative holdings and various state laws is based on
management's beliefs and may not be an accurate description of the state court
and administrative holdings and various state laws.
51
Competition
The automotive retailing industry is extremely competitive and consumers
generally have a number of choices in deciding where to purchase or service a
new or used vehicle.
The Company competes for new vehicle sales with other franchised dealers
in each of its marketing areas. Hometown does not have any cost advantage in
purchasing new vehicles from the Manufacturers and typically relies on sales
expertise, reputation and customer goodwill, the quality of its service and
location of its dealerships to sell new vehicles. In recent years, automobile
dealers have also faced increased competition in the sale or lease of new
vehicles from independent leasing companies, on-line purchasing services and
warehouse clubs. In addition, Ford Motor has announced that it is exploring the
possibility of going into business with some of its dealers to create automotive
superstores in selected markets. The Company believes that the principal
competitive factors in new vehicle sales are the marketing campaigns conducted
by Manufacturers, the ability of dealerships to offer a wide selection of the
most popular vehicles, the location of dealerships and the quality of customer
service. Other competitive factors include customer preference for particular
brands of automobiles, pricing (including Manufacturer rebates and other special
offers) and warranties. The Company believes that its dealerships are
competitive in all of these areas.
In used vehicles, Hometown competes with other franchised dealers,
independent used car dealers, automobile rental agencies and private parties for
supply and resale of used vehicles. The Company believes that the principal
competitive factors in used vehicle sales are the quality and condition of its
used cars, price and the quality of customer service.
The Company competes against other franchised dealers to perform warranty
repairs and against other automobile dealers, franchised and independent service
center chains and independent garages for non-warranty repair and routine
maintenance business. The Company competes with other automobile dealers,
service stores and automotive parts retailers in its parts operations. The
Company believes that the principal competitive factors in parts and service
sales are price, the use of factory approved replacement parts, a dealership's
expertise with a Manufacturer's brands and models, the quality of customer
service and convenience for the customer.
Facilities
Set forth in the table below is certain information relating to the
properties that the Company uses in its business. Certain of the leases
described below reflect the terms of new leases which became effective on the
closing of the Offering. See "Certain Transactions - Leases."
52
Occupant/Trade Name Location Use Lease/Own
Shaker's Lincoln Mercury 831 Straits New and used car Lease expires in
Turnpike sales; service; F & I 2013; $240,000 per
Watertown, CT 06795 year with CPI
increases in 2002
and 2007
Lincoln Mercury Autocare 1189 New Haven Rd. Service Owned by dealership
Naugatuck, CT 06770
Family Ford 1200 Wolcott Street New and used car Lease expires in
Waterbury, CT 06705 sales; service; F & I 2013; $240,000 per
year with CPI
increases in 2002
and 2007
Shaker's Jeep Eagle 1311 South Main St. New and used car Lease expires in
Waterbury, CT 06706 sales; service; F & I 2013; $72,000 per
year with CPI
increases in 2002
and 2007
Westwood Lincoln Mercury 55 Kinderkamack Rd. New and used car Lease expires in
Emerson, NJ 07630 sales; service; F & 2013; $360,000 per
I; livery sales year with CPI
increases in 2002
and 2007
Muller Toyota Route 31 and New and used car Lease expires in
Van Sickles Rd. sales; service; F & I 2013; $360,000 per
Clinton, NJ 08809 year with CPI
increases in 2002
and 2007
Muller Toyota Route 31 and Used car sales Lease expires in
Spruce St. 2000; $60,000 per
Glen Gardner, NJ year with increases
08826 up to $72,000 per
year
Muller Chevrolet, Route 173 and New and used car Lease expires in
Oldsmobile, Isuzu Voorhees Rd. sales; service; F & I 2013; $396,000 per
Stewartsville, NJ year with CPI
08865 increases in 2002
and 2007
Muller Chevrolet 135 Fifth Street Auto collision repairs Lease expires in
Phillipsburg, NJ 2000 at
08865 $48,000 per year
Baystate Lincoln Mercury 571 Worcester Road New and used car Lease expires in
Framingham, MA 01701 sales; service; F & I 2013 at $360,000
per year for the
first 5 years,
$420,000 for the
next 5 years and
with a CPI increase
in 2008 for the last
5 years; two
five-year open
market at $420,000
per year
Brattleboro Chrysler Route 5, Putney Rd. New and use car Lease expires in
Plymouth Dodge N. Brattleboro, VT sales; service; F & I 2003 at $240,000
05304 per year; with one
five year renewal
option and option to
purchase at fair
market value of not
less than $1.5
million; $240,000
per year
53
Governmental Regulations
A number of regulations affect Hometown's business of marketing, selling,
financing and servicing automobiles. The Company is also subject to laws and
regulations relating to business corporations generally.
Under New Jersey, Connecticut, Massachusetts and Vermont law, the Company
must obtain a license in order to establish, operate or relocate a dealership or
provide certain automotive repair services. These laws also regulate the
Company's conduct of business, including its advertising and sales practices.
Other states may have similar requirements.
The Company's financing activities are subject to federal
truth-in-lending, consumer leasing and equal credit opportunity regulations, as
well as state and local motor vehicle finance laws, installment finance laws,
insurance laws, usury laws and other installment sales laws. Some states
regulate finance fees that may be paid as a result of vehicle sales. Penalties
for violation of any of these laws or regulations may include revocation of
certain licenses, assessment of criminal and civil fines and penalties and, in
certain instances, may create a private cause of action for individuals. The
Company believes that its dealerships substantially comply with all laws and
regulations affecting their businesses and do not have any material liabilities
under such laws and regulations, and that compliance with all such laws and
regulations do not and will not, individually or in the aggregate, have a
material adverse effect on the Company's capital expenditures, earnings, or
competitive position.
Environmental Matters
The Company is subject to a wide range of federal, state and local
environmental laws and regulations, including those governing discharges to the
air and water, storage of petroleum substances and chemicals, handling and
disposal of wastes, and remediation of contamination arising from spills and
releases. As with automobile dealerships generally, and service and parts and
collision repair center operations in particular, the Company's business
involves the generation, use, handling and disposal of hazardous or toxic
substances or wastes. Operations involving the management of hazardous and
non-hazardous wastes are subject to requirements of the federal Resource
Conservation and Recovery Act and comparable state statutes. Pursuant to these
laws, federal and state environmental agencies have established approved methods
for storage, treatment, and disposal of regulated wastes with which the Company
must comply.
Hometown's business also involves the use of aboveground and underground
storage tanks. Under applicable laws and regulations, the Company is responsible
for the proper use, maintenance and abandonment of regulated storage tanks owned
or operated by it and for remediation of subsurface soils and groundwater
impacted by releases from such existing or abandoned aboveground or underground
storage tanks. In addition to these regulated tanks, the Company owns and
operates other underground and aboveground devices or containers (e.g.
automotive lifts and service pits) that may not be classified as regulated
tanks, but which are capable of releasing stored materials into the environment,
thereby potentially obligating the Company to remediate any soils or groundwater
resulting from such releases.
54
The Company is also subject to laws and regulations governing remediation
of contamination at facilities it operates or to which it sends hazardous or
toxic substances or wastes for treatment, recycling or disposal. The
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
also known as the "Superfund" law, imposes liability, without regard to fault or
the legality of the original conduct, on certain classes of persons that are
considered to have contributed to the release of a "hazardous substance" into
the environment. These persons include the owner or operator of the disposal
site or sites where the release occurred and companies that disposed or arranged
for the disposal of the hazardous substances released at such sites. Under
CERCLA, these "responsible parties" may be subject to joint and several
liability for the costs of cleaning up the hazardous substances that have been
released into the environment, for damages to natural resources and for the
costs of certain health studies, and it is not uncommon for neighboring
landowners and other third parties to file claims for personal injury and
property damage allegedly caused by the release of hazardous substances.
Further, the Federal Water Pollution Control Act, also known as the Clean
Water Act, and comparable state statutes prohibit discharges of pollutants into
regulated waters without authorized National Pollution Discharge Elimination
System (NPDES) and similar state permits, require containment of potential
discharges of oil or hazardous substances, and require preparation of spill
contingency plans. The Company expects to implement programs that address
wastewater discharge requirements as well as containment of potential discharges
and spill contingency planning.
Environmental laws and regulations have become very complex, making it
very difficult for businesses that routinely handle hazardous and non-hazardous
wastes to achieve and maintain full compliance with all applicable environmental
laws. Like virtually any network of automobile dealerships and vehicle service
facilities, the Company, from time to time, can be expected to experience
incidents and encounter conditions that will not be in compliance with
environmental laws and regulations. However, none of Hometown's dealerships have
been subject to any material environmental liabilities in the past and the
Company does not anticipate that any material environmental liabilities will be
incurred in the future. Although the Company is in the process of establishing
an environmental management program that is intended to reduce the risk of
noncompliance with environmental laws and regulations, environmental laws and
regulations and their interpretation and enforcement are changed frequently and
the Company believes that the trend towards broader and stricter environmental
legislation and regulations is likely to continue. Hence, there can be no
assurance that compliance with environmental laws or regulations or the future
discovery of unknown environmental conditions will not require additional
expenditures by the Company or that such expenditures would not be material. See
"Risk Factors - Governmental Regulations and Environmental Matters."
Employees
As of December 31, 1997, the Company (after giving effect to the Exchange
and the Acquisitions) employed 331 people, of whom approximately 74 were
employed in managerial positions, 61 were employed in non-managerial sales
positions, 108 were employed in non-managerial parts and service positions and
88 were employed in administrative support positions.
Hometown believes that its relationships with its employees are favorable.
None of the employees is represented by a labor union. Because of its dependence
on the Manufacturers, the Company may, however, be affected by labor strikes,
work slowdowns and walkouts at the manufacturing facilities of their
Manufacturers or of suppliers to, or shippers for, their Manufacturers.
55
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company and their respective
ages as of January 31, 1998 are as follows:
Name Age Position
---- --- --------
Salvatore A. Vergopia 58 Chairman of the Board and Chief Executive
Officer
Joseph Shaker 30 President, Chief Operating Officer and
Director
William C. Muller Jr. 46 Vice President--New Jersey Operations and
Director
Corey Shaker 40 Vice President--Connecticut Operations and
Director
Edward A. Vergopia 28 Vice President--Fleet Operations and Director
James Christ 41 General Manager--Muller Toyota and Director
John Rudy 55 Chief Financial Officer and Secretary
Steven Shaker 28 Vice President--Parts and Service
Matthew J. Visconti Jr.(1) 41 Vice President--Mergers and Acquisitions
Domenic Colasacco(2) 49 Director
Steven A. Hirsh(2) 58 Director
Louis I. Margolis(2) 53 Director
- ----------------
(1) Mr. Visconti will take office immediately after the closing of the Offering.
(2) Messrs. Colasacco, Hirsh and Margolis will take office as directors
effective 45 days after the closing of this Offering.
All directors hold office until the next annual meeting of shareholders
and until their successors are duly elected and qualified. Officers are elected
to serve subject to the discretion of the Board of Directors.
Set forth below is a brief description of the background and business
experience of the executive officers and directors of the Company:
Salvatore A. Vergopia has been Chairman of the Board and Chief Executive
Officer since October 1, 1997. In addition, from 1992 to date, he has been
President and for over 20 years prior thereto, Vice President of Westwood
Lincoln Mercury Sales Inc. Under his management, Westwood has been a winner of
numerous awards, including: (a) Lincoln-Mercury 100 Champions Leadership
Conference award in each of the past 25 years; (b) North American Customer
Excellence Award; and (c) Ford Motor Credit Company's Partners in Quality Award.
In addition to his responsibilities as a dealer, he has served on the Customer
Dispute Settlement Board for New Jersey and Connecticut and is a member and past
Chairman of the Ford Lincoln-Mercury NADA 20 Group. He holds a B.S. degree from
Arizona State University.
Joseph Shaker has been the President and Chief Operating Officer since
October 1, 1997 and is in charge of the Company's dealer acquisition program,
including the implementation of such programs as may be necessary to assimilate
new dealers into Hometown's operational model. In addition, from 1991 to date,
he has been the Chief Operating Officer of Shaker's Lincoln Mercury, Shaker's
Jeep Eagle and Lincoln Mercury Autocare in Connecticut. In 1992, at the request
of Ford Motor Company, he developed the pilot free-standing neighborhood
Autocare Center which has become the model for Ford's free-standing neighborhood
auto maintenance centers. He also started Shaker's Lincoln Mercury limousine
department in 1992 and has been responsible for its growth and implementation.
He is a Member of the Executive Committee of the NADA 20 Group. He holds a B.S.
(Management) degree from Bentley College.
56
William C. Muller Jr. has been Vice President - New Jersey Operations
since October 1, 1997. In addition, from 1980 to date, he has been the President
of Muller Toyota, Inc. and of Muller Chevrolet, Oldsmobile, Isuzu, Inc. Under
his management, Muller Toyota has been: (a) a 9-time recipient of Toyota's
Prestigious President's Award, given to those dealers with superior levels of
customer satisfaction who also exceed capital standards and have high market
penetration and facilities that meet or exceed Toyota standards; (b) a 13-time
recipient of Toyota Parts Excellence Award; (c) a 9-time winner of Toyota
Service Excellence Award; and (d) a 3-time winner of Toyota's Sales Excellence
Award. He holds a B.A. degree from Fairleigh Dickinson University.
Corey Shaker has been Vice President - Connecticut Operations since
October 1, 1997 and is in charge of Hometown's Company-wide sales training
efforts. In addition, from 1989 to date, he has been Chief Operating Officer and
General Manager of Family Ford Inc. where he was responsible for all aspects of
its operations. He is a member of NADA Ford F01 20 group. He was awarded the
Lincoln Mercury Salesperson of the Nation award in 1980 and is a three time
winner of the Lincoln Mercury Inner Circle award. He holds a B.S. in Business
Administration from Providence College.
Edward A. Vergopia has been Vice President - Fleet Operations since
October 1, 1997. In addition, from 1988 to date, he has been Executive Vice
President of Westwood where, among other responsibilities, he managed the
Lincoln Mercury Division of Spoilers Plus (custom cars) and Westwood Lincoln
Mercury Limousine Department. During those periods, he also worked in the
Leasing, Financing and Parts and Service Departments of Westwood Lincoln
Mercury. He holds a B.B.A. from the University of Miami.
James Christ has been General Manager of the Muller Toyota division of the
Company since October 1, 1997. In addition, from 1995 to date, he has been
General Manager of Muller Toyota in Clinton, New Jersey. From March 1986 to
November 1994, he was Vice President and General Manager of Liberty Toyota, Inc.
in Burlington, New Jersey and from August 1989 to November 1994, he was Vice
President of Richardson Imports, Inc. a Lexus dealership, in Cherry Hill, New
Jersey. Prior thereto he had more than 5 years experience in managerial
capacities at Toyota. He holds a B.S. in Business Administration from West
Chester University.
John C. Rudy has been Chief Financial Officer since October 1, 1997 and,
upon the closing of the Offering, will assume full-time status. His
responsibilities include financial reporting, accounting and computer systems.
In addition, from 1992 to date, he has been President of Beacon Business
Services, Inc., a business consulting firm providing business strategy,
financial, and accounting services to small and mid-size businesses. From 1990
to 1992, he directed the Metropolitan New York area troubled business practice
for Coopers & Lybrand, and from 1987 through 1989, served as Chief Financial
Officer for Plymouth Lamston Stores Corporation, a chain of retail stores in New
York City. He holds a Bachelor of Science Degree in Economics from Albright
College in Reading, Pennsylvania, an MBA from Emory University in Atlanta,
Georgia, and is a Certified Public Accountant in New York State.
Steven Shaker has been Vice President in charge of Parts and Service since
October 1, 1997. In addition, from 1992 to date, he has been Director of Parts
and Service of all of the Shaker Group's operations and was instrumental in the
implementation of the pilot program to develop the Ford Motor Company's first
Autocare automobile service center. He holds a B.A. degree from Salve Regina
College.
Matthew J. Visconti Jr. will become Vice President--Mergers and
Acquisitions upon the closing of the Offering. During 1997 he served as one of
the organizers of the Company and consulted with it on
57
merger and acquisition matters. From January 1996 to December 1996, he was
General Manager of the Ray Catena Company which held Jaguar and Porsche
franchises in Edison, New Jersey. Prior thereto, from July 1994 to December
1995, he was General Sales Manager of Town Motors in Englewood, New Jersey which
held Audi, Lincoln, Mercury, Porsche, Subaru and Suzuki franchises. From prior
to 1992 to April 1994, he was an owner and President of The Blake Group, Inc., a
business consultant specializing in merger and acquisition transactions in the
retail automobile sector.
Domenic Colasacco is Chairman of the Board and President of United States
Trust Company (USTC), a Boston based firm specializing in trust and investment
management services for institutional and personal clients. Mr. Colasacco has
been serving as the Chief Investment Officer of USTC since 1980. From 1990 to
March 1998, he was also a director of UST Corp., the holding company for USTC
and USTrust, a commercial and retail bank in Greater Boston. He holds both a
bachelors degree and an M.B.A. from Babson College and is a Chartered Financial
Analyst.
Steven A. Hirsh has been a portfolio manager for William Harris & Co., a
financial services company, for more than five years. Since 1994 he has also
been Chairman, Chief Executive Officer and President of Astro Communications,
Inc., a manufacturer of strobe lights. Mr. Hirsh has been a director of Complete
Management, Inc., a physician practice management company since 1996 and Market
Guide, Inc, a financial data base company since 1997. He holds a Bachelor of
Science degree from the University of Colorado and a Master of Business
Administration from the University of Chicago.
Louis I. Margolis has been a General Partner of Pine Street Associates,
L.P., a private investment partnership that invests in other private limited
partnerships since January 1994. In January 1997, Mr. Margolis formed and is the
President and sole shareholder of Chapel Hill Capital Corp., a financial
services company. From 1991 through 1993, he was a Member of the Management
Committee of Nomura Securities International. From 1993 through 1995, he was
Chairman of Classic Capital Inc., a registered investment advisor. Mr. Margolis
has been a director of Milestone Scientific, Inc., a manufacturer of dental
devices, since 1997. Mr. Margolis has been a member of the Financial Products
Advisory Committee of the Commodity Futures Trading Commission since its
formation in 1986, a Trustee of the Futures Industry Institute since 1991 and a
Trustee of Saint Barnabas Hospital in Livingston, New Jersey since 1994.
Committees of the Board of Directors
The Company's Board of Directors has established Compensation and Audit
committees, whose members will be Messrs. Colasacco, Hirsh and Margolis. The
Compensation Committee reviews and recommends to the Board of Directors the
compensation and benefits of all officers of the Company, reviews general policy
matters relating to compensation and benefits of employees of the Company and
administers the issuance of stock options and discretionary cash bonuses to the
Company's officers, employees, directors and consultants. The Audit Committee
meets with management and the Company's independent public accountants to
determine the adequacy of internal controls and other financial reporting
matters. It is the intention of the Company to appoint only independent
directors to the Audit and Compensation Committees.
58
Compensation of Executive Officers
The following table sets forth certain summary information for the year
ended December 31, 1997 with respect to compensation paid to Hometown's Chief
Executive Officer and four highest paid other officers by the Core Operating
Companies for services provided to such Core Operating Companies:
Other Annual
Name and Principal Position Salary(1) Bonus(2) Compensation(3)
Salvatore A. Vergopia, Chairman & Chief
Executive Officer $ 174,950 $380,000 $ 10,557
Joseph Shaker, President and Chief
Operating Officer $ 81,000 $100,000 $ 1,357
William C. Muller Jr., Vice President--
New Jersey Operations $ 259,247 -- $ 52,444
Corey Shaker, Vice President --
Connecticut Operations $ 114,400 $100,000
Edward A. Vergopia, Vice President -
Fleet Operations $ 129,388 $250,000
James Christ, General Manager -
Muller Toyota $ 108,000 $113,000
(1) Does not include the dollar value of perquisites and other personal
benefits.
(2) The amounts shown are cash bonuses earned in the specified year and paid
in the first quarter of the following year.
(3) Consists of excess life insurance for Salvatore Vergopia, extra disability
insurance on Joe Shaker, and life insurance on co-owner for William C.
Muller, Jr.
Compensation Committee Interlocks and Insider Participation
Until after the consummation of the Offering, Hometown will have no
Compensation Committee or other Board committee performing equivalent functions.
Compensation contracts have been approved by the entire Board of Directors,
consisting of: Salvatore A. Vergopia; Joseph Shaker; William C. Muller Jr.;
Corey Shaker; Edward A. Vergopia; and James Christ.
Employment Contracts
In April 1998, Hometown entered into five-year employment agreements,
effective upon the closing of the Offering, with the following key personnel of
the Core Operating Companies: Salvatore A. Vergopia as Chairman and Chief
Executive Officer, Joseph Shaker as President and Chief Operating Officer,
William C. Muller Jr. as Vice President - New Jersey Operations, Corey Shaker as
Vice President - Connecticut Operations, Edward A Vergopia as Vice President -
Fleet Operations, James Christ as General Manager - Muller Toyota; and Steven
Shaker as Vice President - Parts and Service. The Company also entered into a
five-year employment agreement with Matthew J. Visconti to become Vice
59
President -- Mergers and Acquisitions. Each agreement provides for an annual
base salary of $200,000, except that the agreement with James Christ provides
for an annual base salary of $150,000 plus an annual bonus equal to five percent
of the pre-tax profits of Muller Toyota, the agreement with Steven Shaker
provides for an annual base salary of $100,000 and the agreement with Mr.
Visconti provides for an annual base salary of $150,000. Each agreement also
provides for participation by the employee in all executive benefit plans and,
if employment is terminated without cause (as defined in the agreement), payment
of an amount equal to the salary which would have been payable over the
unexpired term of his employment agreement.
Stock Options
In February 1998, in order to attract and retain persons necessary for the
success of the Company, Hometown adopted its 1998 Stock Option Plan (the "Stock
Option Plan") covering up to 480,000 shares of Class A Common Stock. Pursuant to
the Stock Option Plan officers, directors and key employees of the Company and
consultants to the Company are eligible to receive incentive and/or
non-incentive stock options. The Stock Option Plan, which expires in January
2008, will be administered by the Board of Directors or a committee designated
by the Board of Directors. The selection of participants, allotment of shares,
determination of price and other conditions relating to the purchase of options
will be determined by the Board of Directors, or a committee thereof, in its
sole discretion. Stock options granted under the Stock Option Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Common Stock on the
date of the grant, except that the term of an incentive stock option granted
under the Stock Option Plan to a stockholder owning more than 10% of the
outstanding Common Stock may not exceed five years and its exercise price may
not be less than 110% of the fair market value of the Common Stock on the date
of the grant. As of the effective date of the Offering, options for an aggregate
of 240,000 shares, exercisable at the Offering price during a five-year period,
were granted to eight officers and nine other employees of the Company and were
outstanding under the Stock Option Plan. These options will be exercisable for
one-third of the shares covered thereby on the first anniversary of the date of
the grant and for an additional one-third of the shares covered thereby each
year thereafter. In addition, options for 5,000 shares will be granted to each
of the Company's outside directors upon their taking office. Options granted to
outside directors will be exercisable at the fair market value per share on the
date of grant and will for 50% of the shares covered immediately upon grant and
for the remainder of the shares following one year's service.
60
CERTAIN TRANSACTIONS
Leases
The Company has leased from various affiliates the premises occupied by
certain of its dealerships. Each of these governing leases will become effective
as of the closing of the Offering, have a term expiring in 2013, be on a triple
net basis and provide for a consumer price index ("CPI") increase to the base
rent for the five-year periods commencing January 1, 2004 and 2009.
Shaker Group. The Company will lease, for an initial annual base rental of
$240,000, the premises occupied by its Lincoln Mercury dealership in Watertown,
Connecticut from Shaker Enterprises, a Connecticut general partnership whose
seven partners include Joseph Shaker, Corey Shaker, Steven Shaker and Janet
Shaker. Joseph Shaker is President and Chief Operating Officer of Hometown and,
prior to the Offering, was a 5.17% stockholder. Corey Shaker is Vice
President-Connecticut Operations and, prior to the Offering, was a 6.23%
stockholder. Steven shaker is vice President - Parts and Service and, prior to
the Offering, was a 5.17% stockholder. Janet Shaker was a 5.70% stockholder of
Hometown prior to the Offering.
Muller Group. The Company will lease, for an initial annual base rental of
$360,000 and $396,000 respectively the premises occupied by its Toyota
dealership in Clinton, New Jersey and its Chevrolet/Oldsmobile/Isuzu dealership
in Stewartsville, New Jersey from Rellum Realty Company, a New Jersey general
partnership, one of whose two partners is William C. Muller Jr. Mr. Muller is
Vice President-New Jersey operations and, prior to the Offering, was a 9.42%
stockholder of Hometown.
Westwood. The Company will lease, for an initial annual base rental of
$360,000 the premises occupied by its Lincoln Mercury dealership in Emerson, New
Jersey from Salvatore A. Vergopia and his wife. Mr. Vergopia is Chairman of the
Board and Chief Executive Officer of Hometown and, prior to the Offering,
including shares owned by his wife, was a 17.63% stockholder of Hometown.
Exchange
The executive officers, directors and holders of more than five percent of
any class of the Company's voting securities who are listed in the table under
"Principal Stockholders" received their stock in the Exchange except one officer
included in "all Officers and Directors as a Group" who received 60,000 shares
of Class A Common Stock on the organization of Hometown. See "Exchange."
The Company will pay a fee of $175,000 to Matthew J. Visconti at the
Closing of the Offering for his services in connection with the Exchange. Mr.
Visconti was one of the organizers and will, upon the closing of the Offering,
become Vice President - Acquisitions and Mergers of the Company.
Loans
During the year ended December 31, 1997, a Core Operating Company lent
$59,000 to Corey Shaker, increasing the amount owed by him to that company to
$86,000 at December 31, 1997. The loan bears interest at 6.83% per annum and
will be repaid immediately prior to the closing of the Offering.
During the year ended December 31, 1997, a Core Operating Company: (a)
lent: (i) $769,000 to Salvatore A. Vergopia, increasing the amount owed by him
to that Core Operating Company to $940,000,
61
which is offset by $1,000,000, or a net of $60,000, owed by that company to
Salvatore Vergopia; and (ii) $7,000 to Edward A. Vergopia, increasing the amount
owed by him to that Core Operating Company to $66,000; and (b) received
repayment of $10,000 from Worldwide Financing Co. Ltd. ("WFC"), reducing the
amount owed by WFC to $90,000. The loans to and from Salvatore A. Vergopia each
bear interest at prime rate, which was 8.5% in 1997 and the loans from WFC and
Edward A. Vergopia are each non-interest bearing. All of these loans will be
repaid immediately prior to the closing of the Offering. Edward A. Vergopia is
Vice President - Fleet Operations and a director of the Company and, prior to
the Offering, was a 5.88% Stockholder of Hometown. WFC, which is not being
acquired by the Company, is owned by Salvatore A. Vergopia and his wife.
During the year ended December 31, 1997, a Core Operating Company lent
Rellum Realty Company $106,000, increasing the amount owed to it by Rellum
Realty at year end to $430,000. The loan was repaid in 1998.
Guarantees
A Core Operating Company is the guarantor of a $2,000,000 credit facility
from SEC Funding Corp. ("SFC") pursuant to which loans are made to third party
purchasers of limousines. As at December 31, 1997 loans outstanding under this
credit line were $935,000. SFC is owned by Salvatore and Edward Vergopia and by
a manager at Westwood.
62
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of March 31, 1998, after
giving pro forma effect to the consummation of the Exchange, by each stockholder
known by the Company to be the beneficial owner of more than 5% of its
outstanding shares, by each director of the Company, by the executive officers
named in the table above and by the directors and executive officers as a group
and as adjusted to effect the issuance of shares by the Company in the Offering.
Percent of
Aggregate
Shares Beneficially Shares Beneficially Voting
Owned Owned Rights of
Before this Offering After this Offering all Classes
--------------------- --------------------- -----------
Name of Beneficial Owner(1) Number(3) Percent(2) Number(3) Percent(2)
--------- ---------- --------- ----------
Salvatore A. Vergopia(4).......... 705,000 17.63 705,000 11.75 17.70
Joseph Shaker..................... 206,612 5.17 206,612 3.44 5.19
William C. Muller Jr.............. 470,034 11.75 470,034 7.83 11.80
Corey Shaker...................... 249,100 6.23 249,100 4.15 6.25
Edward A. Vergopia................ 235,000 5.88 235,000 3.92 5.90
James Christ...................... 93,248 2.33 93,248 1.55 2.34
Steven Shaker..................... 206,424 5.17 206,424 3.44 5.18
Paul Shaker....................... 218,268 5.46 218,268 3.64 5.48
Janet Shaker...................... 227,668 5.69 227,668 3.79 5.71
William C. Muller Sr.............. 376,718 9.42 376,718 6.28 9.46
All Officers and Directors as a
group (8 persons)(5)........... 2,225,418 55.64 2,225,418 37.09 54.50
- ------------
(1) The respective addresses of the beneficial owners are: Salvatore A.
Vergopia and Edward A. Vergopia, c/o Westwood Lincoln Mercury, 55
Kinderkamack Road, Emerson, New Jersey 07630; Joseph Shaker, c/o Shaker's
Inc. 831 Straits Turnpike Watertown, Connecticut 06795; William C. Muller
Jr., James Christ and William C. Muller Sr. c/o Muller Toyota, Inc., Route
31, PO Box J, Clinton, New Jersey, 08809; Corey Shaker, Janet Shaker,
Steven Shaker and Paul Shaker, c/o Family Ford, Inc., 1200 Wolcott Street,
Waterbury, Connecticut 06705.
(2) Percentages based on number of shares of all classes.
(3) Class B Common Stock unless otherwise noted.
(4) Includes 225,600 shares owned by his wife Janet.
(5) Includes 60,000 shares of Class A Common Stock owned by one officer.
The Company's officers and directors and holders of more than five percent
of any class of its voting securities have agreed with the Representative that
they will not sell or otherwise dispose of any Common Stock, or any securities
convertible into shares of the Company's Common Stock without the prior written
consent of such Representative until , 1998. After that date,
an aggregate of
63
shares of Common Stock will become eligible for sale pursuant to Rule 144 and
the limitations specified therein.
DESCRIPTION OF CAPITAL STOCK
General
The authorized capital stock of the Company consists of 29,760,000 shares
of which 24,000,000 are shares of Class A Common Stock, par value $.001 per
share, 3,760,000 are shares of Class B Common Stock, par value $.001 per share,
and two million are shares of Preferred Stock, par value $.001 per share,
issuable in series. As of March 31, 1998 none of the shares of Class B Common
Stock or Preferred Stock were outstanding and 240,000 shares of Class A Common
Stock were outstanding. Upon the closing of the Offering and the simultaneous
closings of the Exchange and the Acquisitions, the Company will issue 3,760,000
shares of Class B Common Stock to the stockholders of the Core Operating
Companies and 2,000,000 shares of Class A Common Stock in the Offering.
Common Stock - Class A and Class B
The Class A Common Stock and the Class B Common Stock each have a par
value of $.001 per share and are identical in all respects, except voting rights
and the convertibility of the Class B Common Stock. Subject to any special
voting rights of any series of Preferred Stock that may be issued in the future,
the holders of Class A Common Stock are entitled to one vote per share and the
holders of Class B Common Stock are entitled to ten votes per share. Except as
otherwise required by law, both Class A Common Stock and Class B Common Stock
vote together as one class on all matters to be voted on by stockholders of the
Company, including the election of directors. Class A Common Stock is not
convertible. The Class B Common Stock is convertible into Class A Common Stock
on a share for share basis, at any time at the election of the holder and is
automatically converted into Class A Common Stock upon any transfer to a person
who is not then an officer or director of the Company or of a subsidiary of the
Company. All of the outstanding shares of Class B Common Stock, representing
approximately 94% of the aggregate voting power of the Company upon completion
of the Offering, are beneficially owned by the principals of the Core Operating
Companies, including a majority of the Board of Directors of Hometown. Neither
class of Common Stock has redemption, preemptive or sinking fund rights. Holders
of both classes of Common Stock are entitled to dividends as and when declared
by the Board of Directors from funds legally available therefor and, upon
liquidation, dissolution or winding up of the Company, to participate ratably in
all assets remaining after payment of all liabilities. All shares of Common
Stock issued and outstanding are, and those offered hereby when issued will be,
legally issued, fully-paid and non-assessable. See "Dividend Policy."
Preferred Stock
The Company's Certificate of Incorporation provides that its Board of
Directors has the authority, without further action by the holders of the
outstanding Common Shares, to issue up to two million shares of Preferred Stock
from time to time in one or more classes or series, to fix the number of shares
constituting any class or series and the stated value thereof, if different from
the par value, and to fix the terms of any such series or class, including
dividend rights, dividend rates, conversion or exchange rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price and the liquidation preference of such class or series. The
Company does not have any Preferred Stock outstanding and has no present
intention to issue any Preferred Stock. The designations, rights and preferences
of any Preferred Stock would be set forth in a Certificate of Designation which
would be filed with the Secretary of State of Delaware.
64
Representative's Warrants
In connection with this Offering, the Company will sell to the
Representative, at a price of $____ per Warrant, ______ Representative's
Warrants, entitling the holders thereof to purchase up to 200,000 shares of
Class A Common Stock at a purchase price of $____ per share over a four year
period commencing one year from the effective date of the Offering.
Reports
The Company intends to furnish to its stockholders annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited interim financial
information. In addition, the Company is required to file periodic reports on
Forms 8-K, 10-Q and 10-K with the United States Securities and Exchange
Commission and to make such reports available to its stockholders.
Limitation of Directors' Liability; Indemnification
The Company's Certificate of Incorporation limits the liability to the
Company of individual directors for certain breaches of their fiduciary duty to
the Company. The effect of this provision is to eliminate the liability of
directors for monetary damages arising out of their failure, through negligent
or grossly negligent conduct, to satisfy their duty of care which requires them
to exercise informed business judgment. The liability of directors under the
federal securities laws is not affected. A director may be liable for monetary
damages only if a claimant can show a breach of the individual director's duty
of loyalty to the Company, a failure to act in good faith, intentional
misconduct, a knowing violation of the law, an improper personal benefit or an
illegal dividend or stock purchase.
The Company's Certificate of Incorporation also provides that each
director or officer of the Company serving as a director or officer shall be
indemnified and held harmless by the Company to the fullest extent authorized by
the General Corporation Law of the State of Delaware against all expense,
liability and loss (including attorneys fees, judgments, fines, Employee
Retirement Income Security Act, excise taxes or penalties and amounts paid or to
be paid in settlement), reasonably incurred or suffered by such person in
connection therewith.
Business Combinations under Delaware Law
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined, generally, as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date on which that person becomes an interested stockholder
unless: (a) before that person became an interested stockholder, the Company's
Board of Directors approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination; (b) upon
completion of the transaction that resulted in the interested stockholder
becoming an interested stockholder, the interested stockholder owns at least 85%
of the voting stock outstanding at the time the transaction commenced (excluding
stock held by directors who are also officers of the Company and by employee
stock plans that do not provide employees with the right to determine whether
shares held subject to the plan will be tendered in a tender or exchange offer);
or (c) following the transaction in which that person became an interested
stockholder, the business combination is approved by the Company's Board of
Directors and authorized at a meeting of stockholders by
65
the affirmative vote of the holders of at least two-thirds of the outstanding
voting stock not owned by the interested stockholder. Under Section 203, these
restrictions also do not apply to certain business combinations proposed by an
interested stockholder following the announcement or notification of one of
certain extraordinary transactions involving the Company and a person who was
not an interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the Company's
directors, if that extraordinary transaction is approved or not opposed by a
majority of the directors who were directors before any person became an
interested stockholder in the previous three years or who were recommended for
election or elected to succeed such directors by a majority of such directors
the in office.
Stockholders' Agreement
The stockholders of the Core Operating Companies have entered into a
Stockholders' Agreement pursuant to which they have agreed, except under certain
circustances, to vote all of their shares, for a period of five years, in favor
of the election to the Board of Directors of Salvatore A. Vergopia, Joseph
Shaker, William C. Muller Jr., Corey Shaker, Edward A. Vergopia and James Christ
and to vote on all other matters in accordance with the recommendations of the
majority of the Board. Salvatore A. Vergopia is Chairman of the Board and Chief
Executive Officer of the Company, and Joseph Shaker is President and Chief
Operating Officer of the Company. Mr. Muller is Vice President--New Jersey
Operations, Corey Shaker, a cousin of Joseph Shaker, is Vice
President--Connecticut Operations, Edward A. Vergopia, the son of Salvatore A.
Vergopia, is Vice President--Fleet Operations and James Christ is General
Manager--Muller Toyota. These six directors, beneficially own approximately
52.1% of the Company's outstanding Class B Common Stock which, after the
Offering, will represent approximately 49.2% of the combined voting power of all
classes of Common Stock and, accordingly, as long as they vote as required by
the Stockholders' Agreement, will be in a position to elect all of the persons
chosen by them. Further, such control could preclude any unsolicited acquisition
of the Company and consequently affect the market price of the Common Stock
offered hereby.
Listings on Nasdaq National Market
Application has been made for quotation of the Company's Class A Common
Stock on the Nasdaq National Market under the symbol "HCAR."
Transfer Agent and Registrar
The transfer agent and registrar for the Common Shares is Continental
Stock Transfer and Trust Company, 2 Broadway, New York, New York 10004.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
2,240,000 shares of Class A Common Stock and 3,760,000 shares of Class B Common
Stock. Of these shares, the 2,000,000 shares (or a maximum of 2,300,000 shares
of Class A Common Stock in the event that the Representative exercises its
over-allotment option in full) sold in the Offering, will be freely tradeable
without restrictions under the Securities Act. The remaining 240,000 outstanding
shares of Class A Common Stock and 3,760,000 of Class B Common Stock were issued
by the Company in private transactions in reliance upon one or more exemptions
under the Securities Act, are "restricted securities" within the meaning of Rule
144 under that Act, and may be resold in a public distribution only if
registered under the Securities Act or
66
pursuant to an exemption therefrom, including Rule 144. In general, under Rule
144 a person, including an affiliate of the Company, who has beneficially owned
restricted securities for at least one year is entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
the then outstanding Common Shares and the average weekly trading volume in
composite trading on all exchanges during the four calendar weeks preceding such
sale. In addition, sales under Rule 144 may be made only through unsolicited
"broker's transactions" or to a "market maker" and are subject to various other
conditions.
The Company's executive officers, directors and holders of more than 5% of
its voting securities have agreed with the Representative that they will not
sell or otherwise dispose of any Common Stock or any securities convertible into
Common Stock of the Company without the prior written consent of such
Representatives until , 1999 (the "lock-up period"). After the lock-up period,
such shares of Common Stock will be eligible for sale in the public market
pursuant to Rule 144 if the conditions of that Rule have been met. The Company
is unable to estimate the amount of restricted securities that will be sold
under Rule 144 because this will depend, among other factors, on the market
price for the Common Shares and the personal circumstances of the sellers.
In addition, 240,000 shares of Class A Common Stock are subject to
outstanding options that have been granted to officers, directors and key
employees.
67
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement among
the Company and the Underwriters named below (the "Underwriters"), the Company
has agreed to sell to the Underwriters, for whom Paulson Investment Company,
Inc. is acting as representative (in such capacity, the "Representative"), and
the Underwriters have severally and not jointly agreed to purchase the shares of
Class A Common Stock set forth below:
Underwriters Number of Shares
- ------------ ----------------
Paulson Investment Company, Inc...................
Total................................ 2,000,000
=========
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to the approval of certain legal matters by their
counsel and various other conditions. The Underwriters are obligated to purchase
all of the above shares if any are purchased.
The Company has been advised by the Representative that the Underwriters
propose to offer the shares of Class A Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $__ per share. The
Underwriters may allow, and such dealers may allow, a concession not in excess
of $___ per share to certain other dealers. After the Offering, the offering
price and other selling terms may be changed by the Representative. The Company
has granted to the Underwriters an option exercisable during the 45-day period
commencing on the date of this Prospectus to purchase from the Company, at the
offering price less underwriting discount, up to an aggregate of 300,000 shares
of Class A Common Stock for the sole purpose of covering over-allotments, if
any. To the extent that the Underwriters exercise the option, each Underwriter
will have a firm commitment to purchase approximately the same percentage
thereof that the total number of shares shown in the above table bears to the
total shown, and the Company will be obligated, pursuant to the option, to sell
such additional shares to the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
In connection with this Offering, the Company has agreed to sell to the
Representative, for nominal consideration, warrants (the "Representative's
Warrants") to purchase up to 200,000 shares of its Class A Common Stock. The
Representative's Warrants are exercisable for a period of four years commencing
one year from the date of this Prospectus. The Representative's Warrants provide
for reductions, which in certain circumstances could be material, in the
exercise price of the Representative's Warrants upon the occurrence of certain
events, including the issuance by the Company of shares of its Class A Common
Stock for a price below the market price of such shares, and corresponding
potentially significant increases in the number of shares purchasable upon
exercise of the Representative's Warrants. The Representative's
68
Warrants also provide for adjustment of the type of securities issuable upon
exercise of the Representative's Warrants to reflect changes in the Class A
Common Stock. The Representative's Warrants grant to the holders thereof certain
rights with respect to the registration under the Securities Act of the
securities issuable upon exercise of the Representative's Warrants.
The foregoing is a summary of the principal terms of the agreements
described above and does not purport to be complete. Reference is made to copies
of each such agreement which are filed as exhibits to the Registration
Statement, of which this Prospectus forms a part. See "Available Information."
LEGAL MATTERS
Morse, Zelnick, Rose & Lander, LLP, 450 Park Avenue, New York, New York
10022, counsel to the Company, will render an opinion that the shares of Class A
Common Stock offered hereby, when issued and paid for in accordance with the
terms of the Underwriting Agreement, will be duly authorized, validly issued,
fully paid and nonassessable. Greenberg Traurig Hoffman Lipoff Rosen & Quentel,
200 Park Avenue, New York, New York 10166, has acted as counsel to the
Underwriters in connection with the Offering. Partners in Morse, Zelnick, Rose &
Lander, LLP own an aggregate of 60,000 shares of Class A Common Stock.
EXPERTS
The financial statements and schedules included in this prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
69
AVAILABLE INFORMATION
The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. The Company has filed with
the Securities and Exchange Commission (the "Commission") a Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act,
with respect to the offer and sale of Common Stock pursuant to this Prospectus.
This Prospectus, filed as a part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement or the exhibits
and schedules thereto in accordance with the rules and regulations of the
Commission and reference is hereby made to such omitted information. Statements
made in this Prospectus concerning the contents of any contract, agreement or
other document filed as an exhibit to the Registration Statement are summaries
of the terms of such contract, agreement or document and are not necessarily
complete. Reference is made to each such exhibit for a more complete description
of the matters involved and such statements shall be deemed qualified in their
entirety by such reference. The Registration Statement and the exhibits and
schedules thereto filed with the Commission may be inspected, without charge,
and copies may be obtained at prescribed rates, at the public reference facility
maintained by the Commission at its principal office at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 11400,
Chicago, Illinois 60661. The Commission also maintains a Website
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. For further information pertaining to the Common Stock offered by
this Prospectus and the Company, reference is made to the Registration
Statement.
The Company intends to furnish to its stockholders annual reports
containing audited financial statements certified by independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.
This Prospectus does not contain all of the information set forth in the
Registration Statement on Form S-l, of which this Prospectus forms a part, and
the exhibits thereto which the Company has filed with the SEC under the
Securities Act, to which reference is hereby made for further information
concerning the Company and the shares of Class A Common Stock offered hereby.
70
==============================================================================
No person has been authorized to give any information or to make any
representation not contained in this Prospectus, and, if given or made, such
information or representation must not be relied upon as having been authorized
by the Company or by any Underwriter. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to buy any security other than the
shares of Common Stock offered hereby, nor does it constitute an offer to sell
or a solicitation of an offer to buy any of the securities offered hereby to any
person in any jurisdiction in which it is unlawful to make such an offer or
solicitation to such person. Neither the delivery of this Prospectus nor any
offer or sale made hereby shall under any circumstance imply that the
information contained herein is correct as of any date subsequent to the date
hereof.
TABLE OF CONTENTS
Page
----
Prospectus Summary .....................................................
Risk Factors ...........................................................
Use of Proceeds ........................................................
Dividend Policy ........................................................
Capitalization .........................................................
Dilution ...............................................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ...........................................................
Business ...............................................................
Management .............................................................
Certain Transactions ...................................................
Description of Capital Stock ...........................................
Shares Eligible for Future Sale ........................................
Underwriters ...........................................................
Legal Matters ..........................................................
Experts ................................................................
Additional Information .................................................
Index to Consolidated Financial
Statements ...........................................................
Until ______________, 1998 [25] days after the commencement of the
offering], all dealers effecting transactions in the Common Stock, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
================================================================================
2,000,000 Shares
HOMETOWN AUTO RETAILERS, INC.
CLASS A COMMON STOCK
-------------
PROSPECTUS
-------------
Paulson Investment Company, Inc.
Dated May , 1998
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
Expenses in connection with the issuance and distribution of the
securities being registered hereunder other than underwriting commissions and
expenses, are estimated below.
SEC registration fee.............................................. $ 2,654.30
NASD registration fee............................................. 3,294.00
NASDAQ listing fee................................................ 17,700.00
Printing expenses................................................. 100,000.00
Accounting fees and expenses...................................... 350,000.00
Legal fees and expenses........................................... 400,000.00
State securities law fees and expenses including
fees of counsel................................................. 10,000.00
Transfer Agent and Registrar Fees................................. 5,000.00
Stock Certificate Expenses........................................ 1,000.00
Miscellaneous expenses............................................ 10,351.70
-----------
Total........................................................ $900,000.00
===========
- ----------
* To be filed by amendment
Item 14. Indemnification of Directors and Officers
Sections 145 of the Delaware General Corporation Law grants to the Company
the power to indemnify the officers and directors of the Company, under certain
circumstances and subject to certain conditions and limitations as stated
therein, against all expenses and liabilities incurred by or imposed upon them
as a result of suits brought against them as such officers and directors if they
act in good faith and in a manner they reasonably believe to be in or not
opposed to the best interests of the Company and, with respect to any criminal
action or proceeding, have no reasonable cause to believe their conduct was
unlawful.
The Company's certificate of incorporation provides as follows:
"NINTH: A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit.
TENTH: (a) Right to Indemnification. Each person who was or is made
a party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer,
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
II-1
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment), against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators: provided, however, that, except
as provided in paragraph (b) hereof, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized by the board of directors of the Corporation. The right to
indemnification conferred in this Section shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition: provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer (in his or her capacity as a
director or officer and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Section or otherwise. The
Corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
(b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of
this Section is not paid in full by the Corporation within thirty days after a
written claim has been received by the Corporation, the claimant may at any time
thereafter bring suit against the Corporation to recover the unpaid amount of
the claim and, if successful in whole or in part, the claimant shall be entitled
to be paid also the expense of prosecuting such claim. It shall be a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any proceeding in advance of its final disposition where
the required undertaking, if any is required, has been tendered to the
Corporation) that the claimant has not met the standards of conduct which make
it permissible under the Delaware General Corporation Law for the Corporation to
indemnify the claimant for the amount claimed, but the burden of proving such
defense shall be on the Corporation. Neither the failure of the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
stockholders) that the claimant has not met such applicable standard or conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
(c) Non-Exclusivity of Rights. The right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition conferred in this Section shall not be exclusive of any other right
which any person may have or hereafter acquire under any statute, provision of
the Certificate of Incorporation, by-law, agreement, vote of stockholders or
disinterested directors or otherwise.
(d) Insurance. The Corporation may maintain insurance, at its expense, to
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would
II-2
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law."
Item 15. Recent Sales of Unregistered Securities
During the past three years the Company has issued the following
unregistered securities:
(a) In March 1997 the Company issued an aggregate of 240,000 shares of
Class A Common Stock1 to its four organizers as follows: 60,000
shares to Matthew J. Visconti Jr.;60,000 shares to Morse, Zelnick,
Rose & Lander, LLP; 60,000 shares to Joseph Lauria, Esq.; and 60,000
AutoInfo, Inc. Mr. Visconti will become Vice President of the
Company upon the closing of the Offering.
(b) At the closing of the Offering the Company will issue an aggregate
of 3,760,000 shares of Class B Common Stock to the stockholders of
the Founding Dealers as follows: an aggregate of 1,880,000 shares to
the 12 stockholders of the parent company of the Shaker Group
including 206,612 shares to Joseph Shaker, President and Chief
Operating Officer and a Director of the Company, 249,100 shares to
Corey Shaker, Vice President - Connecticut Operations and a Director
of the Company, 206,424 shares, 218,268 shares, and 277,668 shares,
respectively, to Steven Shaker, Paul Shaker and Janet Shaker, all of
whom are holders of more than 5% of the voting securities of the
Company prior to the Offering; an aggregate 940,000 shares to the
stockholders of the Muller Group including 470,034 shares to William
C. Muller Jr., Vice President - New Jersey Operations, 93,248 shares
to James Christ, General Manager - Muller Toyota and a Director of
the Company and 376,718 shares to William C. Muller Sr. a holder of
more than 5% of the voting securities of the Company prior to and
after giving effect to the Offering; and 940,000 shares to the
stockholders of Westwood, consisting of 479,400 shares to Salvatore
A. Vergopia, Chairman of the Board and Chief Executive Officer of
the Company, 225,600 shares to Janet Vergopia, the wife of Salvatore
A. Vergopia and 235,000 shares to Edward A. Vergopia, Vice President
- Fleet Operations and a Director of the Company and the son of
Salvatore and Janet Vergopia.
The shares issued or to be issued in each of the above transactions have
been or will be issued for investment and without a view to distribution and
each share certificate bears or will bear an appropriate restricted security
legend. Each of the transactions did not involve a public offering of the
Company's securities and were exempt from the registration requirements of the
Securities Act pursuant to Section 4(2), thereof.
Item 16. Exhibits
Exhibit No. Description
- ----------- -----------
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation of Dealer-Co., Inc.
(NY-3/10/97)
3.2 Certificate of Incorporation of Hometown Auto Retailers,
Inc. (Del-6/5/97)
- ----------
(1) Adjusted to give effect to the re-classification and split in 1998 of 20
shares of Common Stock into 240,000 shares of Class A Common Stock.
II-3
3.3 Certificate of Ownership and Merger of Dealer-Co., Inc.
into Hometown Auto Retailers, Inc. (Del-6/27/97)
3.4 Certificate of Merger of Dealer-Co., Inc. and Hometown
Auto Retailers, Inc. into Hometown Auto Retailers, Inc.
(the "Company") (NY-9/11/97)
3.5 Certificate of Amendment of the Certificate of
Incorporation filed February 19, 1998
3.6 Certificate of Amendment of the Certificate of
Incorporation to be filed May , 1998
3.7 By-Laws of the Company
4.1 Form of Class A Common Stock Certificate *
4.2 Form of Class B Common Stock Certificate*
4.3 Form of Warrant Agreement between the Company and Paulson
Investment Company and related Warrant*
4.4 Stock Option Plan of the Company
5.1 Opinion of Morse, Zelnick, Rose & Lander, LLP as to
legality of the securities being registered.*
10.1 Exchange Agreement, dated as of the 1st day of July, 1997,
among the Registrant and the members of the Shaker Group,
the Muller Group and the Westwood Group (Exchange)
10.2 Agreement, dated July 2, 1997, between the Registrant and
Brattleboro Chrysler Plymouth Dodge, Inc. (an
Acquisition), Amendment dated November 11, 1997 and April
14, 1998.
10.3 Agreement, dated August 14, 1997, between the Registrant
and Leominster Lincoln Mercury, Inc., dba Bay State
Lincoln Mercury (an Acquisition) and Amendments dated
October 31, 1997 and April 14, 1998, respectively
10.4 Stockholders Agreement, dated as of the 16th day of
February 1998, among the Shaker Stockholders, the Muller
Stockholders and the Westwood Stockholders
10.5 Employment Agreement, dated as of the 20th day of April,
1998, between the Registrant and Salvatore A. Vergopia
10.6 Employment Agreement, dated as of the 20th day of April,
1998, between the Registrant and Joseph Shaker
10.7 Employment Agreement, dated as of the 20th day of April,
1998, between the Registrant and William C. Muller Jr.
II-4
10.8 Employment Agreement, dated as of the 20th day of April,
1998, between the Registrant and Corey Shaker
10.9 Employment Agreement, dated as of the 20th day of April,
1998, between the Registrant and Edward A. Vergopia
10.10 Employment Agreement, dated as of the 20th day of April,
1998, between the Registrant and James Christ
10.11 Proposed employment Agreement, dated as of the 20th day of
April, 1998, between the Registrant and Matthew J.
Visconti Jr.*
10.12 Employment Agreement, dated as of the 20th day of April,
1998, between the Registrant and Steven Shaker
10.13 Lease, dated as of April 20, 1998, between Shaker
Enterprises, as landlord, and Hometown (Lincoln/Mercury
dealership in Watertown, CT.)
10.14 Lease, dated as of April 20, 1998, between Joseph Shaker
Realty Company, as landlord, and Hometown (Ford dealership
in Waterbury, CT.)
10.15 Lease, dated as of April 20, 1998, between Joseph Shaker
Realty Company, as landlord, and Hometown (Jeep/Eagle
dealership Waterbury, CT.)
10.16 Lease, dated as of April 20, 1998, between Rellum Realty
Company, as landlord, and Hometown (Toyota dealership in
Clinton, NJ)
10.17 Lease, dated as of April 20, 1998, between Rellum Realty
Company, as landlord, and Hometown
(Chevrolet/Oldsmobile/Isuzu dealership In Stewartville,
NJ)
10.18 Lease, dated as of April 20, 1998, between Salvatore A.
Vergopia and Janet Vergopia, as landlord, and Hometown
(Lincoln Mercury dealership in Emerson, NJ)
10.19 Inventory Loan and Security Agreement between Toyota Motor
Credit Corporation and Muller Toyota, Inc.; Commercial
Promissory Notes; Dealer Floor Plan Agreement
10.20 Ford Motor Company Automotive Wholesale Installment Sale
and Security Agreement with Shakers, Inc.; Power of
Attorney for Wholesale Installment Sale Contract; and
Automotive Installment Sale Contract
10.21 Ford Motor Company Automotive Wholesale Installment Sale
and Security Agreement with Family Ford, Inc. and Power of
Attorney for Wholesale
10.22 Chrysler Financial Security Agreement and Master Credit
Agreement with Shaker's Inc.
23.1 Consent of Arthur Andersen LLP
II-5
23.2 Consent of Morse, Zelnick, Rose & Lander, LLP (included in
Exhibit 5.1)*
23.3 Consent of Domenic Colasacco
23.4 Consent of Steven Hirsh
23.5 Consent of Louis I. Margolis
25.1 Power of Attorney of certain of Hometown's Officers and
directors (included on signature page)
99.1 Form of Warrant Agreement dated as of _____ __, 1998.*
- -----------
* To be filed by amendment.
Item 17. Undertakings
A. The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933:
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement, and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-6
(4) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(5) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
B. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-7
HOMETOWN AUTO RETAILERS, INC.
INDEX TO UNAUDITED PRO FORMA FINANCIAL PAGES
Basis of Presentation F-2
Unaudited Pro Forma Balance Sheets, December 31, 1997 F-4
Unaudited Pro Forma Statements of Operations, December 31, 1997 F-5
Notes to the Unaudited Pro Forma Financial Statements F-6
INDEX TO CORE OPERATING COMPANIES AND THE ACQUISITIONS
Name Representing these Entities
HOMETOWN Hometown Auto Retailers, Inc.
SHAKER E.R.R. Enterprises, Inc. and Subsidiaries
Shaker's, Inc.
Family Ford, Inc.
Family Rental, Inc.
Shaker's Lincoln Mercury Auto Care, Inc.
WESTWOOD Westwood Lincoln Mercury Sales, Inc.
MULLER Muller Toyota, Inc.
Muller Chevrolet, Oldsmobile, Isuzu, Inc. (Note 1)
William Chevrolet, Inc. (Inactive)(Note 1)
BAY STATE Leominster Lincoln Mercury, Inc.
(DBA Bay State Lincoln Mercury)
BRATTLEBORO Brattleboro Chrysler Plymouth Dodge, Inc.
Notes:
(1) The independent operations of William Chevrolet, Inc. have been
discontinued and for presentation purposes, the residual balance sheet
accounts have been combined with Muller Chevrolet, Oldsmobile, Isuzu,
Inc..
F-1
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited pro forma combined financial statements give effect to the
Exchange, the Acquisitions and consummation of the Offering as discussed below:
Exchange
In May 1997, the Core Operating Companies agreed, in principle, to combine
their dealerships in Hometown. Effective, as of July 1, 1997, the stockholders
of the Core Operating Companies entered into an Exchange Agreement pursuant to
which they agreed to exchange all of the outstanding shares of four corporations
operating six franchised dealerships, one collision repair center and one
factory authorized freestanding auto service center, for 3,760,000 shares of
Hometown Class B Common Stock as follows: 1,880,000 shares to the stockholders
of Shaker; 940,000 shares to the shareholders of Westwood; and 940,000 shares to
the stockholders of Muller.
The consideration to be paid by the Company to each of the stockholders in
the Core Operating Companies was determined by negotiations among the respective
principals of the Core Operating Companies as to the relative value of each of
the dealerships, which they controlled. As such, no one individual determined
the consideration to be paid. The Company and the principals of the Core
Operating Companies did not use an independent third party to determine the
relative values of each dealership but agreed among themselves on the values
attributable to each based on an evaluation of operating results, prospects for
growth and financial position.
The Exchange agreement is subject to certain conditions including, among
others: (i) the continuing accuracy on the closing date of the representations
and warranties of the applicable Core Operating Companies and the Company; (ii)
the performance of each of the covenants by the applicable Core Operating
Companies (iii) the receipt of all permits, approvals and consents required for
transfer of ownership of the Core Operating Companies and their assets including
the consent of the applicable manufacturers.
Acquisitions
In July and August 1997, under the direction of its Core Operating
Companies, the Company entered into two agreements (the "Acquisitions") to
acquire certain assets and liabilities of two dealerships in Massachusetts and
Vermont for an aggregate consideration of $5.7 million. A portion of the
proceeds from the Offering will be applied to the purchase price of the
Acquisitions. Each of the Acquisitions is subject to satisfaction of various
conditions precedent, including the achieving by each of the sellers of certain
levels of income, the receipt of factory consents from all automobile
manufacturers whose franchises are held by each of the sellers and the Closing
of the Offering being made hereby on or prior to July 15, 1998.
Initial Public Offering (the Offering)
The net proceeds to the Company from the sale of 2,000,000 shares of Class
A Common Stock, based upon an assumed initial public offering price of $10.00
per share, are estimated to be $17.2 million ($19.9 million if the Underwriters'
over-allotment option for an additional 300,000 shares is exercised in full)
after deducting the underwriting discount and estimated expenses of this
Offering. Of the net proceeds, approximately $5.7 million will be used to pay
the purchase price of the Acquisitions. In addition, approximately $.8 million
will be used to repay indebtedness with a weighted average interest rate of
approximately 10.1%. The remainder of the net proceeds will be used for working
capital and general corporate purposes, including possible use in additional
acquisitions of dealerships and for expansion of the livery sales business.
Pending such allocation of the remainder, that portion of the proceeds will be
used to reduce floor plan financing indebtedness.
Hometown, the Core Operating Companies, and the Acquisitions are
hereinafter referred to as the Company. The Exchange and the Acquisitions have
been accounted for using the purchase method of accounting.
F-2
Shaker, the parent of one group of Core Operating Companies, has been identified
as the acquiror for financial statement presentation purposes in accordance with
SAB No. 97 because its stockholders hold the largest single number of shares of
Class B Common Stock in the Exchange, which shares represent the single largest
voting interest in the Company. The unaudited pro forma combined financial
statements also give effect to the issuance of Common Stock, which was issued by
the Company to the sellers of the Core Operating Companies. These statements are
based on the historical financial statements of the Core Operating Companies and
Acquisitions and the estimates and assumptions set forth below and should be
read in conjunction with such financial statements and related notes thereto
included in this document.
The unaudited pro forma combined balance sheet gives effect to these
transactions (the Exchange, the Acquisitions and the Offering) as if they had
occurred on January 1, 1997. The unaudited pro forma combined statements of
operations for the year ended December 31, 1997 give effect to these
transactions as if they had occurred at the beginning of the period, January 1,
1997.
The Company believes that the accompanying unaudited pro forma combined
financial information contains all the material adjustments necessary to fairly
present its financial position as of December 31, 1997. The unaudited pro forma
financial information presented does not purport to be indicative of the
financial position or operating results which would have been achieved had the
acquisitions taken place at the dates indicated and should not be construed as
representative of the Company's financial position or results of operations for
any future date or period.
The unaudited pro forma adjustments are based on available information and
upon certain assumptions that the Company believes are reasonable under the
circumstances; however, the actual recording of the acquisitions will be based
on ultimate appraisals, evaluations and estimates of fair value. If these
appraisals and evaluations identify assets with lives shorter than 40 years,
such assets will be amortized over their expected useful lives. Periodically,
but no less than annually, the Company will evaluate the relative fair market
value of the intangible assets identified in its acquisitions by estimating the
future earnings streams of the related business lines and comparing the present
value of the result of that estimation to the stated value of the related
assets. Impairments, if any, will be charged to operations when identified.
F-3
UNAUDITED PRO FORMA BALANCE SHEETS
As of December 31, 1997
(in thousands)
Muller
-----------------
Hometown Shaker Westwood Toyota Chevy Bay State
-------- -------- -------- -------- -------- ----------
Current Assets
Cash and cash equivalents ............................ $ 47 $ 3,539 $ 431 $ 614 $ 148 $ --
Accounts receivable, net ............................. -- 914 1,933 495 156 --
Inventories .......................................... -- 7,609 10,545 3,972 5,169 1,950
Prepaid expenses and other current assets ........... 103 234 132 16 11 --
Deferred income taxes ................................ -- -- 205 -- -- --
-------- -------- -------- -------- -------- ----------
Total current assets .............................. 150 12,296 13,246 5,097 5,484 1,950
Property and equipment, net ............................. -- 1,346 238 808 289 278
Receivable from finance companies ....................... -- -- -- 990 294 --
Due from related parties ................................ -- 294 1,096 1,184 -- --
Deferred income taxes ................................... -- -- -- -- -- --
Excess of purchase price over net
tangible assets acquired ............................. -- -- -- -- -- --
Other assets ............................................ -- 106 102 -- 210 --
-------- -------- -------- -------- -------- ----------
Total assets ...................................... $ 150 $ 14,042 $ 14,682 $ 8,079 $ 6,277 $ 2,228
======== ======== ======== ======== ======== ==========
Current Liabilities
Floor plan notes payable ............................. $ -- $ 6,761 $ 10,179 $ 4,492 $ 5,405 $ 1,891
Accounts payable and accrued expenses ................ 1 463 1,207 1,113 286 --
Current maturities of long-term debt ................. -- 278 2 164 80 --
Other current bank borrowings ........................ -- 85 1,000 200 200 --
Advances from officers and affilitates ............... 150 -- -- -- -- 337
Income taxes pabale .................................. -- 146 -- 37 -- --
-------- -------- -------- -------- -------- ----------
Total current liabilities ......................... 151 7,733 12,388 6,006 5,971 2,228
Long-term debt .......................................... -- 107 6 600 321 --
Long-term deferred income taxes ......................... -- 164 -- -- -- --
Due to related parites .................................. -- 888 1,000 -- 754 --
Other long-term liabilities ............................. -- 52 -- 288 -- --
Stockholders' Equity
Common stock ......................................... -- 69 60 30 345 --
Additional paid-in capital ........................... -- -- 76 96 811 --
Treasury stock, at cost .............................. -- -- -- (890) -- --
Retained earnings (deficit) .......................... (1) 5,029 1,152 1,949 (1,925) --
-------- -------- -------- -------- -------- ----------
Total stockholders' equity (deficit) .............. (1) 5,098 1,288 1,185 (769) --
-------- -------- -------- -------- -------- ----------
Total liabilities and stockholders' equity ........ $ 150 $ 14,042 $ 14,682 $ 8,079 $ 6,277 $ 2,228
======== ======== ======== ======== ======== ==========
Purchase &
Accounting I.P.O. Pro Forma
Brattleboro Sub-total Adjustments Proceeds As Adjusted
(4) (5)
----------- -------- ----------- ----------- -----------
Current Assets
Cash and cash equivalents ............................ $ -- $ 4,779 $ (2,544) $ 317 $ 2,552
Accounts receivable, net ............................. -- 3,498 -- -- 3,498
Inventories .......................................... 2,298 31,543 -- -- 31,543
Prepaid expenses and other current assets ........... -- 496 (150) (260) 86
Deferred income taxes ................................ -- 205 -- -- 205
----------- -------- ----------- ----------- -----------
Total current assets .............................. 2,298 40,521 (2,694) 57 37,884
Property and equipment, net ............................. 50 3,009 -- -- 3,009
Receivable from finance companies ....................... -- 1,284 -- -- 1,284
Due from related parties ................................ -- 2,574 (1,936) -- 638
Deferred income taxes ................................... -- -- -- -- --
Excess of purchase price over net
tangible assets acquired ............................. -- -- 15,970 -- 15,970
Other assets ............................................ -- 418 -- -- 418
----------- -------- ----------- ----------- -----------
Total assets ...................................... $ 2,348 $ 47,806 $ 11,340 $ 57 $ 59,203
=========== ======== =========== =========== ===========
Current Liabilities
Floor plan notes payable ............................. $ 2,256 $ 30,984 -- (10,500) $ 20,484
Accounts payable and accrued expenses ................ -- 3,070 175 (175) 3,070
Current maturities of long-term debt ................. -- 524 -- (167) 357
Other current bank borrowings ........................ -- 1,485 -- -- 1,485
Advances from officers and affilitates ............... 92 579 5,129 (5,708) --
Income taxes pabale .................................. -- 183 -- -- 183
----------- -------- ----------- ----------- -----------
Total current liabilities ......................... 2,348 36,825 5,304 (16,550) 25,579
Long-term debt .......................................... -- 1,034 -- (593) 441
Long-term deferred income taxes ......................... -- 164 -- -- 164
Due to related parites .................................. -- 2,642 (2,480) -- 162
Other long-term liabilities ............................. -- 340 -- -- 340
Stockholders' Equity
Common stock ......................................... -- 504 (500) 2 6
Additional paid-in capital ........................... -- 983 11,302 17,198 29,483
Treasury stock, at cost .............................. -- (890) 890 -- --
Retained earnings (deficit) .......................... -- 6,204 (3,176) -- 3,028
----------- -------- ----------- ----------- -----------
Total stockholders' equity (deficit) .............. -- 6,801 8,516 17,200 32,517
----------- -------- ----------- ----------- -----------
Total liabilities and stockholders' equity ........ $ 2,348 $ 47,806 $ 11,340 $ 57 $ 59,203
=========== ======== =========== =========== ===========
The accompanying Notes to Unaudited Pro Forma Financial Statements are an
integral part of this Balance Sheet.
F-4
UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS
For the Year Ended December 31, 1997
(in thousands, except per share data)
Muller
----------------
Hometown Shaker Westwood Toyota Chevy Bay State Brattleboro
-------- -------- -------- -------- -------- ----------- -----------
Revenues
New vehicle sales ...................... $ -- $ 29,345 $ 45,470 $ 21,604 $ 11,704 $ 9,890 $ 9,038
Used vehicle sales ..................... -- 21,800 8,396 14,454 5,542 12,459 12,928
Parts and service sales ................ -- 6,727 4,352 3,096 1,811 2,066 2,024
Other dealership revenues, net ......... -- 1,624 731 1,102 675 301 594
-------- -------- -------- -------- -------- ----------- -----------
Total revenues ...................... -- 59,496 58,949 40,256 19,732 24,716 24,584
Cost of sales ............................. -- 51,226 52,770 34,760 16,881 21,502 20,986
-------- -------- -------- -------- -------- ----------- -----------
Gross profit ........................ -- 8,270 6,179 5,496 2,851 3,214 3,598
Amortization of excess of purchase
price over net tangible assets acquired -- -- -- -- -- 399 399
Selling, general and administrative
expenses ............................... 1 7,715 5,594 4,569 2,714 1,934 3,314
-------- -------- -------- -------- -------- ----------- -----------
Income (loss) from operations ....... (1) 555 585 927 137 1,280 284
Other income (expense)
Interest expense, net .................. -- (189) (295) (219) (293) (272) (72)
Other income (expense), net ............ -- 116 (39) 26 (53) 9 (41)
-------- -------- -------- -------- -------- ----------- -----------
Income (loss) before taxes .......... (1) 482 251 734 (209) 1,017 171
Provision for income taxes ................ -- 166 106 36 -- 52 --
-------- -------- -------- -------- -------- ----------- -----------
Net income (loss) ................... $ (1) $ 316 $ 145 $ 698 $ (209) $ 965 $ 171
======== ======== ======== ======== ======== =========== ===========
Earnings per share, basic and diluted (7)....................................................................................
Weighted average shares .....................................................................................................
Sub- Pro Forma Pro Forma
Total Adjustments As Adjusted
(6)
--------- ----------- -----------
Revenues
New vehicle sales ...................... $ 127,051 $ -- $ 127,051
Used vehicle sales ..................... 75,579 -- 75,579
Parts and service sales ................ 20,076 -- 20,076
Other dealership revenues, net ......... 5,027 -- 5,027
--------- ----------- -----------
Total revenues ...................... 227,733 -- 227,733
Cost of sales ............................. 198,125 -- 198,125
--------- ----------- -----------
Gross profit ........................ 29,608 -- 29,608
Amortization of excess of purchase
price over net tangible assets acquired
Selling, general and administrative
expenses ............................... 25,841 (2,166) 23,675
--------- ----------- -----------
Income (loss) from operations ....... 3,767 1,767 5,534
Other income (expense)
Interest expense, net .................. (1,340) 1,148 (192)
Other income (expense), net ............ 18 -- 18
--------- ----------- -----------
Income (loss) before taxes .......... 2,445 2,915 5,360
Provision for income taxes ................ 360 1,784 2,144
--------- ----------- -----------
Net income (loss) ................... $ 2,085 $ 1,131 $ 3,216
========= =========== ===========
Earnings per share, basic and diluted (7) ............................ $ 0.54
Weighted average shares .............................................. 6,000,000
The accompanying Notes to Unaudited Pro Forma Financial Statements are an
integral part of this statement.
F-5
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. Hometown Auto Retailers, Inc.
Hometown Auto Retailers, Inc. has conducted no operations to date and has
acquired the Core Operating Companies and Acquisitions on the date of this
Prospectus and will consummate those transactions on the closing of the
Offering.
2. Basis of Combinations
The unaudited pro forma combined financial statements give effect to: the
acquisitions of substantially all of the net assets of (a) Shaker, (b) Westwood,
and (c) Muller (the "Exchange"); the acquisition of the business and certain
assets and liabilities of (d) Bay State and (e) Brattleboro (the
"Acquisitions"); the pro forma adjustments necessitated by the combinations; and
the consummation of the Offering of 2,000,000 shares of the Common Stock of
Hometown. The Exchange and the Acquisitions were accounted for using the
purchase method of accounting. These statements are based on the historical
financial statements of the Core Operating Companies and the Acquisitions and
the estimates and assumptions as discussed in these footnotes.
3. Consideration paid to Core Operating Companies and the Acquisitions
The following table sets forth the consideration to be paid to the
stockholders of the Core Operating Companies (excluding Shaker), the
Acquisitions and the Associated Transaction Costs, along with the estimated
"Excess of purchase price over net tangible assets acquired". For presentation
purposes, Muller represents the total of Muller Toyota, Muller Chevrolet, and
William Chevrolet (a discontinued operation):
Associated
Westwood Muller Bay State Brattleboro Costs Total
---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share data)
Cash ............................ $ -- $ -- $ 3,000 $ 2,708 $ 175 $ 5,883
Common Stock .................... 6,110 6,110 -- -- -- 12,220
---------- ---------- ---------- ---------- ---------- ----------
Total ..................... 6,110 6,110 3,000 2,708 175 18,103
Less: Fair value of net tangible
assets acquired .............. 1,288 416 337 92 -- 2,133
---------- ---------- ---------- ---------- ---------- ----------
Excess of purchase price over
net tangible assets acquired . $ 4,822 $ 5,694 $ 2,663 $ 2,616 $ 175 $ 15,970
========== ========== ========== ========== ========== ==========
Number of shares ................ 940,000 940,000 1,880,000
The Company's executive officers, directors and 5% stockholders have
agreed with the Representative that they will not sell or otherwise dispose of
any Common Stock or any securities convertible into Common Stock of the Company
without the prior written consent of the Representative until , ____. The fair
value of these shares, which has been supported through independent appraisals,
has been adjusted to reflect, among other things, these restrictions. After the
lock-up period, such shares of Common Stock will be eligible for sale in the
public market pursuant to Rule 144 if the conditions of that Rule have been met.
The Company is unable to estimate the amount of restricted securities that will
be sold under Rule 144 because this will depend, among other factors, on the
market price for the shares of Common Stock and the personal circumstances of
the sellers.
F-6
HOMETWON AUTO RETAILERS, INC.
Based upon management's preliminary analysis, it is anticipated that the
historical carrying value of the assets and liabilities of the Core Operating
Companies and the Acquisitions will approximate fair value. The amount of
"Excess of purchase price over net tangible assets acquired" subsequent to the
Exchange and the Acquisitions is estimated to be $16 million. The Company will
use an estimated life of 40 years for the amortization of goodwill. Management
of Hometown has not currently identified any other material tangible or
identifiable intangible assets of the Core Operating Companies to which a
portion of the purchase price could reasonably be allocated.
4. Unaudited Pro Forma Balance Sheets - Purchase and Accounting Adjustments:
The following table sets forth the accounting adjustments required to
reflect the purchase of the Core Operating Companies and the Acquisitions, the
recording of the Associated Transaction Costs and the settlement of certain
related party payables and a distribution to the owners of Shaker. For
presentation purposes, Muller represents the total of Muller Toyota, Muller
Chevrolet and William Chevrolet:
Debit (Credit) Shaker Westwood Muller Bay State Brattleboro
---------- ---------- ---------- ---------- ----------
(in thousands)
Assets:
Cash and cash equivalents ......................... $ -- $ -- $ -- $ -- $ --
Prepaid expenses and other current assets ........ -- -- -- -- --
Due from related parties .......................... -- -- -- -- --
Excess of purchase price over net
tangible assets acquired ....................... -- 4,822 5,694 2,663 2,616
Liabilities and shareholders' equity:
Advances from officers and affiliates ............. -- -- -- (2,663) (2,616)
Accounts payable and accrued expenses ............. -- -- -- -- --
Due to related parties ............................ -- -- -- -- --
Common stock ...................................... 67 59 374 -- --
Additional paid-in capital ........................ (67) (6,033) (5,202) -- --
Treasury stock, at cost ........................... -- -- (890) -- --
Retained earnings (deficit) ....................... -- 1,152 24 -- --
---------- ---------- ---------- ---------- ----------
Total purchase adjustments ........................ $ -- $ -- $ -- $ -- $ --
---------- ---------- ---------- ---------- ----------
Associated Related
Debit (Credit) Costs Parties (a) Total
---------- ---------- ----------
(in thousands)
Assets:
Cash and cash equivalents ......................... $ -- $ (2,544) $ (2,544)
Prepaid expenses and other current assets ........ -- (150) (150)
Due from related parties .......................... -- (1,936) (1,936)
Excess of purchase price over net
tangible assets acquired ....................... 175 -- 15,970
Liabilities and shareholders' equity:
Advances from officers and affiliates ............. -- 150 (5,129)
Accounts payable and accrued expenses ............. (175) -- (175)
Due to related parties ............................ -- 2,480 2,480
Common stock ...................................... -- -- 500
Additional paid-in capital ........................ -- -- (11,302)
Treasury stock, at cost ........................... -- -- (890)
Retained earnings (deficit) ....................... -- 2,000 3,176
---------- ---------- ----------
Total purchase adjustments ........................ $ -- $ -- $ --
---------- ---------- ----------
(a) Includes the pro forma adjustments to reflect the settlement of certain
Related Party Payables and a distribution to the owners of Shaker after the
audited Balance Sheet date.
F-7
5. Unaudited Pro Forma Balance Sheets - Offering Proceeds:
The following table sets forth adjustments based on receipt of the net
Offering Proceeds:
December 31, 1997
----------------------------------------------------------
Debit (Credit) (a) (b) (c) (d) (e) Total
-------- ------- ------- ----- -------- --------
(in thousands)
Assets:
Cash and cash equivalents ............................. $ 17,460 $(3,000) $(2,708) $(935) $(10,500) $ 317
Prepaid expenses and other current assets ............. (260) -- -- -- -- (260)
Liabilities and shareholders' equity:
Floor plan notes payable .............................. -- -- -- -- 10,500 10,500
Accounts payable and accrued expenses ................. -- -- -- 175 -- 175
Current maturities of long-term debt .................. -- -- -- 167 -- 167
Advances from officers and affiliates ................. -- 3,000 2,708 -- -- 5,708
Long-term debt ........................................ -- -- -- 593 -- 593
Common stock .......................................... (2) -- -- -- -- (2)
Additional paid-in capital ............................ (17,198) -- -- -- -- (17,198)
======== ======= ======= ===== ======== ========
Total pro forma adjustments ...................... $ -- $ -- $ -- $ -- $ -- $ --
======== ======= ======= ===== ======== ========
(a) Reflects the proceeds from the issuance of 2,000,000 shares of Hometown Auto
Retailers, Inc. Class A Common Stock net of estimated Offering costs (based on
an assumed Offering price of $10 per share). Offering costs consist primarily of
underwriting discounts and commissions, accounting fees, legal fees and printing
expenses.
(b)(c) Reflects the settlement of the acquisition of (b) Bay State and (c)
Brattleboro in exchange for the accrued cash portion of the purchase price to be
paid from the Offering proceeds. See "Consideration paid to Core Operating
Companies and the Acquisitions" in footnote 3 for the allocation of the purchase
price.
(d) Reflects the pay-down of certain long-term debt and the settlement of the
Associated Transaction Costs with the proceeds from the Offering.
(e) Reflects the temporary pay-down of floorplan obligations with proceeds from
the Offering.
F-8
6. Unaudited Pro Forma Statements of Operations - Pro Forma Adjustments
The following table sets forth the components of the pro forma
adjustments:
December 31, 1997
---------------------------------------------------------------
Debit (Credit) (a) (b) (c) (d) (e) (f) Total
------- ------- ------- ------- ------- ------- -------
(in thousands)
Amortization of excess
purchase price over net
tangible assets acquired ........... $ 399 $ -- $ -- $ -- $ -- $ -- $ 399
Selling, general and
administrative expenses ............. -- (2,242) 76 -- -- -- (2,166)
Other income (expense)
Interest expense, net .............. -- -- -- 163 (1,311) -- (1,148)
Provision for income taxes ............ -- -- -- -- -- 1,784 1,784
------- ------- ------- ------- ------- ------- -------
Net income ...................... $ 399 $(2,242) $ 76 $ 163 $(1,311) $ 1,784 $(1,131)
======= ======= ======= ======= ======= ======= =======
(a) Reflects the amortization of the "excess purchase price over net tangible
assets acquired" using an estimated useful life of 40 years.
(b) Adjusts compensation expense and management fees to the level that certain
management employees and owners of the Core Operating Companies and the
Acquisitions will contractually receive subsequent to the closing of the
Exchange and the Acquisitions. The Company has entered into five-year
employment agreements with each of following: Salvatore A. Vergopia as
Chairman and Chief Executive Officer; Joseph Shaker as President and Chief
Operating Officer; William C. Muller Jr. as Vice President - New Jersey
Operations; Corey Shaker as Vice President - Connecticut Operations;
Edward A Vergopia as Vice President - Fleet Operations; James Christ as
General Manager -Muller Toyota; and Steven Shaker as Vice President -
Parts and Service. Each agreement provides for an annual base salary of
$200,000, except that the agreement with James Christ provides for an
annual base salary of $150,000 plus an annual bonus equal to five percent
of the pre-tax profits of Muller Toyota and the agreement with Steven
Shaker provides for an annual base salary of $100,000. Each agreement also
provides for participation by the employee in all executive benefit plans
and, if employment is terminated without cause (as defined in the
agreement), payment of an amount equal to the salary which would have been
payable over the unexpired term of his employment agreement.
(c) Adjusts rent expense to reflect newly negotiated fair market value leases.
(d) Reflects a reduction to interest income on Cash and Cash Equivalents not
realized as part of the Exchange and the Acquisitions offset by the
reduction of interest expense on certain long-term debt that will be
liquidated out of proceeds of the Offering and the reduction of interest
expense on debt and leases not assumed as part of the transactions with
the acquired dealerships.
(e) Reflects the pro forma decrease in interest expense resulting from the
temporary repayment of floor plan obligations with proceeds from the
Offering in the amount of $10.5 million with a weighted average interest
rate of 9.5%. Also includes interest savings for refinancing the balance
of the floor plan obligations with a commercial lender at 7.5%.
(f) Reflects the incremental provision for federal and state income taxes
relating to the pro forma adjustments described above and the loss of
S-corporation status of Muller Toyota, Muller Chevrolet, Bay State and
Brattleboro.
F-9
7. Earnings per Share
Statement of Financial Accounting Standard No. 128 "Earnings Per Share"
("SFAS 128"). SFAS No. 128 requires the presentation of basic earnings per share
and diluted earnings per share. "Basic earnings per share" represents net income
divided by the weighted average shares outstanding. "Diluted earnings per share"
represents net income divided by weighted average shares outstanding adjusted
for the incremental dilution of outstanding stock options. In this pro forma
situation, the consideration of outstanding stock options is not dilutive.
F-10
INDEX TO FINANCIAL PAGES
Report of Independent Public Accountants F-13
Balance Sheets, Hometown and Brattleboro for the year ended December
31, 1997 and Shaker, Westwood, Muller Toyota, Muller Chevrolet
and Bay State for the years ending December 31, 1997 and 1996 F-14
Statements of Operations, Hometown for the year ended December 31,
1997 and Shaker, Westwood and Muller Toyota for the years
ended December 31, 1997, 1996 and 1995 F-15
Statements of Operations, Muller Chevrolet and Bay State for the
years ended December 31, 1997, 1996 and 1995 and Brattleboro
for the year ended December 31, 1997 F-16
Statements of Stockholders' Equity, Hometown for the year ended
December 31, 1997 and Shaker, Westwood and Muller Toyota, for
the years ended December 31, 1997, 1996 and 1995 F-17
Statements of Stockholders' Equity, Muller Chevrolet and Bay State
for the years ended December 31, 1997, 1996 and 1995 and
Brattleboro for the year ended December 31, 1997 F-18
Statements of Cash Flows, Hometown for the year ended December 31,
1997 and Shaker, Westwood and Muller Toyota for the years
ended December 31, 1997, 1996 and 1995 F-19
Statements of Cash Flows, Muller Chevrolet and Bay State for the
years ended December 31, 1997, 1996 and 1995 and Brattleboro
for the year ended December 31, 1997. F-20
Notes to the Financial Statements F-21
F-11
INDEX TO CORE OPERATING COMPANIES AND ACQUISITIONS
Name Representing these Entities
- --------------- ----------------------------------------------------
HOMETOWN Hometown Auto Retailers, Inc.
SHAKER E.R.R. Enterprises, Inc. and Subsidiaries
Shaker's, Inc.
Family Ford, Inc.
Family Rental, Inc.
Shaker's Lincoln Mercury Auto Care, Inc.
WESTWOOD Westwood Lincoln Mercury Sales, Inc.
MULLER Muller Toyota, Inc.
Muller Chevrolet, Oldsmobile, Isuzu, Inc. (Note 1)
William Chevrolet, Inc. (Inactive)(Note 1)
BAY STATE Leominster Lincoln Mercury, Inc.
(DBA Bay State Lincoln Mercury)
BRATTLEBORO Brattleboro Chrysler Plymouth Dodge, Inc. (Note 2)
Notes:
(1) The independent operations of William Chevrolet, Inc. have been
discontinued and for presentation purposes, the residual balance sheet
accounts have been combined with Muller Chevrolet, Oldsmobile, Isuzu, Inc.
(2) Certain financials have been excluded from this presentation, as their
operations are not significant subsidiaries under SX Rule No.305.
F-12
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: Hometown Auto Retailers, Inc, E.R.R. Enterprises, Inc., Westwood Lincoln
Mercury Sales, Inc., Muller Toyota, Inc., Muller Chevrolet, Oldsmobile, Isuzu,
Inc., Leominster Lincoln Mercury, Inc., and Brattleboro Chrysler Plymouth Dodge,
Inc. (collectively "the Companies"):
We have audited the accompanying financial statements, as identified in
the index on page F-1. These financial statements are the responsibility of the
respective management of each of the Companies. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Companies and the
results of their operations and their cash flows for the periods identified in
the index on page F-1, are in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
New York, NY
March 6, 1998
F-13
BALANCE SHEETS
(in thousands)
Hometown Shaker Westwood Muller Toyota
-------- ------------------ ------------------ -------------------
12/31/97 12/31/97 12/31/96 12/31/97 12/31/96 12/31/97 12/31/96
-------- -------- -------- -------- -------- -------- --------
Current Assets
Cash and cash equivalents .................... $ 47 $ 3,539 $ 3,081 $ 431 $ 476 $ 614 $ 579
Accounts receivable, net .................... -- 914 1,091 1,933 1,580 495 208
Inventories ................................. -- 7,609 8,504 10,545 6,478 3,972 3,743
Prepaid expenses and other current assets ... 103 234 68 132 70 16 5
Deferred income taxes ....................... -- -- -- 205 217 -- --
------- ------- ------- ------- ------- ------- -------
Total current assets ..................... 150 12,296 12,744 13,246 8,821 5,097 4,535
Property and equipment, net .................... -- 1,346 1,428 238 280 808 819
Receivable from finance companies .............. -- -- -- -- -- 990 873
Due from related parties ....................... -- 294 558 1,096 330 1,184 664
Deferred income taxes .......................... -- -- -- -- -- -- 128
Other assets ................................... -- 106 68 102 26 -- 5
------- ------- ------- ------- ------- ------- -------
Total Assets ............................. $ 150 $14,042 $14,798 $14,682 $ 9,457 $ 8,079 $ 7,024
======= ======= ======= ======= ======= ======= =======
Current Liabilities
Floor plan notes payable .................... $ -- $ 6,761 $ 7,649 $10,179 $ 6,003 $ 4,492 $ 4,315
Accounts payable and accrued expenses ....... 1 463 451 1,207 695 1,113 1,063
Current maturities of long-term debt ........ -- 278 65 2 3 164 157
Other current bank borrowings ............... -- 85 101 1,000 500 200 --
Advances from officers and affilities ....... 150 -- -- -- -- -- --
Income taxes payable ........................ -- 146 340 -- 104 37 154
------- ------- ------- ------- ------- ------- -------
Total current liabilities ................ 151 7,733 8,606 12,388 7,305 6,006 5,689
Long-term debt ................................. -- 107 386 6 9 600 762
Long-term deferred income taxes ................ -- 164 150 -- -- -- --
Due to related parties ......................... -- 888 845 1,000 1,000 -- --
Other long-term liabilities .................... -- 52 29 -- -- 288 86
Stockholders' Equity
Common stock ................................ -- 69 69 60 60 30 30
Additional paid-in capital .................. -- -- -- 76 76 96 96
Treasury stock, at cost ..................... -- -- -- -- -- (890) (890)
Retained earnings (deficit) ................. (1) 5,029 4,713 1,152 1,007 1,949 1,251
------- ------- ------- ------- ------- ------- -------
Total stockholders' equity (deficit) ..... (1) 5,098 4,782 1,288 1,143 1,185 487
------- ------- ------- ------- ------- ------- -------
Total liabilities and stockholders' equity $ 150 $14,042 $14,798 $14,682 $ 9,457 $ 8,079 $ 7,024
======= ======= ======= ======= ======= ======= =======
Muller Chevrolet Bay State Brattleboro
------------------- ------------------ -----------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
-------- -------- -------- -------- --------
Current Assets
Cash and cash equivalents .................... $ 148 $ 29 $ 888 $ 1,052 $ 54
Accounts receivable, net .................... 156 173 175 232 135
Inventories ................................. 5,169 4,061 2,805 3,900 3,406
Prepaid expenses and other current assets ... 11 -- 18 40 --
Deferred income taxes ....................... -- -- -- -- --
------- ------- ------- ------- -------
Total current assets ..................... 5,484 4,263 3,886 5,224 3,595
Property and equipment, net .................... 289 434 278 357 383
Receivable from finance companies .............. 294 231 -- -- --
Due from related parties ....................... -- -- 214 227 --
Deferred income taxes .......................... -- -- -- -- --
Other assets ................................... 210 234 177 191 14
------- ------- ------- ------- -------
Total Assets ............................. $ 6,277 $ 5,162 $ 4,555 $ 5,999 $ 3,992
======= ======= ======= ======= =======
Current Liabilities
Floor plan notes payable .................... $ 5,405 $ 4,364 $ 2,972 $ 3,787 $ 3,188
Accounts payable and accrued expenses ....... 286 393 187 388 158
Current maturities of long-term debt ........ 80 126 26 17 70
Other current bank borrowings ............... 200 -- -- -- --
Advances from officers and affilities ....... -- -- 474 -- --
Income taxes payable ........................ -- -- 3 62 --
------- ------- ------- ------- -------
Total current liabilities ................ 5,971 4,883 3,662 4,254 3,416
Long-term debt ................................. 321 499 51 33 148
Long-term deferred income taxes ................ -- -- -- -- --
Due to related parties ......................... 754 340 -- -- 252
Other long-term liabilities .................... -- -- 13 18 --
Stockholders' Equity
Common stock ................................ 345 345 25 25 33
Additional paid-in capital .................. 811 811 310 310 --
Treasury stock, at cost ..................... -- -- -- -- --
Retained earnings (deficit) ................. (1,925) (1,716) 494 1,359 143
------- ------- ------- ------- -------
Total stockholders' equity (deficit) ..... (769) (560) 829 1,694 176
------- ------- ------- ------- -------
Total liabilities and stockholders' equity $ 6,277 $ 5,162 $ 4,555 $ 5,999 $ 3,992
======= ======= ======= ======= =======
The accompanying Notes to Financial Statements are an intergral part of these
Balance Sheets.
F-14
STATEMENTS OF OPERATIONS - CORE OPERATING COMPANIES
(in thousands)
Hometown Shaker Westwood
-------- -------------------------------- --------------------------------
12/31/97 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- -------- -------- --------
Revenues
New vehicle sales ...................... $ -- $ 29,345 $ 30,511 $ 25,713 $ 45,470 $ 43,211 $ 41,507
Used vehicle sales ..................... -- 21,800 22,429 18,260 8,396 7,990 7,189
Parts and service sales ................ -- 6,727 7,406 6,565 4,352 4,586 4,193
Other dealership revenues, net ......... -- 1,624 1,876 1,482 731 742 669
-------- -------- -------- -------- -------- -------- --------
Total revenues ...................... -- 59,496 62,222 52,020 58,949 56,529 53,558
Cost of sales
New vehicle sales ...................... -- 27,505 28,316 23,668 42,985 41,124 39,663
Used vehicle sales ..................... -- 20,048 20,855 16,969 7,651 7,579 6,925
Parts and service sales ................ -- 3,673 3,905 3,552 2,134 2,363 2,129
-------- -------- -------- -------- -------- -------- --------
Cost of sales ............................. -- 51,226 53,076 44,189 52,770 51,066 48,717
-------- -------- -------- -------- -------- -------- --------
Gross profit ........................ -- 8,270 9,146 7,831 6,179 5,463 4,841
Selling, general and administrative
expenses ............................... 1 7,715 8,049 6,961 5,594 4,699 4,463
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations ....... (1) 555 1,097 870 585 764 378
Other income (expense)
Interest expense, net .................. -- (189) (384) (555) (295) (360) (184)
Other income (expense), net ............ -- 116 1 16 (39) (36) 6
-------- -------- -------- -------- -------- -------- --------
Income (loss) before taxes .......... (1) 482 714 331 251 368 200
Provision (benefit) for income taxes ...... -- 166 321 118 106 160 88
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ................... $ (1) $ 316 $ 393 $ 213 $ 145 $ 208 $ 112
======== ======== ======== ======== ======== ======== ========
S-Corporation pro forma provision (benefit)
for income taxes (unaudited) ........ -- -- -- -- -- -- --
Pro forma net income (loss) (unaudited) ...
Muller Toyota
--------------------------------
12/31/97 12/31/96 12/31/95
-------- -------- --------
Revenues
New vehicle sales ...................... $ 21,604 $ 19,142 $ 17,776
Used vehicle sales ..................... 14,454 12,604 7,963
Parts and service sales ................ 3,096 3,013 2,906
Other dealership revenues, net ......... 1,102 1,227 1,267
-------- -------- --------
Total revenues ...................... 40,256 35,986 29,912
Cost of sales
New vehicle sales ...................... 20,095 17,761 16,554
Used vehicle sales ..................... 13,117 11,503 7,072
Parts and service sales ................ 1,548 1,605 1,599
-------- -------- --------
Cost of sales ............................. 34,760 30,869 25,225
-------- -------- --------
Gross profit ........................ 5,496 5,117 4,687
Selling, general and administrative
expenses ............................... 4,569 4,293 4,276
-------- -------- --------
Income (loss) from operations ....... 927 824 411
Other income (expense)
Interest expense, net .................. (219) (257) (494)
Other income (expense), net ............ 26 (21) (48)
-------- -------- --------
Income (loss) before taxes .......... 734 546 (131)
Provision (benefit) for income taxes ...... 36 216 (55)
-------- -------- --------
Net income (loss) ................... $ 698 $ 330 $ (76)
======== ======== ========
S-Corporation pro forma provision (benefit)
for income taxes (unaudited) ........ 251 -- --
-------
Pro forma net income (loss) (unaudited) ... $ 447
========
The accompanying Notes to Financial Statements are an intergral part of these
statements.
F-15
STATEMENTS OF OPERATIONS - CORE OPERATING COMPANIES AND ACQUISITIONS
(in thousands)
Muller Chevrolet Bay State Brattleboro
-------------------------------- -------------------------------- -----------
12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95 12/31/97
-------- -------- -------- -------- -------- -------- --------
Revenues
New vehicle sales ...................... $ 11,704 $ 13,818 $ 11,687 $ 9,890 $ 9,640 $ 4,258 $ 9,038
Used vehicle sales ..................... 5,542 6,711 5,372 12,459 12,879 14,708 12,928
Parts and service sales ................ 1,811 1,812 1,336 2,066 1,847 1,306 2,024
Other dealership revenues, net ......... 675 964 962 301 205 211 594
-------- -------- -------- -------- -------- -------- --------
Total revenues ...................... 19,732 23,305 19,357 24,716 24,571 20,483 24,584
Cost of sales
New vehicle sales ...................... 10,918 13,101 11,103 9,198 8,921 4,057 8,371
Used vehicle sales ..................... 5,025 6,327 4,805 11,271 11,474 13,609 11,459
Parts and service sales ................ 938 962 776 1,033 933 600 1,156
-------- -------- -------- -------- -------- -------- --------
Cost of sales ............................. 16,881 20,390 16,684 21,502 21,328 18,266 20,986
-------- -------- -------- -------- -------- -------- --------
Gross profit ........................ 2,851 2,915 2,673 3,214 3,243 2,217 3,598
Selling, general and administrative
expenses ............................... 2,714 2,792 3,174 1,934 1,687 1,228 3,314
-------- -------- -------- -------- -------- -------- --------
Income (loss) from operations ....... 137 123 (501) 1,280 1,556 989 284
Other income (expense)
Interest expense, net .................. (293) (251) (287) (272) (265) (193) (72)
Other income (expense), net ............ (53) (12) (20) 9 (5) 1 (41)
-------- -------- -------- -------- -------- -------- --------
Income (loss) before taxes .......... (209) (140) (808) 1,017 1,286 797 171
Provision (benefit) for income taxes ...... -- -- -- 52 67 44 --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ................... $ (209) $ (140) $ (808) $ 965 $ 1,219 $ 753 $ 171
======== ======== ======== ======== ======== ======== ========
S-Corporation pro forma provision (benefit)
for income taxes (unaudited) ........ (66) (42) (276) 345 434 271 67
-------- -------- -------- -------- -------- -------- --------
Pro forma net income (loss) (unaudited) ... $ (143) $ (98) $ (532) $ 620 $ 785 $ 482 $ 104
======== ======== ======== ======== ======== ======== ========
The accompanying Notes to Financial Statements are an intergral part of these
statements.
F-16
STATEMENTS OF CASH FLOWS - CORE OPERATING COMPANIES
(in thousands)
Hometown Shaker Westwood
-------- -------------------------------- ----------------------------
12/31/97 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1) $ 316 $ 393 $ 213 $ 145 $ 208 $ 112
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities -
Loss (gain) on disposal of property -- -- -- -- -- -- --
Depreciation and amortization -- 184 149 134 29 63 57
Deferred income taxes -- 14 (2) 215 12 (94) (109)
Provision for finance reserves -- -- -- -- -- -- --
Changes in assets and liabilities:
Accounts receivable, net -- 177 (142) 136 (353) (51) (81)
Inventories -- 895 1,265 (152) (4,067) (197) 638
Prepaid expenses and other current assets (103) (166) (77) 174 (62) (27) 138
Receivable from finance company -- -- -- -- -- -- --
Other assets -- (38) 30 (77) (76) (15) 32
Floor plan notes payable -- (888) (811) (162) 4,176 (505) 310
Accounts payable and accrued expenses 1 12 (31) (99) 512 (29) 170
Income taxes payable -- (194) 227 (7) (104) 30 73
Other long term liabilities -- 23 16 14 -- -- --
---- ------- ------- ------- ----- ----- -----
Net cash provided by (used in) operating activities (103) 335 1,017 389 212 (617) 1,340
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment - (102) (18) (419) (9) (113) (86)
Proceeds from sale of property and equipment -- -- -- -- 22 7 --
---- ------- ------- ------- ----- ----- -----
Net cash provided by (used in) investing activities -- (102) (18) (419) 13 (106) (86)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings -- 60 56 276 -- -- --
Principal payments of long-term debt -- (126) (145) (59) (4) (5) (12)
Other current bank borrowings, net of repayments -- (16) (67) 10 500 500 (950)
Advance to/from officers and affiliates 150 -- -- -- -- 137 (140)
Due from/to related parties -- 307 495 146 (766) (168) 293
Capital contributions and (disbursements) -- -- -- -- -- -- --
Dividends paid -- -- -- -- -- -- --
---- ------- ------- ------- ----- ----- -----
Net cash provided by (used in) financing activities 150 225 339 373 (270) 464 (809)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 47 458 1,338 343 (45) (259) 445
CASH AND CASH EQUVALENTS,
beginning of period -- 3,081 1,743 1,400 476 735 290
CASH AND CASH EQUVALENTS,
end of period $ 47 $ 3,539 $ 3,081 $ 1,743 $ 431 $ 476 $ 735
==== ======= ======= ======= ===== ===== =====
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for -
Interest $-- $ 427 $ 595 $ 736 $ 302 $ 386 $ 207
Taxes -- 245 96 49 186 230 124
12/31/97 12/31/96 12/31/95
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 698 $ 330 $ (76)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities -
Loss (gain) on disposal of property -- -- --
Depreciation and amortization 37 29 10
Deferred income taxes 128 (43) (4)
Provision for finance reserves -- 175 780
Changes in assets and liabilities:
Accounts receivable, net (287) 24 (194)
Inventories (229) (508) 907
Prepaid expenses and other current assets (11) 19 (15)
Receivable from finance company (117) (420) (1,252)
Other assets 5 39 (58)
Floor plan notes payable 177 723 (392)
Accounts payable and accrued expenses 50 33 222
Income taxes payable (117) 154 (50)
Other long term liabilities 202 (80) 167
----- ----- -----
Net cash provided by (used in) operating activities 536 475 45
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (26) (155) (9)
Proceeds from sale of property and equipment - -- --
----- ----- -----
Net cash provided by (used in) investing activities (26) (155) (9)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings -- 180 --
Principal payments of long-term debt (155) (97) (91)
Other current bank borrowings, net of repayments 200 -- --
Advance to/from officers and affiliates -- -- --
Due from/to related parties (520) (63) (218)
Capital contributions and (disbursements) -- -- (111)
Dividends paid -- -- --
----- ----- -----
Net cash provided by (used in) financing activities (475) 20 (420)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 35 340 (384)
CASH AND CASH EQUVALENTS,
beginning of period 579 239 623
----- ----- -----
CASH AND CASH EQUVALENTS,
end of period $ 614 $ 579 $ 239
===== ===== =====
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for -
Interest $ 219 $ 257 $ 494
Taxes 26 62 63
The accompanying Notes to Financial Statements are an intergral part of these
statements.
F-17
STATEMENTS OF STOCKHOLDERS' EQUITY - CORE OPERATING COMPANIES AND ACQUISITIONS
(in thousands)
Muller Chevrolet Bay State Brattleboro
------------------------------ ------------------------------ -----------
12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95 12/31/97
-------- -------- -------- -------- -------- -------- --------
Common Stock:
Balance ........................... $ 345 $ 345 $ 345 $ 25 $ 25 $ 25 $ 33
------- ------- ------- ------- ------- ------- -------
Additional Paid-in Capital
Balance, Beginning of period ......... $ 811 $ 811 $ 811 $ 310 $ -- $ -- $ --
Capital contribution (disbursement) -- -- -- -- 310 --
------- ------- ------- ------- ------- ------- -------
Balance, End of period ............ $ 811 $ 811 $ 811 $ 310 $ 310 $ -- $ --
------- ------- ------- ------- ------- ------- -------
Treasury Stock, at cost
Balance ........................... $ -- $ -- $ -- $ -- $ -- $ -- $ --
------- ------- ------- ------- ------- ------- -------
Retained Earnings (Deficit)
Balance, Beginning of period ......... $(1,716) $(1,576) $ (768) $ 1,359 $ 732 $ 513 $ 192
Net Income (Loss) ................. (209) (140) (808) 965 1,219 753 171
Dividends and other changes ....... -- -- -- (1,830) (592) (534) (220)
------- ------- ------- ------- ------- ------- -------
Balance, End of period ............ $(1,925) $(1,716) $(1,576) $ 494 $ 1,359 $ 732 $ 143
------- ------- ------- ------- ------- ------- -------
Total Stockholders' Equity (Deficit).. $ (769) $ (560) $ (420) $ 829 $ 1,694 $ 757 $ 176
======= ======= ======= ======= ======= ======= =======
The accompanying Notes to Financial Statements are an intergral part of these
statements.
F-18
STATEMENTS OF CASH FLOWS - CORE OPERATING COMPANIES
(in thousands)
Hometown Shaker Westwood
-------- ------------------------------ ------------------------------
12/31/97 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ (1) $ 316 $ 393 $ 213 $ 145 $ 208 $ 112
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities
Loss (gain) on disposal of property ............... -- -- -- -- -- -- --
Depreciation and amortization ..................... -- 184 149 134 28 63 57
Deferred income taxes ............................. -- 14 (2) 215 12 (94) (109)
Provision for finance reserves .................... -- -- -- -- -- -- --
Changes in assets and liabilities:
Accounts receivable, net ....................... -- 178 (142) 136 (353) (51) (81)
Inventories .................................... -- 895 1,265 (152) (4,066) (197) 638
Prepaid expenses and other current assets ...... (103) (167) (77) 174 (62) (27) 138
Receivable from finance company ................ -- -- -- -- -- -- --
Other assets ................................... -- (38) 30 (77) (76) (15) 32
Floor plan notes payable ....................... -- (888) (811) (162) 4,175 (505) 310
Accounts payable and accrued expenses .......... 1 11 (31) (99) 511 (29) 170
Income taxes payable ........................... -- (193) 227 (7) (104) 30 73
Other long term liabilities .................... -- 22 16 14 -- -- --
------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating activities (103) 334 1,017 389 210 (617) 1,340
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................ -- (102) (18) (419) (9) (113) (86)
Proceeds from sale of property and equipment ...... -- -- -- -- 22 7 --
------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in) investing activities -- (102) (18) (419) 13 (106) (86)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings ........... -- 60 56 276 -- -- --
Principal payments of long-term debt .............. -- (126) (145) (59) (3) (5) (12)
Other current bank borrowings, net of repayments .. -- (16) (67) 10 500 500 (950)
Advance to/from officers and affiliates ........... 150 -- -- -- -- 137 (140)
Due from/to related parties ....................... -- 308 495 146 (765) (168) 293
Capital contributions and (disbursements) ......... -- -- -- -- -- -- --
Dividends paid ................................... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing activities 150 226 339 373 (268) 464 (809)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................. 47 458 1,338 343 (45) (259) 445
CASH AND CASH EQUVALENTS,
beginning of period ............................... -- 3,081 1,743 1,400 476 735 290
------- ------- ------- ------- ------- ------- -------
CASH AND CASH EQUVALENTS,
end of period ..................................... $ 47 $ 3,539 $ 3,081 $ 1,743 $ 431 $ 476 $ 735
======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for
Interest .......................................... $ -- $ 427 $ 595 $ 736 $ 302 $ 386 $ 207
Taxes ............................................. -- 245 96 49 186 230 124
Muller Toyota
------------------------------
12/31/97 12/31/96 12/31/95
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ 698 $ 330 $ (76)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities
Loss (gain) on disposal of property ............... -- --
Depreciation and amortization ..................... 36 29 10
Deferred income taxes ............................. -- (43) (4)
Provision for finance reserves .................... -- 175 780
Changes in assets and liabilities:
Accounts receivable, net ....................... (287) 24 (194)
Inventories .................................... (229) (508) 907
Prepaid expenses and other current assets ...... (11) 19 (15)
Receivable from finance company ................ (117) (420) (1,252)
Other assets ................................... 5 39 (58)
Floor plan notes payable ....................... 177 723 (392)
Accounts payable and accrued expenses .......... 49 33 222
Income taxes payable ........................... (117) 154 (50)
Other long term liabilities .................... 332 (80) 167
------- ------- -------
Net cash provided by (used in) operating activities 536 475 45
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................ (26) (155) (9)
Proceeds from sale of property and equipment ...... -- --
------- ------- -------
Net cash provided by (used in) investing activities (26) (155) (9)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings ........... -- 180
Principal payments of long-term debt .............. (155) (97) (91)
Other current bank borrowings, net of repayments .. 200 --
Advance to/from officers and affiliates ........... -- --
Due from/to related parties ....................... (520) (63) (218)
Capital contributions and (disbursements) ......... -- -- (111)
Dividends paid ................................... -- --
------- ------- -------
Net cash provided by (used in) financing activities (475) 20 (420)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................. 35 340 (384)
CASH AND CASH EQUVALENTS,
beginning of period ............................... 579 239 623
------- ------- -------
CASH AND CASH EQUVALENTS,
end of period ..................................... $ 614 $ 579 $ 239
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for
Interest .......................................... $ 219 $ 257 $ 494
Taxes ............................................. 26 62 63
The accompanying Notes to Financial Statements are an intergral part of these
statements.
F-19
STATEMENTS OF CASH FLOWS - CORE OPERATING COMPANIES AND ACQUISITIONS
(in thousands)
Muller Chevrolet Bay State Brattleboro
------------------------------ ------------------------------ -----------
12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95 12/31/97
-------- -------- -------- -------- -------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ (209) $ (140) $ (808) $ 965 $ 1,219 $ 753 $ 171
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities
Loss (gain) on disposal of property ............... 60 -- -- -- -- -- --
Depreciation and amortization ..................... 127 50 57 98 74 10 10
Deferred income taxes ............................. -- -- -- -- -- -- --
Provision for finance reserves .................... -- 125 145 -- -- -- --
Changes in assets and liabilities:
Accounts receivable, net ....................... 17 (145) 671 57 14 (85) (52)
Inventories .................................... (1,108) (187) 970 1,095 (2,137) 438 (791)
Prepaid expenses and other current assets ...... (11) 12 (12) 22 4 (10) --
Receivable from finance company ................ (63) 161 17 -- -- -- --
Other assets ................................... 4 (6) -- -- (200) 8 9
Floor plan notes payable ....................... 1,041 1 (994) (815) 1,846 (432) 993
Accounts payable and accrued expenses .......... (106) (90) 24 (201) 190 100 (156)
Income taxes payable ........................... -- -- -- (59) 49 (16) --
Other long term liabilities .................... -- -- -- (5) (28) 9 --
------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating activities (248) (219) 70 1,157 1,030 775 184
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................ (23) (355) (6) (4) (304) (9) (107)
Proceeds from sale of property and equipment ...... -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in) investing activities (23) (355) (6) (4) (304) (9) (107)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt borrowings ........... -- 545 153 46 -- 42 280
Principal payments of long-term debt .............. (224) (131) (67) (20) (48) (35) (61)
Other current bank borrowings, net of repayments .. 200 -- -- -- -- -- --
Advance to/from officers and affiliates ........... -- -- -- 474 -- -- --
Due from/to related parties ....................... 414 99 (78) 13 77 (46) (207)
Capital contributions and (disbursements) ......... -- -- -- -- 310 -- --
Dividends paid ................................... -- -- -- (1,830) (592) (533) (220)
------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing activities 390 513 8 (1,317) (253) (572) (208)
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................. 119 (61) 72 (164) 473 194 (131)
CASH AND CASH EQUVALENTS,
beginning of period ............................... 29 90 18 1,052 579 385 185
------- ------- ------- ------- ------- ------- -------
CASH AND CASH EQUVALENTS,
end of period ..................................... $ 148 $ 29 $ 90 $ 888 $ 1,052 $ 579 $ 54
======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Cash paid for
Interest .......................................... $ 211 $ 264 $ 302 $ 323 $ 284 $ 210 $ 72
Taxes ............................................. 16 -- -- 111 17 61 --
The accompanying Notes to Financial Statements are an intergral part of these
statements.
F-20
NOTES TO FINANCIAL STATEMENTS
(Notes apply to all dealerships except as noted.)
1. BUSINESS AND ORGANIZATION:
Business of Hometown Auto Retailers, Inc. ("Hometown")
Hometown was founded on March 10, 1997 as Dealerco, Inc., a New York
Corporation, and was later merged into Hometown Auto Retailers, Inc., a Delaware
Corporation. Hometown's purpose is to consolidate and operate automobile
dealerships in the Northeast, primarily in New Jersey and New England. Hometown
was formed to combine three dealership groups (the Core Operating Companies)
located in New Jersey and Connecticut, acquire two other dealerships (the
Acquisitions) located in Vermont and Massachusetts, complete an initial public
offering (the Offering) of its Common Stock and, subsequent to the Offering,
continue to acquire, through merger or purchase, additional dealerships to
expand its regional operations.
Business of Core Operating Companies and Acquisitions
Shaker, Westwood, Muller, Bay State and Brattleboro (the Companies) are
primarily engaged in the retail sale of new and used automobiles and the sale of
the related finance, insurance and service contracts. In addition, the Companies
sell automotive parts, provide vehicle servicing and sell wholesale used
vehicles. In addition, Westwood is engaged in the retail sale of livery cars to
livery fleet operators as well as the related finance, insurance and service
contracts. Finally, Shaker owns and operates a factory authorized free-standing
neighborhood automobile maintenance and light repair and parts center. The
following table lists the locations of the businesses:
Shaker's Lincoln Mercury, Inc. Watertown, Connecticut
Shaker's Jeep/Eagle, Inc. Waterbury, Connecticut
Shaker's Lincoln Mercury Autocare, Inc. Naugatuck, Connecticut
Family Ford, Inc. Waterbury, Connecticut
Family Rental, Inc. Waterbury, Connecticut
Westwood Lincoln Mercury Sales, Inc. Emerson, New Jersey
Muller Toyota, Inc. Clinton, New Jersey
Muller Chevrolet, Oldsmobile, Isuzu, Inc. Stewartsville, New Jersey
Muller Auto Body Phillipsburg, New Jersey
Bay State Lincoln Mercury, Inc. Framingham, Massachusetts
Brattleboro Chrysler Plymouth Dodge, Inc. North Brattleboro, Vermont
Organization of the Core Operating Companies
Shaker, Westwood and Muller have agreed to enter into a combination
whereby each company will exchange all of their common stock for an agreed upon
number of shares of Hometown Class B Common Stock. These transactions have been
accounted for using the purchase method of accounting with Shaker being deemed
the acquiror. Reference is made to footnote 18 for further information regarding
this transaction.
F-21
Organization of the Acquisitions
Hometown has also entered into agreements to acquire Bay State and
Brattleboro for cash. These acquisitions will be accounted for using the
purchase method of accounting. Reference is made to footnote 18 for further
information regarding these transactions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Major Suppliers and Franchise Agreements
The Companies purchase substantially all of their new vehicles at the
prevailing prices charged by the applicable manufacturers to all franchised
dealers. The Companies' sales volume could be adversely impacted by the
manufacturers' inability to supply it with an adequate supply of popular models
or as a result of an unfavorable allocation of vehicles by the manufacturer.
Each dealer is franchise agreement contains provisions which may limit,
without the consent of the applicable manufacturer, changes in dealership
management and ownership, place certain restrictions on the dealership (such as
minimum working capital requirements) and provide for termination of the
franchise agreement by the manufacturer in certain instances. See footnote 3 for
a more detailed discussion of these risks.
Revenue Recognition
Revenue for vehicle and parts sales is recognized upon delivery to and
acceptance by the customer. Revenue for vehicle service is recognized when the
service has been completed.
Finance, Insurance and Service Contract Income Recognition
The Companies arrange financing for customers through various institutions
and receive financing fees equal to the difference between the loan rates
charged to customers and the predetermined financing rates set by the financing
institution. In addition, the Companies receive commissions from the sale of
credit life and disability insurance and extended service contracts to
customers.
The Companies may be charged back (chargebacks) for unearned financing
fees, insurance or service contract commissions in the event of early
termination of the contracts by the customers. The revenues from financing fees
and commissions are recorded at the time of the sale of the vehicles. The
reserves for future chargebacks are based on historical operating results and
the termination provisions of the applicable contracts. Finance, insurance and
service contract income, net of estimated chargebacks, are included in other
dealership revenue in the accompanying financial statements.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash on deposit, cash
invested in applicable Manufacturers' cash management accounts, contracts in
transit, marketable securities and liquid investments, such as money market
accounts, that have an original maturity of three months or less at the date of
purchase. Contracts in transit represent contracts on vehicles sold, for which
the proceeds are in transit from financing institutions.
Inventories
New, used and demonstrator vehicle values 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.
F-22
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are capitalized and amortized over the lesser of the life of the
lease or the estimated useful life of the asset.
Expenditures for major additions or improvements which extend the useful
lives of assets are capitalized. Minor replacements, maintenance and repairs
that do not improve or extend the life of such assets are charged to operations
as incurred. Disposals are removed at cost less accumulated depreciation and any
resulting gain or loss is reflected in current operations.
Other Assets
Organizational costs associated with E.R.R. Enterprises, Inc. and its
subsidiaries are amortized over a 60 month period.
The costs of acquiring an Oldsmobile franchise by Muller Chevrolet and to
record the acquisition of another dealership location by Bay State were
capitalized and are being amortized over 15 years on a straight-line basis.
Income Taxes
The Companies follow the liability method of accounting for income taxes.
Under this method, deferred income taxes are recorded based upon differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets are realized or liabilities are settled. A valuation allowance
reduces deferred tax assets when it is more likely than not that some or all of
the deferred tax assets will not be realized.
Muller Chevrolet, Bay State and Brattleboro are S corporations as defined
by the Internal Revenue Code, whereby a company, electing such status, is not
subject to taxation for federal purposes. Under S corporation status, the
stockholders report their proportional shares of the company's taxable earnings
or losses in their personal tax returns.
Effective January 1, 1997, Muller Toyota had elected S corporation status.
Interest Expense
Automobile manufacturers periodically provide floor plan interest
assistance, or subsidies, which reduce the dealer's cost of financing. The
accompanying financial statements reflect interest expense net of floor plan
assistance.
Fair Value of Financial Instruments
The Companies' financial instruments consist primarily of cash
equivalents, floor plan notes payable, current bank borrowings and long-term
debt. The carrying amount of these financial instruments approximates fair value
due either to length of maturity or existence of variable interest rates that
approximate market rates.
Advertising and Promotion
The Companies expense advertising and promotion as incurred.
F-23
Concentration of Credit Risk
Financial instruments that potentially subject the Companies to a
concentration of credit risk consist principally of cash, cash equivalents,
contracts in transit and accounts receivable. The Companies maintain cash
balances at financial institutions that may, at times, be in excess of federally
insured levels. Also, the Companies grant credit to individual customers and
local companies in the automobile repair business such as automotive parts
stores, automotive mechanics, and automotive body repair shops. The Companies
perform ongoing credit evaluations of their customers and generally do not
require collateral. The Companies maintain an allowance for doubtful accounts at
a level which management believes is sufficient to cover potential credit
losses.
Use of Estimates
The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Statements of Cash Flows
For purposes of the statements of cash flows, cash and cash equivalents
include contracts in transit which are typically collected within one month.
Additionally, the net change in floor plan financing of inventory, which is a
customary financing technique in the industry, is reflected as an operating
activity in the accompanying statements of cash flows.
Long Lived Assets
The Companies review long lived assets and certain related intangibles for
impairment whenever changes in circumstances indicate that the carrying amount
of an assets may not be fully recoverable.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued the following
statements. The Companies are currently not affected by these statements,
however, when applicable, the Companies will adopt the provisions of each
statement.
Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
SFAS No. 123 defines a fair value based method of accounting for stock based
compensation and encourages adoption of that method. SFAS No. 123, however, also
allows measurement of compensation cost using the intrinsic value based method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". If
the Companies elect to use the accounting in Opinion No. 25, they must make pro
forma disclosures of net income and earnings per share, as if the fair value
based method of accounting has been applied.
Statement No. 128 "Earnings Per Share" ("SFAS 128"). SFAS No. 128 requires
the presentation of basic earnings per share and diluted earnings per share.
"Basic earnings per share" represents net income divided by the weighted average
shares outstanding. "Diluted earnings per share" represents net income divided
by weighted average shares outstanding adjusted for the incremental dilution of
outstanding stock options. A reconciliation of weighted average common shares
outstanding to weighted average common shares outstanding assuming dilution is
required as disclosure.
Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS No.
130, requires the presentation of comprehensive income in an entity's financial
statements. Comprehensive income represents all
F-24
changes in equity of an entity during the reporting period, including net income
and charges directly to equity, which are excluded from net income.
Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS No. 131 requires that enterprises report
certain information about operating segments, information about products and
services, the geographic areas in which they operate and their major customers.
3. SUMMARY OF MATERIAL RISK FACTORS:
Manufacturers' Control over Dealerships
The dealerships operated by the Companies sell automobiles pursuant to
franchise agreements with automobile manufacturers or authorized distributors of
the manufacturers. Through the terms and conditions of these franchise
agreements, manufacturers exert considerable influence over the operations of
the company's dealerships. Each of the franchise agreements includes provisions
for the termination or non-renewal of the manufacturer-dealer relationship for a
variety of causes, including any unapproved change of ownership or management
and other material breaches of the franchise agreement. Prior approval of the
relevant manufacturer is required with respect to acquisition of additional
automobile dealerships and a manufacturer may deny a company's application to
make an acquisition or seek to impose further restrictions on a company as a
condition to granting approval of an acquisition. Certain state laws, however,
limit the ability of automobile manufacturers to reject proposed transfers of
dealerships, notwithstanding the terms of any dealer or franchise agreement. The
loss of one or more of the Companies' franchise agreements could have a material
adverse effect on the Companies' business, financial condition and results of
operations.
As a condition to granting their consent to the Exchange and the
Acquisitions, the Manufacturers have imposed restrictions on the Companies.
These restrictions include restrictions on (i) the acquisition of more than a
specified percentage of the Common Stock (20% in the case of GM and Toyota
Motor, 50% in the case of Ford Motor and -% in the case of ___________ by any
one person who in the opinion of the Manufacturer is unqualified to own a
dealership or who has interests incompatible with the Manufacturer;(ii) certain
material changes in the Companies or extraordinary corporate transactions such
as a merger or sale of a material amount of assets; (iii) the removal of a
dealership general manager without the consent of the manufacturer; (iv) the use
of dealership facilities to sell or service new vehicles of other manufacturers;
(v) in the case of GM, the advertising or marketing of non-GM operations with GM
operations; (vi) in the case of Ford Motor, mandatory binding arbitration of any
dispute between the Companies and Ford Motor concerning Ford Motor franchise
agreements; (vii) in the case of GM and Mitsubishi, any change in control of the
Companies' Board of Directors, and (viii) in the case of Ford Motor, any change
in the Companies' Board of Directors or management. If the Companies are unable
to comply with these restrictions, the Manufacturer may require the Companies to
(i) sell the assets of the dealerships to the Manufacturer or to a third party
acceptable to the Manufacturer and/or (ii) terminate the dealership agreements
with the Manufacturer.
Certain of the Manufacturers require their franchised dealerships to
appoint an employee (typically designated as the "Executive Manager") to act as
the primary contact between the dealership and the applicable Manufacturer. Such
individual typically is required to have operational control of all of the
applicable manufacturers' dealerships and to have full authority to resolve
issues raised by the applicable manufacturer in connection with the operation of
the dealership. The dealership is not allowed to change its Executive Manager
without the consent of the applicable Manufacturer. The agreements with the
Manufacturers also generally provide for periodic reporting and notice
provisions as a means of determining whether the Companies are in compliance
with the restrictions contained in those agreements. A manufacturer, upon its
determination of a violation of the restrictions, will notify the dealership of
the violation and the dealership will generally have a period to cure the
violation. If the dealership disputes the Manufacturer's claim of a violation or
is unwilling or unable to cure the violation, the manufacturer may enforce the
remedies specified in the agreement through judicial or regulatory proceedings
or in certain instances through arbitration.
F-25
Dependence on Automobile Manufacturers
The Companies are significantly dependent upon their relationships with,
and the success of, certain manufacturers. For the year ended December 31, 1997,
Ford Motor, Toyota Motor and Chrysler, accounted for 63%, 17% and 11%,
respectively, of the new vehicle sales of Hometown, after giving effect to both
the Exchange and the Acquisitions. The Companies may become dependent on
additional manufacturers in the future as a result of its acquisition strategy
and changes in the Companies' sales mix.
F-26
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable consist of the following:
Shaker Westwood Muller Toyota
------------------- ------------------- -------------------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97 12/31/96
-------- -------- -------- -------- -------- --------
(in thousands)
Amounts due from manufacturers $ 218 $ 211 $ 678 $ 406 $ 61 $ 70
Parts and service receivables 440 350 211 115 361 119
Warranty receivables ......... 25 19 79 68 47 14
Due from finance companies ... 171 452 788 777 69 32
Other ........................ 60 59 210 214 57 73
------- ------- ------- ------- ------- -------
Sub-total ................. 914 1,091 1,966 1,580 595 308
Less: Allowance for doubtful
accounts ................... -- -- (33) -- (100) (100)
------- ------- ------- ------- ------- -------
Total receivables ......... $ 914 $ 1,091 $ 1,933 $ 1,580 $ 495 $ 208
======= ======= ======= ======= ======= =======
Muller Chevrolet Bay State Brattleboro
------------------- ------------------- -----------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
-------- -------- -------- -------- --------
(in thousands)
Amounts due from manufacturers $ 4 $ 23 $ 86 $ 110 $ 71
Parts and service receivables 24 5 15 39 12
Warranty receivables ......... 30 16 12 3 37
Due from finance companies ... 117 212 58 85 11
Other ........................ 81 17 4 4 4
------- ------- ------- ------- -------
Sub-total ................. 256 273 175 241 135
Less: Allowance for doubtful
accounts ................... (100) (100) -- (9) --
------- ------- ------- ------- -------
Total receivables ......... $ 156 $ 173 $ 175 $ 232 $ 135
======= ======= ======= ======= =======
Inventories consist of the following:
Shaker Westwood Muller Toyota
-------------------- -------------------- --------------------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97 12/31/96
--------- --------- --------- --------- --------- ---------
(in thousands)
New Vehicles $ 4,623 $ 4,936 $ 9,037 $ 5,406 $ 2,346 $ 2,498
Used Vehicles 2,420 3,044 1,115 709 1,139 1,024
Parts, accessories and other 566 524 393 363 487 221
v
Total Inventories $ 7,609 $ 8,504 $ 10,545 $ 6,478 $ 3,972 $ 3,743
========= ========= ========= ========= ========= =========
Muller Chevrolet Bay State Brattleboro
-------------------- -------------------- ---------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
--------- --------- --------- --------- ---------
(in thousands)
New Vehicles $ 4,592 $ 3,403 $ 1,821 $ 2,989 $ 2,190
Used Vehicles 429 492 855 770 1,108
Parts, accessories and other 148 166 129 141 108
--------- --------- --------- --------- ---------
Total Inventories $ 5,169 $ 4,061 $ 2,805 $ 3,900 $ 3,406
========= ========= ========= ========= =========
Other assets:
Muller Chevrolet
In May 1993, Muller Chevrolet purchased an Oldsmobile franchise for
$300,000 which is being amortized over 15 years. The accumulated amortization as
of December 31, 1997 and December 31, 1996 was approximately $90,000 and
$66,000, respectively.
Bay State
Bay State changed locations in 1996 and purchased an existing automobile
dealership. The excess purchase price over the net assets acquired was $200,000.
This goodwill is included in Other Assets and is being amortized over 15 years
on a straight line basis. The accumulated amortization as of December 31, 1997
and December 31, 1996 was approximately $23,000 and $9,000, respectively.
F-28
Accounts payable and accrued expenses consist of the following:
Shaker Westwood Muller Toyota
-------------------- -------------------- --------------------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97 12/31/96
--------- --------- --------- --------- --------- ---------
(in thousands)
Accounts payable, trade ..................... $ 233 $ 173 $ 157 $ 134 $ 568 $ 574
Accrued compensation costs .................. 44 76 311 73 49 39
Customer deposits ........................... 39 35 129 41 -- --
Reserve for finance, insurance
and service contracts
charge-backs ............................. 40 51 305 238 38 73
Other accrued expenses ...................... 107 116 305 209 458 377
--------- --------- --------- --------- --------- ---------
Total ....................................... $ 463 $ 451 $ 1,207 $ 695 $ 1,113 $ 1,063
========= ========= ========= ========= ========= =========
Muller Chevrolet Bay State Brattleboro
-------------------- -------------------- ---------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
--------- --------- --------- --------- ---------
(in thousands)
Accounts payable, trade ..................... $ 147 $ 218 $ 28 $ 73 $ 22
Accrued compensation costs .................. -- -- -- -- --
Customer deposits ........................... -- -- 45 100 --
Reserve for finance, insurance
and service contracts
charge-backs ............................. 103 88 36 36 100
Other accrued expenses ...................... 36 87 78 179 36
--------- --------- --------- --------- ---------
Total ....................................... $ 286 $ 393 $ 187 $ 388 $ 158
========= ========= ========= ========= =========
F-29
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
Estimated Shaker Westwood Muller Toyota
Useful Lives ----------------------- ----------------------- ---------------------
in Years 12/31/97 12/31/96 12/31/97 12/31/96 12/31/97 12/31/96
----------- -------- -------- -------- -------- -------- --------
(in thousands)
Land and land improvements 15 to 20 $ 188 $ 193 $ -- $ -- $ 500 $ 500
Building and leasehold improvements 7 to 31.5 1,061 1,037 289 298 277 258
Machinery, equipment, furniture
and fixtures 3 to 7 1,564 1,494 484 472 928 900
Vehicles 5 142 146 22 34 -- --
----------- -------- -------- -------- -------- -------- --------
Sub-total 2,955 2,870 795 804 1,705 1,658
Less -- Accumulated depreciation (1,609) (1,442) (557) (524) (897) (839)
----------- -------- -------- -------- -------- -------- --------
Property and equipment, net $ 1,346 $ 1,428 $ 238 $ 280 $ 808 $ 819
=========== ======== ======== ======== ======== ======== ========
Estimated Muller Chevrolet Bay State Brattleboro
Useful Lives ----------------------- ----------------------- --------
in Years 12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
----------- -------- -------- -------- -------- --------
(in thousands)
Land and land improvements 15 to 20 $ -- $ -- $ -- $ -- $ 148
Building and leasehold improvements 7 to 31.5 50 50 228
Machinery, equipment, furniture
and fixtures 3 to 7 497 483 376 376 62
Vehicles 5 73 137 77 58 --
-------- -------- -------- -------- --------
Sub-total 620 670 453 434 438
Less -- Accumulated depreciation (331) (236) (175) (77) (55)
-------- -------- -------- -------- --------
Property and equipment, net $ 289 $ 434 $ 278 $ 357 $ 383
======== ======== ======== ======== ========
6. DUE FROM FINANCE COMPANIES:
Muller Toyota and Muller Chevrolet use specialty financing companies that
provide credit to customers with poor credit history. The dealerships are
advanced approximately 70% of the financed amount and are paid the balance from
the finance company when the loans are satisfied. Muller Chevrolet has a
receivable balance of $294,000 and $231,000, net of reserves for uncollectible
amounts of $270,000 as of December 31, 1997 and 1996. Muller Toyota has a
receivable balance of $990,000 and $873,000, net of reserves for uncollectible
amounts of $955,000 and $955,000, as of December 31, 1997 and 1996,
respectively. These receivables are classified as long-term due to the fact that
the remaining balances are paid to the dealerships when the loans are satisfied.
F-30
7. FLOOR PLAN NOTES PAYABLE:
Floor plan notes payable reflects amounts payable for the purchase of specific
vehicle inventory and consists of the following:
Shaker Westwood Muller Toyota
---------------------- ---------------------- ----------------------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97 12/31/96
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
New vehicles ........................................... $ 4,895 $ 5,094 $ 9,098 $ 5,667 $ 2,989 $ 3,279
Used vehicles .......................................... 1,866 2,555 879 227 1,129 800
Rental and
other vehicles ...................................... -- -- 202 109 374 236
---------- ---------- ---------- ---------- ---------- ----------
Total .................................................. $ 6,761 $ 7,649 $ 10,179 $ 6,003 $ 4,492 $ 4,315
========== ========== ========== ========== ========== ==========
Floor plan obligations
related to sold
vehicles not yet
remitted to financial
institutions ........................................... $ -- $ -- $ 101 $ 277 $ 520 $ 572
========== ========== ========== ========== ========== ==========
Muller Chevrolet Bay State Brattleboro
---------------------- ---------------------- ----------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
---------- ---------- ---------- ---------- ----------
(in thousands)
New vehicles ................................... $ 4,947 $ 3,869 $ 1,989 $ 2,974 $ 2,368
Used vehicles .................................. 458 435 983 813 820
Rental and
other vehicles .............................. -- 60 -- -- --
---------- ---------- ---------- ---------- ----------
Total .......................................... $ 5,405 $ 4,364 $ 2,972 $ 3,787 $ 3,188
========== ========== ========== ========== ==========
Floor plan obligations
related to sold
vehicles not yet
remitted to financial
institutions ................................... $ 355 $ 466 $ 98 $ 31 $ --
========== ========== ========== ========== ==========
The floor plan arrangements permit the Companies to finance their vehicle
purchases dependent upon new and used vehicle sales and inventory levels. The
resultant liability is secured by the related inventory and normally by personal
guarantees from the owners. Payments are due when the related vehicles are sold.
F-31
Information about the floor plan accounts is as follows:
As of December 31, 1997
-------------------------------------------------------------------------------------
Interest Rate Floor Plan Interest Floor Plan Liability
---------------- --------------------------------- -------------------------------
Maximum Current Current
Avail- Avail- Out-
Ranging from Expense Credits Net ability ability standing
---------------- --------- --------- --------- --------- --------- ---------
Shaker ...............................9.50% 10.50% $ 831 $ (423) $ 408 $ 7,975 $ 1,214 $ 6,761
Westwood .............................9.50% 9.50% 423 (223) 200 6,900 -- 10,179
Muller Toyota ........................8.90% 9.50% 241 (166) 75 4,700 208 4,492
Muller Chevrolet .....................8.90% 9.50% 389 (138) 251 5,850 445 5,405
Bay State ............................9.50% 9.50% 390 (68) 322 2,900 -- 2,972
Brattleboro ..........................9.50% 10.25% 210 (171) 39 2,550 -- 3,188
As of December 31, 1996
-------------------------------------------------------------------------------------
Interest Rate Floor Plan Interest Floor Plan Liability
---------------- --------------------------------- -------------------------------
Maximum Current Current
Avail- Avail- Out-
Ranging from Expense Credits Net ability ability standing
---------------- --------- --------- --------- --------- --------- ---------
Shaker ...........................9.25% 10.00% $ 901 $ (335) $ 566 $ 7,850 $ 201 $ 7,649
Westwood .........................9.25% 9.25% 499 (202) 297 5,500 -- 6,003
Muller Toyota ....................8.25% 9.75% 306 (162) 144 4,700 385 4,315
Muller Chevrolet .................8.90% 9.50% 349 (147) 202 5,850 1,486 4,364
Bay State ........................9.50% 9.50% 378 (95) 283 3,300 -- 3,787
As of December 31, 1995
-------------------------------------------------------------------------------------
Interest Rate Floor Plan Interest Floor Plan Liability
---------------- --------------------------------- -------------------------------
Maximum Current Current
Avail- Avail- Out-
Ranging from Expense Credits Net ability ability standing
---------------- --------- --------- --------- --------- --------- ---------
Shaker ................................ 9.25% 10.00% $ 1,029 $ (314) $ 715 $ 9,075 $ 614 $ 8,461
Westwood .............................. 9.50% 9.50% 599 (493) 106 5,500 -- 6,508
Muller Toyota ......................... 8.25% 9.75% 375 None 375 4,700 1,108 3,592
Muller Chevrolet ...................... 8.90% 9.50% 425 (151) 274 5,850 1,487 4,363
Bay State ............................. 9.50% 9.50% 244 (37) 207 4,000 2,059 1,941
Management and the applicable financing companies are aware of and have
agreed to the financing in excess of the original lines of credit.
F-32
8. OTHER CURRENT BANK BORROWINGS:
Shaker
One of the subsidiaries of E.R.R. Enterprises, Inc., Family Rental, Inc.,
leases vehicles through the Manufacturer for its rental fleet. The terms of the
leases are six to twelve months at various interest rates.
Westwood
Effective May 24, 1996, Westwood entered into an agreement with Midland
Bank for a $1,000,000 revolving line of credit. This line of credit bears
interest at the prime rate (8.5% and 8.25% at December 31, 1997 and 1996,
respectively), expires in April 1998, and is guaranteed by a majority
stockholder of Westwood. As of December 31, 1997 and 1996, borrowings under this
line of credit amounted to $1,000,000 and $500,000, respectively. Westwood's
management intents and believes it has the ability to renew this line of credit
under substantially the same terms and conditions existing as of December 31,
1997.
Muller Toyota
During 1997, Muller Toyota obtained a $200,000 revolving line of credit.
This line of credit bears interest at the prime rate plus 1.5% (10.0% at
December 31, 1997), expires in April 1998, and is collateralized by certain
assets of the Company. As of December 31, 1997, borrowings under this line of
credit amounted to $200,000. Subsequent to December 31, 1997, this line was
repaid and closed.
Muller Chevrolet
During 1997, Muller Chevrolet obtained a $200,000 revolving line of
credit. This line of credit bears interest at the prime rate (8.5% at December
31, 1997), expires in April 1998, and is guaranteed by a majority shareholder of
Muller Chevrolet. As of December 31, 1997, borrowings under this line of credit
amounted to $200,000. Muller Chevrolet's management intents and believes it has
the ability to renew this line of credit under substantially the same terms and
conditions existing as of December 31, 1997.
F-33
9. LONG TERM DEBT:
Shaker
12/31/97 12/31/96
-------- --------
(in thousands)
Notes payable for computer equipment, due in monthly
installments including interest at rates ranging from
7.4% to 7.9%, maturing in March and April 2000 $ 158 $ 199
Mortgage note payable, due in monthly installments
including interest at a variable rate (9.0% in 1997 and
8.5% in 1996), maturing in September 1998 227 252
------- -------
385 451
Less: Current portion 278 65
------- -------
$ 107 $ 386
======= =======
Maturities of long-term debt for each of the next five years and thereafter are
as follows:
Year ending Aggregate
December 31, Obligation
------------ ----------
(in thousands)
1998 $ 278
1999 62
2000 45
2001 -
2002 -
thereafter -
----------
$ 385
==========
F-34
9. LONG TERM DEBT (CONTINUED):
Westwood
12/31/97 12/31/96
-------- --------
(in thousands)
Note for computer equipment, due in monthly installments
including interest, maturing in May 1997 .................... $ -- $ 1
Note for computer equipment, due in monthly installments
including interest, maturing in June 1997 ................... -- 1
Note for computer equipment, due in monthly installments
including interest, maturing in November 2001 ............... 8 10
-------- --------
8 12
Less: Current portion ....................................... 2 3
-------- --------
$ 6 $ 9
======== ========
Maturities of long-term debt for each of the next five years and thereafter are
as follows:
Year ending Aggregate
December 31, Obligation
------------ ----------
(in thousands)
1998 $ 2
1999 2
2000 2
2001 2
2002 -
thereafter -
----------
$ 8
==========
F-35
9. LONG TERM DEBT (CONTINUED):
Muller Toyota
12/31/97 12/31/96
--------- ---------
(in thousands)
Notes payable, due in monthly installments including interest at 3%
above the 3 month LIBOR rate (8.9% and 8.5% as of December 31, 1997
and 1996, respectively), maturing in July 1999, personally
guaranteed by the majority stockholders and collateralized by
substantially all the assets of Muller Toyota ..................... $139 $223
Notes payable, due in monthly installments including interest at
10.5%, maturing in October 2006 ................................... 529 591
Various equipment notes payable, due in monthly installments
including interest ranging from 103% to 131%, maturing on various
dates through 2003, collateralized by the related equipment ....... 96 105
--------- ---------
764 919
Less: Current portion ............................................. 164 157
--------- ---------
$600 $762
========= =========
Maturities of long-term debt for each of the next five years and
thereafter are as follows:
Year ending Aggregate
December 31, Obligation
------------ ----------
(in thousands)
1998 $ 164
1999 145
2000 100
2001 105
2002 105
thereafter 145
----------
$ 764
==========
F-36
9. LONG TERM DEBT (CONTINUED):
Muller Chevrolet
12/31/97 12/31/96
-------- --------
(in thousands)
Note payable, due in monthly installments including interest at
prime plus 2% (10.5% and 10.25% at December 31, 1997 and
1996, respectively), maturing in May 1998, collateralized by a
second mortgage on a shareholder's personal residence and the
assignment of Muller Chevrolet's open accounts with
Chevrolet, personally guaranteed by the shareholders and cross
guaranteed by Muller Toyota, Inc. and a company affiliated
through common ownership ............................................. $ 12 $ 42
Note payable, due in monthly installments including interest at
prime plus 2% (10.5% and 10.25% at December 31, 1997 and
1996, respectively), maturing in September 2000, collateralized
by substantially all corporate assets of Muller Chevrolet and a
company affiliated through common ownership and guaranteed
by the shareholders .................................................. 64 104
Note payable, due in monthly installments including interest at
9.5%, maturing in February 2016, collateralized by body shop
equipment ............................................................ 145 148
Note payable, due in monthly installments including interest at
prime plus 1.5% (10% and 9.75% at December 31, 1997 and
1996, respectively), maturing in January 2001, collateralized
by the related equipment ............................................. 62 82
Note payable, due in monthly installments including interest at
7.5%, maturing in February 2000 ...................................... 90 214
Note payable to bank, due in monthly installments including
interest at 7.5%; maturing in May 2001; collateralized by
related equipment .................................................... 28 35
----- -----
401 625
Less: Current portion ................................................ 80 126
-----
$ 321 $ 499
===== =====
Maturities of long-term debt for each of the next five years and thereafter are
as follows:
Year ending Aggregate
December 31, Obligation
---------------- ----------
(in thousands)
1998 $ 80
1999 68
2000 42
2001 12
2002 12
thereafter 97
-----
$ 311
=====
F-37
9. LONG TERM DEBT (CONTINUED):
Bay State
12/31/97 12/31/96
-------- --------
(in thousands)
Various notes payable for loaner vehicles, notes have 15 month
terms with monthly payments of 1.5% to 2.0% of capitalized
amounts plus interest at 9.5%. The balance is due at the end
of the term ..................................................... $ 77 $ 50
Less: Current portion ........................................... 26 17
---- ----
$ 51 $ 33
==== ====
Maturities of long-term debt for each of the next five years and thereafter are
as follows:
Year ending Aggregate
December 31, Obligation
------------ ----------
(in thousands)
1998 $ 26
1999 51
2000
2001 --
2002 --
thereafter --
----
$ 77
====
F-38
9. LONG TERM DEBT (CONTINUED):
Brattleboro
12/31/97
--------
(in thousands)
Note payable, due in monthly installments including interest at
9.25%, maturing in June 2002, collateralized by the related
buildings and improvements............................................. $ 218
Less: Current portion ................................................. 70
-----
$ 148
=====
Maturities of long-term debt for each of the next five years and thereafter are
as follows:
Year ending Aggregate
December 31, Obligation
------------ ----------
(in thousands)
1998 $ 70
1999 70
2000 70
2001 8
2002
thereafter --
-----
$ 218
=====
10. STOCKHOLDERS' EQUITY:
Capital stock consists of the following:
Par or
Shares Shares Shares Stated Value Treasury
Authorized Issued Outstanding per Share Stock
---------- ------ ----------- --------- -----
E.R.R. Enterprises, Inc. Class A 10,000 7,218 7,218 $ 5.00 --
E.R.R. Enterprises, Inc. Class B 18,045 18,045 18,045 1.84 --
Westwood 100 60 60 1,000.00 --
Muller Toyota 100 100 75 400.00 $ 890,000
Muller Chevrolet 100 100 100 400.00 --
Bay State 15,000 100 100 250.00 --
Brattleboro 250 100 100 330.00 --
F-39
11. RELATED PARTY TRANSACTIONS:
Operating Leases with Stockholder
Some of the principal stockholders of the Companies lease to the
dealerships the premises under various operating leases. Additional information
regarding the terms of these leases is contained in Note 13, "Operating Leases."
Stockholder Loan Guarantees
The Companies have provided guarantees and/or pledged assets as security
for certain outstanding loan obligations of various related parties. See Note 15
"Commitments and Contingencies," for discussion of guarantee and security
arrangements provided on behalf of related parties.
F-40
11. RELATED PARTY TRANSACTIONS (CONTINUED):
Shaker
Due from related parties: 12/31/97 12/31/96
-------- --------
(in thousands)
Note receivable from Joseph Shaker Realty, a related party
through common ownership, non-interest bearing with
payment on demand $208 $167
Note receivable from Shaker Enterprises, a related
party through common ownership. Payable monthly
including interest at 6.34% maturing in May 2013 -- 364
(Repaid in 1997)
Note receivable from Corey Shaker, a stockholder. Interest
payable monthly at 6.83% maturing in December 1998 86 27
---- ----
$294 $558
==== ====
Due to related parties:
Note payable to Ed Shaker, a stockholder. Non interest
bearing with payment on demand $706 $667
Note payable to Edick Leasing, a related party through
common ownership. Interest payable monthly at 9.5%
with payment on demand 100 100
Note payable to Joseph Shaker Realty, a related party
through common ownership. Interest payable monthly
at 5.6% with payment on demand 82 78
---- ----
$888 $845
==== ====
Other:
Shaker purchases certain used vehicles from Edick Leasing, a related party
through common ownership. Vehicles purchased from the affiliate for the years
ended December 31, 1997 , 1996 and 1995 aggregated approximately $312,000,
$446,000 and $440,000, respectively.
F-41
11. RELATED PARTY TRANSACTIONS (CONTINUED):
Westwood
Due from related parties: 12/31/97 12/31/96
--------- --------
(in thousands)
Note receivable from Salvatore Vergopia, a stockholder
Interest payable annually at the prime rate, 8.5% and 8.25%
at December 31, 1997 and 1996, respectively, with
payment on demand $ 940 $ 171
Note receivable from Worldwide Financing Co. Ltd., a
related party through common ownership. Non-interest
bearing with payment on demand 90 100
Note receivable from Edward Vergopia, a stockholder
Non-interest bearing with payment on demand 66 59
------ ------
$1,096 $ 330
====== ======
Due to related parties:
Note payable to Salvatore Vergopia, a stockholder
Interest payable annually at the prime rate, 8.5% and 8.25%
at December 31, 1997 and 1996, respectively, with
payment on demand $1,000 $1,000
====== ======
F-42
11. RELATED PARTY TRANSACTIONS (CONTINUED):
Muller Toyota
Due from related parties: 12/31/97 12/31/96
-------- --------
(in thousands)
Note receivable from Rellum Realty, a related party
through common ownership. Non-interest bearing
with no repayment terms. Subsequent to December
31, 1997 this note was repaid $ 430 $ 324
Note receivable from Muller Chevrolet. Non-interest
bearing with payment on demand 754 340
------ ------
$1,184 $ 664
====== ======
Muller Chevrolet
Due from related parties: 12/31/97 12/31/96
-------- --------
(in thousands)
Note payable to Muller Toyota. Non-interest
bearing with payment on demand. $ 754 $ 340
====== ======
F-43
11. RELATED PARTY TRANSACTIONS (CONTINUED):
Bay State
Due from related parties: 12/31/97 12/31/96
-------- --------
(in thousands)
Advances to James Langway, stockholder,
non-interest bearing with payment on demand. $ 214 $ 227
====== ======
Due to related parties:
Advances from James Langway, stockholder,
non-interest bearing with payment on demand. $ 474 $ --
====== ======
Brattleboro
Due from related parties: 12/31/97
--------
(in thousands)
Note payable to Tom Cosenzi, stockholder,
non-interest bearing with payment on demand. $ 252
======
12. ADVERTISING:
Advertising expense (net of manufacturers' rebates and assistance) consist
of the following:
For the years ending December 31,
---------------------------------
1997 1996 1995
---- ---- ----
(in thousands)
Shaker ...................................... $793 $790 $736
Westwood .................................... 17 66 65
Muller Toyota ............................... 523 464 422
Muller Chevrolet ............................ 450 385 450
Bay State ................................... 103 100 51
Brattleboro ................................. 395 N/P N/P
N/P (not presented)
F-44
13. OPERATING LEASES:
The Companies lease various facilities and equipment under operating lease
agreements, including leases with related parties. These leases expire on
various dates. The lease agreements are subject to renewal under essentially the
same terms and conditions as the original leases. Equipment leases with third
parties are not material.
Total rent expense for operating leases and rental agreements with related
parties are as follows:
For the years ending December 31,
---------------------------------
1997 1996 1995
(in thousands)
Shaker ................................... $480 $480 $480
Westwood ................................. 352 256 264
Muller Toyota ............................ 488 478 457
Muller Chevrolet ......................... 460 460 404
Bay State ................................ 270 172 60
Brattleboro .............................. 276 N/P N/P
N/P = Not presented
Shaker
Shaker rents its operating facilities in Waterbury and Watertown on a year
to year basis. Shaker is obligated under the agreements to pay executory costs
such as insurance, repairs and maintenance, and other related expenses.
Shaker's Waterbury facilities are rented from a Connecticut partnership in
which the majority stockholders of Shaker are general partners.
Shaker's Watertown facility is rented from a second partnership in which
certain stockholders of Shaker are general partners.
Westwood
Westwood currently leases its operating facilities from two majority
stockholders of Westwood, under a lease agreement dated February 1, 1997 for 10
years. Westwood is committed under such agreement for rental payments of
$360,000 per year through 2002 and an aggregate of $1,470,000 thereafter. Prior
to February 1, 1997, Westwood leased its operating facilities from the same
majority shareholders under a lease agreement dated February 1, 1992 for 10
years.
Muller Toyota and Muller Chevrolet
Muller Toyota and Muller Chevrolet rent their operating facilities, on a
month to month basis, from a partnership owned by the stockholders of Muller
Toyota and Muller Chevrolet.
Bay State
Bay State rents its operating facilities, on a month to month basis, from
a partnership owned by the stockholders of Bay State.
F-45
14. INCOME TAXES:
Federal and state income taxes are as follows:
Federal & State Income Taxes
Hometown Shaker Westwood
-------- -----------------------------------------------------------
12/31/97 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- -------- -------- --------
(in thousands)
Federal
Current $ -- $ 103 $ 220 $(117) $ 73 $ 198 $ 154
Deferred -- 7 (7) 192 9 (74) (86)
State
Current -- 49 103 20 21 55 43
Deferred -- 7 5 23 3 (19) (23)
------ ----- ----- ----- ----- ----- -----
Total Taxes $ -- $ 166 $ 321 $ 118 $ 106 $ 160 $ 88
====== ===== ===== ===== ===== ===== =====
Muller Toyota Muller Chevrolet
---------------------------------------------------------------
12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- -------- --------
(in thousands)
Federal
Current $ -- $ 226 $ (40) $ -- $ -- $ --
Deferred -- (58) (3) -- --
State
Current 36 33 (11) -- --
Deferred -- 15 (1) -- --
------- ----- ----- ----- ----- -------
Total Taxes $ 36 $ 216 $ (55) $ -- $ -- $ --
======= ===== ===== ===== ===== =======
Bay State Brattleboro
------------------------------ -----------
12/31/97 12/31/96 12/31/95 12/31/97
-------- -------- -------- --------
(in thousands)
Federal
Current $ -- $ -- $ -- $ --
Deferred -- -- --
State
Current 52 67 44
Deferred -- -- --
------- ----- ----- -----
Total Taxes $ 52 $ 67 $ 44 $ --
======= ===== ===== =====
F-46
14. INCOME TAXES (CONTINUED):
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate tax rate of 34% to income before
income taxes as follows:
Hometown Shaker Westwood
-------- ------------------------------ ------------------------------
12/31/97 12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- -------- -------- --------
(in thousands)
Provision at the
statutory rate .................... 0% 34% 34% 34% 34% 34% 34%
Increase (decrease) resulting from
Income of S Corporation ........... 0% 0% 0% 0% 0% 0% 0%
State income tax, net of
benefit for federal deduction .. 0% 6% 6% 6% 6% 6% 6%
Other ............................. 0% -6% 5% -4% 2% 3% 4%
--- --- --- --- --- --- ---
Total Taxes .......................... 0% 34% 45% 36% 42% 43% 44%
=== === === === === === ===
Muller Toyota Muller Chevrolet
---------------------------- ----------------------------
12/31/97 12/31/96 12/31/95 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- -------- --------
(in thousands)
Provision at the
statutory rate .......................... 34% 34% 34% 34% 34% 34%
Increase (decrease) resulting from
Income of S Corporation ................. -34% 0% 0% -34% -34% -34%
State income tax, net of
benefit for federal deduction ........ 6% 6% 6% 6% 6% 6%
Other ................................... -1% 0% 2% -6% -6% -6%
--- --- --- --- --- ---
Total Taxes ................................ 5% 40% 42% 0% 0% 0%
=== === === === === ===
Bay State Brattleboro
---------------------------- ------------
12/31/97 12/31/96 12/31/95 12/31/97
-------- -------- -------- --------
(in thousands)
Provision at the
statutory rate .......................... 34% 34% 34% 34%
Increase (decrease) resulting from
Income of S Corporation ................. -34% -34% -34% -34%
State income tax, net of
benefit for federal deduction ........ 5% 5% 6% 0%
Other ................................... 0% 0% 0% 0%
--- --- --- ---
Total Taxes ................................ 5% 5% 6% 0%
=== === === ===
F-47
14. INCOME TAXES (CONTINUED):
Deferred income taxes are provided for temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences representing deferred
tax assets and liabilities result principally from the following:
Hometown Shaker Westwood Muller Toyota
-------- -------------------- -------------------- ------------------
12/31/97 12/31/97 12/31/96 12/31/97 12/31/96 12/31/97 12/31/96
-------- -------- -------- -------- -------- -------- --------
Deferred tax assets - (in thousands)
Reserves and accruals
not deductible until paid $ -- $ 5 $ 7 $ 192 $ 204 $-- $ 128
Depreciation ............. -- -- -- 5 3 --
Other .................... -- -- -- 8 10 --
----- ----- ----- ----- ----- --- -----
Total .................... -- 5 7 205 217 -- 128
Deferred tax liabilities
Depreciation ............. -- (72) (52) -- -- --
Other .................... -- (97) (105) -- -- --
----- ----- ----- ----- ----- --- -----
Total .................... -- (169) (157) -- -- --
----- ----- ----- ----- ----- --- -----
Net deferred tax asset
(liability) .............. $ -- $(164) $(150) $ 205 $ 217 $-- $ 128
===== ===== ===== ===== ===== === =====
Muller Chevrolet Bay State Brattleboro
----------------------- --------------------- -----------
12/31/97 12/31/96 12/31/97 12/31/96 12/31/97
-------- -------- -------- -------- --------
Deferred tax assets - (in thousands)
Reserves and accruals
not deductible until paid ........ $ -- $ -- $ -- $ -- $ --
Depreciation ...................... -- -- -- -- --
Other ............................. -- -- -- -- --
------ ------ ------ ------ ------
Total ............................. -- -- -- -- --
Deferred tax liabilities
Depreciation ...................... -- -- -- -- --
Other ............................. -- -- -- -- --
------ ------ ------ ------ ------
Total ............................. -- -- -- --
------ ------ ------ ------ ------
Net deferred tax asset
(liability) ....................... $ -- $ -- $ -- $ -- $ --
====== ====== ====== ====== ======
F-48
15. COMMITMENTS AND CONTINGENCIES:
Litigation
The Companies are defendants in several lawsuits arising from normal
business activities. Management has reviewed pending litigation with legal
counsel and believes that the ultimate liability, if any, resulting from such
actions will not have a material adverse effect on the Companies' financial
position or results of operations.
Insurance
The Companies carry a standard range of insurance coverage, including
general and business auto liability, commercial property, workers' compensation
and excess liability coverage.
Westwood
As of September 29, 1995, Westwood entered into an agreement with a
financial institution for an indirect auto financing credit line in the amount
of $1,000,000 for the sale of new and used third party limousines to customers.
Loans advanced under this credit line to customers are made with the full
recourse to Westwood. Under the agreement, Westwood must also maintain an
account with this financial institution amounting to a minimum of 25% of the
loans outstanding. As of December 31, 1997 and 1996, loans outstanding under
this credit line amounted to approximately $475,000 and $863,000, respectively.
Westwood is a guarantor for a $2,000,000 credit line granted by a
financial institution to SEC Funding Corp., a company in which the majority
stockholder of Westwood is also a stockholder. This credit line is used for
financing the sale of new and used third party limousines. As of December 31,
1997 and 1996, loans outstanding under this credit line amounted to
approximately $935,000 and $950,000, respectively.
Westwood is a guarantor of a portfolio of customers limousine vehicle
loans granted by Ford Motor Credit Co. As of December 31, 1997 and 1996,
Westwood fully guaranteed limousine vehicle loans aggregating approximately
$6,768,000 and $1,879,000, respectively, and was a limited guarantor on loans
aggregating approximately $800,000 as of December 31, 1997. The limited
guarantee is effective for a twelve month period, commencing with the inception
of the respective loan, and expires thereafter.
Westwood is a guarantor of a portfolio of vehicle loans, granted by Ford
Motor Credit Co., to various customers of Westwood with below average credit. As
of December 31, 1997 and 1996, Westwood fully guaranteed vehicle loans
associated with these customers, aggregating approximately $754,000 and
$2,545,000 respectively.
F-49
16. RETIREMENT PLANS:
Shaker
Shaker has a contributory qualified profit-sharing 401(k) plan covering
substantially all full-time employees. Profit sharing contributions, if any, are
determined annually by the Board of Directors. No profit sharing contributions
were made in 1997, 1996 and 1995. For the years ended December 31, 1997, 1996
and 1995, matching contributions made by Shaker were approximately $24,000,
$16,000 and $14,000, respectively.
Westwood
During 1997, Westwood established a contributory qualified 401(k) plan
covering substantially all full-time employees. Employee elective deferrals are
matched by Westwood at 25% of the first 5% of the deferrals. For the year ended
December 31, 1997, matching contributions made by Westwood were approximately
$30,000.
Muller Toyota and Muller Chevrolet
Muller Toyota and Muller Chevrolet have a profit-sharing plan with a
401(k) deferral feature. Employees may defer up to 20% of wages as a plan
contribution subject to limitations imposed by tax regulations. Profit-sharing
contributions are at the discretion of the Board of Directors. No contributions
were made for the years ended December 31, 1997, 1996 and 1995.
Bay State
Bay State has a contributory qualified 401(k) plan covering substantially
all full time employees. Baystate does not make any matching contributions to
the plan.
17. STOCK OPTION PLAN:
In February 1998, in order to attract and retain persons necessary for the
success of the Company, Hometown adopted its 1998 Stock Option Plan (the "Stock
Option Plan") covering up to 480,000 shares of Class A Common Stock. Pursuant to
the Stock Option Plan officers, directors and key employees of the Company and
consultants to the Company are eligible to receive incentive and/or
non-incentive stock options. The Stock Option Plan, which expires in January
2008, will be administered by the Board of Directors or a committee designated
by the Board of Directors. The selection of participants, allotment of shares,
determination of price and other conditions relating to the purchase of options
will be determined by the Board of Directors, or a committee thereof, in its
sole discretion. Stock options granted under the Stock Option Plan are
exercisable for a period of up to 10 years from the date of grant at an exercise
price which is not less than the fair market value of the Common Stock on the
date of the grant, except that the term of an incentive stock option granted
under the Stock Option Plan to a stockholder owning more than 10% of the
outstanding Common Stock may not exceed five years and its exercise price may
not be less than 110% of the fair market value of the Common Stock on the date
of the grant
F-50
18. PROPOSED ACQUISITION BY SHAKER:
The stockholders of the Core Operating Companies have entered into
definitive purchase agreements with Hometown providing for the purchase of the
Companies by Shaker under the following terms and conditions:
Acquisition of Core Operating Companies
The stockholders of Shaker, Westwood and Muller (the Core Operating
Companies) entered into the Exchange agreement pursuant to which they have
agreed to exchange all of the outstanding shares of four corporations,
operating six franchised dealerships, one collision repair center and one
factory authorized freestanding auto service center, for 3,760,000 shares
of Hometown Class B Common Stock as follows: 1,880,000 shares to the
stockholders of Shaker; 940,000 shares to the shareholders of Westwood;
and 940,000 shares to the stockholders of Muller Toyota, Inc. and Muller
Chevrolet, Inc.
The Exchange agreement provides that the combination is subject to
certain conditions including, among others: (i) the continuing accuracy on
the closing date of the representations and warranties of the applicable
Core Operating Companies and Hometown; (ii) the performance of each of the
covenants by the applicable Core Operating Companies; and (iii) the
receipt of all permits, approvals and consents required for transfer of
ownership of the Core Operating Companies and their assets including the
consent of the manufacturers.
Acquisitions
Hometown entered into two agreements (the "Acquisitions") to acquire
certain assets and liabilities of two dealerships in Massachusetts and
Vermont for an aggregate consideration of $5.7 million, subject to
adjustment based on the book value of certain acquired assets. Each of the
Acquisitions is subject to satisfaction of various conditions precedent,
including the achieving by each of the sellers of certain levels of
income, the receipt of factory consents from all automobile manufacturers
whose franchises are held by each of the sellers.
F-51
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City, County and
State of New York on May 13, 1998.
HOMETOWN AUTO RETAILERS, INC.
by: /S/ JOSEPH SHAKER
----------------------------
Joseph Shaker, President and
Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below on May 13, 1998 by the
following persons in the capacities indicated and each of the undersigned
persons, in any capacity, hereby severally constitutes Joseph Shaker and Stephen
A. Zelnick, and each of them singularly, his true and lawful attorney with full
power to them and each of them to sign for him and in his name and in the
capacity indicated below, this Registration Statement and any and all amendments
thereto.
Signature Title
--------- -----
/S/ JOSEPH SHAKER President and Chief Operating Officer
--------------------------
Joseph Shaker
/S/ JOHN RUDY Chief Financial Officer
--------------------------
John Rudy
/S/ SALVATORE A. VERGOPIA
--------------------------
Salvatore A. Vergopia Director (Chairman)
/S/ WILLIAM C. MULLER JR.
--------------------------
William C. Muller Jr. Director
/S/ COREY SHAKER
--------------------------
Corey Shaker Director
/S/ EDWARD A. VERGOPIA
--------------------------
Edward A. Vergopia Director
/S/ JAMES CHRIST
--------------------------
James Christ Director
II-8